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Unformatted text preview: Econ303: International Money and Finance Tutorial 4 A. Short answer questions 1. A new government is elected and announces that it will increase the money supply in a year. Use the AA DD model to study the economys response (i.e. Y, E and CA) to this announcement. 2. Analyse how domestic output, the exchange rate and the current account will be affected by a temporary increase in foreign demand for money. 3. Using AA DD model, demonstrate how a permanent increase in domestic demand for real money balances will affect output, exchange rate and the current account in the short run and in the long run. 4. Assume that the government decides to have balanced budget (G=T) at all times. Thus, if the government decides to increase its spending, it must increase taxes by the same amount. Does this mean that the government can no longer use fiscal policy to affect employment and output?...
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- Spring '10