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Comprehensive Problems Ch5

# Comprehensive Problems Ch5 - (b Suppose now that G rise to...

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Comprehensive Comprehensive Problems Problems Chapter 5: The Open Economy Chapter 5: The Open Economy P’ O Tuitional EBA Macroeconomics Use the model of the small open economy to predict what would happen to the trade balance, 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. (b) The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars. Consider an economy describe by the following equation: Y = C + I + G + NX Y = 5,000 G = 1,000 T = 1,000 C = 250 + 0.75 (Y-T) I = 1,000 – 50 r NX = 500 – 500 ε r = r* = 5 (a) Solve for national saving, investment, the trade balance, and the equilibrium exchange rate.

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Unformatted text preview: (b) Suppose now that G rise to 1,250. Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find. (c) Now suppose that the r* rise from 5% to 10%. G = 1,000. Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find. • Suppose that some foreign countries begin to subsidize investment by instituting an investment tax credit. (a) What happens to world interest rate? (b) What happen to investment in our small open economy? (c) What happens to our trade balance? (d) What happens to our real exchange rate? A n y q ue s t i o , p l e a f r c m 8 9 136 3 2 6 4 L _ g @ h...
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