Question

In: Economics

Using the long run model of a small open economy to graph the impact of reducing...

Using the long run model of a small open economy to graph the impact of reducing the government budget deficit (T up or G down) on the us exchange rate and trade balance. Draw corresponding diagrams for the market of loanable funds and foreign currency exchange market. Please label axes, curves, equilibrium values, curve shift direction.

Based on the graph, explain why Camdessus' policy is useful here. What happens to the exchange and trade balance because of the government budget deficit.

Solutions

Expert Solution


Related Solutions

Consider the long-run model of a small open economy with perfect capital mobility.
Consider the long-run model of a small open economy with perfect capital mobility. Starting from an initial equilibrium with balanced trade, illustrate graphically and explain verbally how the following (ceteris paribus) events affect saving, investment, and the trade balance in this economy.a. The domestic government implements a reduction in government purchases.
Consider the long-run model of a small open economy with perfect capital mobility. Starting from an...
Consider the long-run model of a small open economy with perfect capital mobility. Starting from an initial equilibrium with balanced trade, illustrate graphically and explain verbally how the following (ceteris paribus) events affect saving, investment, and the trade balance in this economy. 1. Foreign governments decide to raise their taxes, causing a change in the world real interest rate
Consider the following scenario in a large open economy using the loanable funds model (long run),...
Consider the following scenario in a large open economy using the loanable funds model (long run), suppose there is a technological breakthrough that increases investment demand a. graph and explain what happens to savings, investment , the real interest rate,net capital flows, net exports and the real exchange rate b. compare what happens to the level of investment in a closed conomy to the level of investment in a large open economy
Suppose we have an economy which is in a long-run equilibrium. a) Graph this economy using...
Suppose we have an economy which is in a long-run equilibrium. a) Graph this economy using long-run and short-run Phillips curves b) Now suppose the aggregate demand decreased as the government spending is reduced. Show what happens to the economy on a Phillips curve graph. Where is the economy’s current position on the graph now? Is it possible to return to the original position (with the initial inflation and unemployment levels) through monetary policy? Explain c) Now, you should consider...
Classical small open economy model: According to the Classical small open economy model, what happens to...
Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) a)...
Consider the short-run impact of the U.S. fiscal policy action on Bermuda, a small open economy...
Consider the short-run impact of the U.S. fiscal policy action on Bermuda, a small open economy that maintains a fixed exchange rate with the U.S. dollar. What is the impact of the U.S. fiscal policy action on consumption, investment, and the unemployment rate in Bermuda? Explain.
Using the ASAD graph and starting in long run equilibrium YA = Y* (see the model...
Using the ASAD graph and starting in long run equilibrium YA = Y* (see the model example in the textbook Figure 13.11) take each of following shocks one by one in separate graphs and decide if the event falls into the real shock (LRAS) category or aggregate demand (AD) shock category. Then graph each. Remember that “shocks” include both good and bad events and the graph should show that in the short run the economy is either that YA <...
Tenement Yaard is a small open economy described by the following long-run classical equations where Y...
Tenement Yaard is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G- government spending, NX - net exports, I- investment C- consumption, r- domestic interest rates, r*- world interest rates: Y= C + I + G + NX Y = 6000 G = 1000 T = 1000 C = 300 + 0.8 (Y-T) I = 2000 - 50r NX = 500 - 400e r = r* = 4 a....
Tenement Yaard is a small open economy described by the following long-run classical equations where Y...
Tenement Yaard is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G- government spending, NX - net exports, I- investment C- consumption, r- domestic interest rates, r*- world interest rates: Y= C + I + G + NX Y = 5000 G = 1200 T = 1050 C = 200 + 0.75 (Y-T) I = 1500 - 60r NX = 450 - 200e r = r* = 3 a....
4- Classical Model: The Long Run 1.1 Open Economy Solve for the following Y, W P...
4- Classical Model: The Long Run 1.1 Open Economy Solve for the following Y, W P , L, C, I, Nx, r, i, Md ,   when 4- the real rate of interest increases answer key 1. Y , ¯ ¯ (W/P), L¯ 2. r ?? C, I ? 3. r ?? CF ?? e ? 4. r ?? i ?? Md ?? P ? 5. e, P ?? E ?? Nx ? Explain in as much detail as possible. Nx...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT