Handout 13 Key - Econ 3140-2 Fall 2009 Handout #13...

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Econ 3140-2 Fall 2009 Handout #13 Suggested answers 1. (a) Using the equilibrium condition in the good market in an open economy, ( S I ) = NX , and using the fact that for the US such equilibrium occurs at the negative current account implying also a higher real interest rate. From Chapter 13, we know that the nominal exchange rate e moves in the same direction than the real interest rate r (i.e. @e @r > 0 ). (b) The higher exchange rate e from Part ( a ) , make the US exports less attractive to the foreign economies like China and Japan, so the net exports curve NX moves (c) The housing sector collapse in the US reduced the consumer±s wealth and con- sumption and increased the savings. Higher savings decreased the equilibrium interest rate r , and moved down and to the left the IS curve, so the American Economy entered to recession. The decline in the US output
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Handout 13 Key - Econ 3140-2 Fall 2009 Handout #13...

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