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# f01_ps5 - Problem Set 5 14.02 Fall 2001 1 True or false...

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Problem Set 5 14.02 Fall 2001 1 True or false, explain (4 pts. each) 1. It is always true that a real devaluation increases exports, both in gross and net terms. 2. Expansive fi scal policies that deteriorate the budget surplus, make domestic bonds relatively less attractive than foreign bonds and hence depreciate the currency. 3. Fixed exchange rates are good because no matter how much the government spends the real value of the currency never changes. Hence the government has no incentive to spend. 4. Fixed exchange rates do not allow a domestic economy to adjust to a fall in export due to a foreign recession. 5. If we start from balanced trade, and a devaluation causes a greater percentage increase in the value of exports than a percentage fall in the quantity of imports, the trade balance will always improve. 6. If a devaluation causes a greater percentage increase in the value of exports than a percentage fall in imports valued in domestic prices, the trade balance will always improve. 2 Policy Abroad Questions (4 pts. each) Consider the goods market of an open economy described by the follow- ing behavioral equations. C = c 0 + c 1 ( Y T ) I = I k 0 i + k 1 Y 1

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and government demand is exogenous. The behavior of imports is described by: Q = q 0 Y q 1 ² and the behavior of exports is given by: X = x 0 Y + x 1 ² with Y denoting the income of the rest of the world, and all para- meters are positive. Assume P = P = 1
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f01_ps5 - Problem Set 5 14.02 Fall 2001 1 True or false...

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