ECN4020_PS4_ans - This Problem Set is Due on Oct 8,...

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This Problem Set is Due on Oct 8, Wednesday in Class. ECON4020 Problem Set 4 Instructor: Masako Miyanishi Chapter 5 1. Use the model of the small open economy to predict what would happen to the trade balance (NX), the real exchange rate, and the nominal exchange rate in response to each of the following events. a. A fall in consumer confidence about the future induces consumers to spend less and save more. An increase in saving shifts the (S-I) schedule to the right, increasing the supply of dollars available to be invested abroad. The increased supply of dollars causes the equilibrium real exchange rate to fall. Because the dollar becomes less valuable, domestic goods become less expensive relative to foreign goods, so exports rise and imports fall. Trade balance increases. The nominal exchange rate falls following the movement of the real exchange rate, because prices do not change in response to this shock. b. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars. The introduction of a stylish line of Toyotas that makes some consumers prefer foreign cars over domestic cars has no effect on saving or investment, but it shifts the NX schedule in ward (imports rise). The trade balance does not change, but the real exchange rate falls. Because prices are not affected, the nominal exchange rate follows the real exchange rate. NX1 NX2 NX S1-I S2-I ε1 ε2 ε NX(ε)
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2. Consider an economy described by the following equations: Y=C+I+G+NX Y=5000 G=1000 T=1000 C=250+0.75(Y-T) I=1000-50r NX=500-500
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This note was uploaded on 09/25/2010 for the course ECON ECON 2000 taught by Professor Perrys during the Fall '09 term at York University.

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ECN4020_PS4_ans - This Problem Set is Due on Oct 8,...

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