Questions 3

Questions 3 - Questions 3 1 Anything that affects the current account other than income and anything that affects the capital account other than r

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Questions 3 1. Anything that affects the current account other than income, and anything that affects the capital account other than r, the interest rate. 2. Because lower income countries have less developed financial institutions and financial markets, investors are less willing to put money into such countries without higher interest rates on their investments. Slope of BP schedule will be steeper if marginal propensity to import is higher, and the degree of capital mobility is lower. 3. Fiscal expansion moves the IS curve to the right, resulting in a new IS-LM equilibrium point for developed countries that is higher than the BP schedule. This will result in higher income as well as an influx of capital form higher interest rates that exceeds the new current account deficit which would result in a BOP surplus as well as appreciation in domestic currency. 4. a. The model makes the assumption that the Marshal Lerner conditions hold. This is an admittedly strong assumption since the model is intended for the short run,
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This note was uploaded on 04/18/2008 for the course ECON 125 taught by Professor Manfredkeil during the Spring '08 term at Claremont.

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