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Suggested_answers_Mock_Mid2_ - 1. a. Consider the impacts...

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1. a. Consider the impacts of the increased US budget deficit on Brazil, a large open economy with flexible exchange rates. Assume that the US and Brazil’s general price level is fixed. i) What is the effect of the increased US budget deficit on Y, the nominal exchange rate and net exports in Brazil? (Assume perfect capital mobility with no anticipated exchange rate effect) Explain. With the increased US budget deficit, the world interest rate, r*, rises. This means that for any value of r, the Brazilian interest rate, capital outflows will be larger. CF shifts rightward. (let’s call this new Capital Outflow function, CF’) Since the IS for Brazil is Y = C + I + G +CF, the IS curve also shifts rightward. With a normally shaped LM, the interest rate rises and the level of CF is now higher. (higher r at along the new CF’) With the higher level of CF, we move down along our NX function, so e falls and NX rises. ii) Explain what might be the consequences of the Brazilian central bank
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This note was uploaded on 04/13/2008 for the course ECON 53 taught by Professor Barbezat during the Spring '08 term at UMass (Amherst).

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Suggested_answers_Mock_Mid2_ - 1. a. Consider the impacts...

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