A small open economy produces two goods, l and 2, at output levels y;, i = 1, 2. Outputprices are set on world markets and denoted p1, p2. The economy is endowed withquantities L of labour and K of capital. Capital is used in sector 2 only, and labour is usedin both sectors, L; denoting the use of labour in sector i= 1, 2. The wage rate and thecapital rental rate are w and r, respectively. The production function for good 1 isY1 = L1, and good 2 has production function y2 = VKL2.What is the equilibrium allocation of labour between sectors (expressed as a function ofgoods' prices and endowments)?a. L1 = L - ()²K, L2 = ()²K.O b. L1 = ()K,L2 = L – ()²K.2p12p12p22p2О с. Li 3D 0, Lg — L.O d. L1 = L, L2 = 0.

Answered: A small open economy produces two…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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As per the Stolper-Samuelson analysis, in an open economy, the factor used extensively in the economic sector with an increasing price: benefits as a producer, but loses more as a consumer. benefits, regardless of the usual consumption certainly benefits as a loses both as a producer and as a consumer.
Suppose that a country with a bowed-out PPF is operating efficiently. The country can produce either capital-intensive goods or labor-intensive goods. If the country DECREASES its production of labor-intensive goods, the opportunity cost of producing labor-intensive goods remains constant. cannot be determined from the given information. increases. decreases.
11. As per the Stolper-Samuelson analysis, in an open economy, the factor used extensively in the economic sector with an increasing price:(a) benefits as a producer, but loses more as a consumer.(b) benefits, regardless of the usual consumption preferences.(c) certainly benefits as a consumer.(d) loses both as a producer and as a consumer.
Q46 How does a straight-line production possibilities boundary differ from a concave boundary? a. The straight-line boundary does not show scarcity, whereas the concave boundary does. b. The concave boundary illustrates constant opportunity costs, whereas the straight-line boundary illustrates decreasing opportunity costs. c. The straight-line boundary shows opportunity cost, whereas the concave boundary does not. d. A straight-line boundary is associated with a command economy, whereas a concave boundary is associated with a free-market economy. e. The straight-line boundary illustrates constant opportunity costs, whereas the concave boundary illustrates increasing opportunity costs.
Policymakers in open economies face a “trilemma” of three conditions that cannot all be realized at the same time. Which one of the following is not part of this “trilemma” of open-economy macroeconomics? Multiple Choice Be open to international flows. Implement capital controls. Fix its exchange rate. Control its domestic interest rate.
Consider the following small open economy model with production. At dates 1 and 2, the home country receives exogenous fixed endowments y1 and y2 respectively. The home country has access to the international capital market at a fixed interest rate r* at which it can save or borrow. Let the net saving of the home country be s1 and its consumption stream in two periods be given by c1 and c2 respectively.the following maximization problem: Max ln c1 + ln c2 s.t. C1 + S1 = Y1 C2 = C1(1+r*) + Y2 (a)Derive optimal consumption and current account functions and carefully interpret it in terms of a two-period Fisherian graph. Refer to (a). Suppose the home country also has an access to an investment technology which means that if it invests k units at date 1, it produces y2 = Aka units of output in the next period where A >0 and 0 < a< 1 . Modify budget constraints for (b)Derive the optimal investment and saving rules for this economy assuming the same logarithmic utility…
Consider the following small open economy model with production. At dates 1 and 2, the home country receives exogenous fixed endowments y1 and y2 respectively. The home country has access to the international capital market at a fixed interest rate r* at which it can save or borrow. Let the net saving of the home country be s1 and its consumption stream in two periods be given by c1 and c2 respectively.the following maximization problem: Max ln c1 + ln c2 s.t. C1 + S1 = Y1 C2 = C1(1+r*) + Y2 Derive optimal consumption and current account functions and carefully interpret it in terms of a two-period Fisherian graph. Refer to (a). Suppose the home country also has an access to an investment technology which means that if it invests k units at date 1, it produces y2 = Aka units of output in the next period where A >0 and 0 < a< 1 . Modify budget constraints for (a)Derive the optimal investment and saving rules for this economy assuming the same logarithmic utility…
Consider the following small open economy model with production. At dates 1 and 2, the home country receives exogenous fixed endowments y1 and y2 respectively. The home country has access to the international capital market at a fixed interest rate r* at which it can save or borrow. Let the net saving of the home country be s1 and its consumption stream in two periods be given by c1 and c2 respectively.the following maximization problem: Max ln c1 + ln c2 s.t. C1 + S1 = Y1 C2 = C1(1+r*) + Y2 Derive optimal consumption and current account functions and carefully interpret it in terms of a two-period Fisherian graph.
Given the following variables in the open economy aggregate expenditure model, autonomous consumption (C0) = 200, autonomous investment (I0) = 200, government spending (G0) = 100, export spending (X0) = 100, autonomous import spending (M0) = 100, taxes (TP) = 0, marginalpropensity to consume (c1) = 0.8, marginal propensity to invest (i1) = 0.1, and marginal propensity to import (m1) = 0.15, a. Compared with the original equilibrium in part a, if the government decides to impose taxes (TP) of 100, calculate the new equilibrium level of income. b. Find the value of the multiplier and the corresponding equilibrium income if tax is specified as ?? = 100 + 0.1?. Hint: Remember that consumption has an autonomous component and is a function of disposable income, Yd, where Yd = Y – TP
Consider the imaginary small country of Kootenay. Assume that Kootenay is closed to trade, so that its net exports are equal to zero. Suppose that the economy is described by the following consumption function, where C is consumption, Y is income (real GDP), IP is planned investment, G is government purchases, and T is taxes: C = $40 billion+0.5×(Y – T) Suppose G=$115 billion, IP=$50 billion, and T=$10 billion. Given the consumption function and the fact that, in a closed economy, planned expenditure can be calculated as Y=C+IP+G, the equilibrium income level is billion. Suppose that government purchases are increased by $100 billion. The new equilibrium level of income will be equal to billion. Based on the effect of the change in government purchases on equilibrium income, you can tell that this economy's multiplier is equal to
Consider Alpha, a country that is open to trade in goods and services with the rest of the world, where prices are fixed and in which only the goods market exists. In Alpha, the Marshall-Lerner condition doesn't hold — more precisely, net exports depend positively on the realexchange rate. Initially, the country is in goods market equilibrium, and trade is balanced. Having discussed which of the following three Figures provides a correct representation of the initial equilibrium in Alpha, describe the effects of a real appreciation. In particular, discuss if and how the various curves represented in the graph you have chosen will be affected, and explain the effects of the appreciation of the exchange rate on the equilibrium values of income, consumption, investment and net exports.
You are given the following information about an open economy with government activity. Consumption C = 5 + 0.8Y. Imports M = 2.5 + 0.1Y. The only tax is a uniform income tax at a rate of 25 percent. Investment I, Government G, and exports X are autonomous. The initial level of National Income Y is 100, and trade is initially balanced. a) Find the values of I and G. b) Find the change in National Income Y if the autonomous part of imports increases to 5. c) Calculate the trade balance resulting from b above. d) Find the new tax rate which would be necessary to restore trade balance

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