SIMON FRASER ECON291 tut9a (5)

SIMON FRASER ECON291 tut9a (5) - it started from a...

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Economics 291: Canadian Macroeconomic Policy Tutorial #9 (week of November 9) 1. What will happen to the exchange rate and net export in each of the following cases? a. The foreign real interest rate falls b. Foreign output falls c. Foreign demand for domestic goods falls d. Domestic output falls e. The domestic real interest rate falls (a) Domestic currency appreciates. NX decreases. (b) NX falls. Domestic currency depreciates. (c) NX falls. Domestic currency depreciates. (d) Net export increases. Domestic currency appreciates. (e) Domestic currency depreciates. NX increases. 2. Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy. a. What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation? b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy. c. What will happen to the trade balance of the small open economy, assuming that
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Unformatted text preview: it started from a position of balanced trade? (a) Expansionary fiscal policy. (b) In the Mundell-Flemming model, IS shifts to the right, currency appreciates, NX falls, IS shifts back to its original position. In the foreign exchange market, demand for domestic currency increases. As a result, domestic currency appreciates. (c) Net export will fall as a result of fiscal expansion. 3. You are the chief economic adviser of a small open economy with flexible exchange rate system. Your big boss, the prime minister of the country, wants to increase the level of output in the short run in order to win re-election. a. Do you recommend using expansionary or contractionary, monetary or fiscal policy? b. Use the Mundell-Fleming model to illustrate graphically your proposed policy. Expansionary monetary policy should be used....
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This note was uploaded on 04/15/2010 for the course ECON 291 taught by Professor J liu during the Summer '07 term at Simon Fraser.

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SIMON FRASER ECON291 tut9a (5) - it started from a...

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