Question

Consider a small-open endowment economy described in Topic 4 with free capital mobility, a single traded good per period, and a government that levies lump-sum taxes to finance government purchases. Assume that there is no physical capital and hence no investment. Assume that the economy exists for an infinite number of periods. Assume a fixed exchange rate and the effects of the once-and-for-all devaluation of the domestic currency. In THREE sentences provide a critic of the assumptions made in seminar 4.

Answer 1

An economy with the above assumptions would be majorly government controlled. There wouldn;t be much control by the producers itslef. The assumptions have said that there would be a fixed exchange rate, with one time devaluation and no physical investment. A fixed exchange rate would ensure greater power to the government, and the production forcs won't have much effect on the exchange rate. Devaluation of a currency is important as it keeps a check on the international trade quality. If the currency doesn't fluctuate regularly, the economy will not have a constant check system and it may not feel accountable in mentaining agood quality based international produce. And lastly, the absence of a physical investment system would be detrimental for production in the long run. The presence of a physical investment would mean that there is constant production and the producers would have a sense of security as well. Otherwise it could simply become an unbalanced economy.