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Econ 110B Ch19 Solutions

Econ 110B Ch19 Solutions - Economics 110B Solutions to...

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Economics 110B Solutions to Practice Questions for Chapter 19 Solutions 1) The domestic demand for goods represents the demand for goods by domestic individuals, firms, and government: C + I + G. The demand for domestic goods represents the demand for goods produced IN a country. This measure will take into account those goods produced domestically and sold abroad (exports) and the fact that some of the goods purchased domestically were produced in other countries (imports). The demand for domestic goods is represented as: C + I + G + NX. 2a) Exports are a function of foreign income (output) and the real exchange rate. An increase in foreign income leads to a higher foreign demand for all goods, both domestic and foreign, and thus increases exports. An increase in the real exchange rate increases the price of domestic goods relative to foreign goods, which decreases the quantity of domestic goods demanded by foreigners, and thus decreases exports. 2b) Imports are a function of domestic income (output) and the real exchange rate. An increase in domestic income leads to a higher domestic demand for all goods, both domestic and foreign, and thus increases imports. An increase in the real exchange rate increases the price of domestic goods relative to foreign goods, which increases the quantity of foreign goods demanded by domestic residents, and thus increases imports. 3) The shape of DD and ZZ depend on the level of autonomous spending on domestic goods (the vertical intercept) and the marginal propensity to spend on domestic goods (the slope). The level of autonomous spending on domestic goods is higher in the open economy (ZZ) than in the closed economy (DD) because the demand for domestic goods by foreigners is included in the open economy.
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