Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a...

Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a budget surplus.

a. Use the appropriate diagrams to determine the effects on the real interest funds market.

b. In the foreign currency exchange market, show the effects of the budget the balance of trade.

Solutions

Expert Solution

This is shown in the diagram below, explanation follows.

A. The budget srplus will mean that there are more funds available in the real interest funds market. This is shown as movement from S1 to S2, where S1 is a balanced budget and S2 is a surplus budget. This will lower the interest rate from r1 to r2. The decline in the interest rates will increase the net capital outflow, which is shown in the second graph.

B. In the foreign exchange market, the increased capital outflow will result in the supply of dollars moving to the right, as shown in graph 3. This will mean the real interest rate will decrease from E1 to E2.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

1) Consider a small open economy that initially starts in balanced trade. Another, "large" economy does...

1) Consider a small open economy that initially starts in balanced trade. Another, "large" economy does tight fiscal policy. As a result, the world real interest rate will _______ and the small open economy will experience a trade ______. a. increase; deficit b. decrease; deficit c. decrease; surplus d. increase; surplus 2) In economics, "domestic" means a. international b. American c. in autarky (not trading) d. actively trading

Suppose a closed economy with no government spending or taxing initially.

6Suppose a closed economy with no government spending or taxing initially. Suppose also that intended investment is equal to 200 and the aggregate consumption function is given by C = 200 + 0.50Y. And suppose that, if at full employment, the economy would produce an output and income of 3200By how much would the government need to raise spending (G) to bring the economy to full employment?7Suppose a closed economy with no government spending which in equilibrium is producing an...

Initially a small open economy is in recession. The government implements expansionary fiscal policy by increasing...

Initially a small open economy is in recession. The government implements expansionary fiscal policy by increasing government spending. However, central bank worries about inflation and increase interest rate. Examine the effects of this policy combination on output, interest rate and the components of demand under flexible exchange rate regime(Hint:Useopen economyIS-LM model)

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the...

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the net tax rate (t). Briefly explain in words (1-2 sentences without a diagram) What type of gap would be caused by this policy AND the impact on real GDP and the price level in the short-run. Decreased net tax rate cause an overall decrease in real GDP, Briefly explain in words (1-2 sentences with no diagram) how the economy adjusts back to the long...

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the...

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the net tax rate (t). Briefly explain in words (1-2 sentences without a diagram) What type of gap would be caused by this policy AND the impact on real GDP and the price level in the short-run. Briefly explain in words (1-2 sentences with no diagram) how the economy adjusts back to the long run equilibrium if left alone and no further fiscal or monetary...

Question 6 Unsaved Suppose a closed economy with no government spending or taxing initially. Suppose also...

Question 6 Unsaved Suppose a closed economy with no government spending or taxing initially. Suppose also that intended investment is equal to 150 and the aggregate consumption function is given by C = 250 + 0.75Y. And suppose that, if at full employment, the economy would produce an output and income of 3200 By how much would the government need to raise spending (G) to bring the economy to full employment? (round your answer to the nearest whole value

1) Consider a small, open economy starting off with balanced trade. If the economy experiences an...

1) Consider a small, open economy starting off with balanced trade. If the economy experiences an increase in demand for economic investment, the result will be _____________ in the world real interest rate and the introduction of a trade _________. a. no change; deficit b. an increase; surplus c. no change; surplus d. a decrease; deficit 2) Consider a small, open economy that starts off in balanced trade. If its government raises taxes for fiscal policy, we expect to see...

Initially, there is a trade surplus in an open economy with a perfect capital mobility and...

Initially, there is a trade surplus in an open economy with a perfect capital mobility and a world interest rate rw. Suppose the government reduces her expenditure. How does the reduction in the government expenditure affect net capital outflow, exchange rate, and net exports? Answer with the aid of the supply-and-demand diagram for the foreign-currency exchange market.

Consider a large open economy. Imagine that initially the economy is bor- rowing from the rest...

Consider a large open economy. Imagine that initially the economy is bor- rowing from the rest of the word. Explain what happens in each of the following scenarios. 1. What do you expect to happen to the magnitude of domestic borrowing when foreign governments impose restrictions on capital mobility and prevent foreign residents from investing at will in the domestic economy? 2. Imagine that domestic rating agencies start to credibly rate foreign assets. How does this impact the world interest...

If we are in a small open economy, with balanced trade, and assuming that everyone else...

If we are in a small open economy, with balanced trade, and assuming that everyone else in the world is going after an expansionary fiscal policy, G* increases - What effect would this policy have on world real interest rates? R* Long run model of small open economy to describe effects of expansionary fiscal policy - small open economy interest rates, investment, net foreign investment, real exchange rates, trade balances - Graph the effects of this policy on the small...

Subjects