ps08 - University of Toronto Economics Department...

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University of Toronto Macroeconomics, Theory and policy Masoud Anjomshoa Economics Department Assignment #8 1- We can define the trade balance (net export) function as NX( ε ,Y*,Y) = X( ε ,Y*) – ε . Q( ε ,Y). In previous assignment we derived the Marshal-Lerner Condition, as follows: 1 Q Q X X X NX - ε ε - ε ε = ε ε 1 Q Q X X 0 X NX ε ε + ε ε ε ε Where, the first two terms in the right hand side of the first relation are the exchange rate elasticity of exports and imports, respectively. a)- Using your economic intuition, and above relations, explain the Marshal-Lerner Condition? (i.e. intuitively, explain when an increase in ε leads to an increase in NX, and when to a decrease in NX.) b)- Again using your economic intuition, and above relations, explain the J-curve? ----------------------------------------------------------------------------------------------------------------------------------- 2- Suppose expected exchange rate for US$ is $1.5 Canadian.
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