Use the textbook’s model of a small, open economy with perfectly mobile capital to predict how...

Use the textbook’s model of a small, open economy with perfectly mobile capital to predict how each of the following shocks will affect a nation’s national saving (S), investment (I), trade balance (NX), and real exchange rate (), all else equal. For each shock, be sure to clearly state a prediction for all four variables and illustrate your predictions with the relevant supply/demand diagrams.

a. The domestic labor force expands (LS up)

b. Domestic income taxes are reduced (T down)

c. Forecasts of a recession cause an exogenous decrease in autonomous investment (i0 down)

d. An increase in the world’s supply of loanable funds, pushes world interest rates down (rw* down)

Expert Solution

Rahul Sunny answered 2 years ago

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