Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 32 1. This problem is composed of the examples found in the chapter except the direction of the change in each case has been reversed. Use the model described by Exhibit 1 to answer the following questions. a. Suppose the government reduces its budget deficit. Describe the sequence of events in the model by describing the shifts in the curves in Exhibit 1 and discuss the movements in the relevant macroeconomic variables. Answer: Panel (a), supply of loanable funds shifts right, real interest rate decreases. NCOincreases, increasing the supply of pounds in the foreign currency exchange market and causing the real exchange rate to depreciate. Saving and domestic investment have increased and the trade balance has moved toward surplus.
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