Final Notes - Net exports real exchange rate demand for...

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Net exports, real exchange rate, demand for imports and exports- 1. the real exchange rate is related to NX. When the real exchange rate is lower, domestic goods are less expensive relative to foreign goods and net exports are greater. 2. The trade balance (NX) must equal the net capital outflow, which in turn equals S-I. S is fixed by the consumption function and fiscal policy; I is fixed by the investment function and the world interest rate (r*). Traditional view of government debt- a debt financed tax cut stimulates consumer spending and lowers national saving. This increase in consumer spending leads to greater aggregate demand and higher income in the short run, burt it leads to a lower capital stock and lower income in the long run. Policy conducted by rule- makes policy or promises more credible because politicians (or whatev) have no discretion and must act by a preset procedure in a certain event. This helps to fight dynamic inconsistency, where exceptions to set or promised policy occur because of policy maker discretion. Discretionary approach to policy making on the other hand allows for exceptions at enforcer’s discretion. Ex: Pres says he won’t negotiate with terrorists, but then does so when his daughter is kidnapped.
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