c Describe and explain the determination of the steady state for this economy

C describe and explain the determination of the

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(c) Describe and explain the determination of the steady state for this economy and find the steady state level of capital per worker. (d) Draw a graph showing depreciation, investment and the steady state capital per worker for both countries. Briefly interpret any differences in the graphs. 6. The Open Economy The country of Castlecliffe is a small open economy with historically strong international trade links. Over the last few years, a change in global consumer preferences has made Castlecliffe’s exports unpopular. (a) Explain and illustrate graphically what effect this will have on Castlecliffe’s saving, investment, net exports, interest rate and exchange rate. (b) Suppose you run an import business in Castlecliffe’s main port. Describe and explain the effect that the above changes will have on Castlecliffe’s imports. (c) Suppose that many years pass and the popularity of Castlecliffe’s exports recovers and they return to their original level. However, in an attempt to improve the country’s infrastructure, the government decides to increase government spending. Describe and explain the effect the expansion in government expenditure will have on Castlecliffe’s trade balance and real exchange rate. (Please turn over for Question 6 part (d)) Page 4 of 5
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(d) The currency of Castlecliffe is the Econ (ECO). The price of a Big Mac in Castlecliffe today is 12 ECO. The price of a Big Mac in the US in USD$3. The USD/ECO exchange rate today is 1/9 (i.e. $1 = 9 ECO). What is the % over/undervaluation of the Econ relative to the USD$. Briefly explain the theory behind your answer. *** END OF PAPER *** Page 5 of 5
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