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SIMON FRASER ECON291 tut11

SIMON FRASER ECON291 tut11 - b How is answer to part(a...

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Economics 291: Canadian Macroeconomic Policy Tutorial #11 (week of Nov 23) 1. Open economy trilemma is used to describe the fact that a country can choose only two of the three features: (1) a fixed exchange rate; (2) free capital flow; and (3) autonomy for domestic monetary policy. Explain why each feature is desirable and why the three features are incompatible. 2. Small open economies are subject to the whims of foreign legislators when they choose to use protectionist measures to protect employment in their countries. Assume that legislators in country B pass legislation designed to restrict the size of imports from country A. a. Assuming flexible exchange rates and fixed price level, what are the effects of the import restriction on output, the exchange rate, and net export in country A?
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Unformatted text preview: b. How is answer to part (a) affected by allowing the domestic prices to adjust? c. Assuming fixed exchange rates and fixed price level, what are the effects of the import restriction on output, the exchange rate, and net export in country A? d. How is answer to part (c) affected by allowing the domestic prices to adjust? 3. Using Mundell-Fleming model to show the effect of a permanent increase in the full-employment output on a small open economy with flexible exchange rate. Explain what happens to output, the price level, net exports, and the exchange rate. 4. Why a country is limited in changing its money supply under a fixed exchange rate system?...
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