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Unformatted text preview: Inflation effects the real interest rate- Inflation can make taxes creep upwards tax brackets do not adjust for inflation Arbitrary distribution of wealth- OPEN ECONOMY- trade can make everyone better off (production possibilities frontier) closed economy no exchange of goods and services with the rest of the world economies do not intereact- net exports = 0 Open economy buy and sell goods and services, but also buy and sell assets- exports = domestically produced G&S sold abroad o Value of exports value of imports = net exports Trade deficit NX < 0 Trade surplus NX > 0 Nominal exchange value of currency When Mexican goods rise faster than prices of US goods, US net exports increase Variables that influence NX- Consumers prefers for foreign and domestic goods- Prices of goods at home and abroad relative prices of goods from abroad tend to be cheaper o Pb / Pa = MUb / MUa Incomes of consumers at home and abroad not many Porsche dealerships opened in...
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