Consider an OPEN ECONOMY with a floating exchange rate regime. In the aftermath of recent elections won by the country’s socialist party, consumer confidence and consumption has increased dramatically. Within the IS-MP framework for an open economy, explain and illustrate graphically what the effect is of the increase in overall consumption on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate.

Consider an OPEN ECONOMY with a floating exchange rate regime. In the aftermath of recent elections won by the country’s socialist party, consumer confidence and consumption has increased dramatically. Within the IS-MP framework for an open economy, explain and illustrate graphically what the effect is of the increase in overall consumption on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate.

Principles of Macroeconomics (MindTap Course List)

7th Edition

ISBN:9781285165912

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Open-Economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 3QCMC

See similar textbooks

Similar questions

Consider an OPEN ECONOMY with a floating exchange rate regime. In the aftermath of recent elections won by the country’s socialist party, consumer confidence and consumption has increased dramatically. Within the IS-MP framework for an open economy, explain and illustrate graphically what the effect is of the increase in overall consumption on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate.
Suppose that the government decides to cut spending. In a three graphs diagram, show theimpact of this policy on real interest rate, national saving, investment, net capital outflows,demand for currency (NX), and supply of currency? Will the currency appreciate ordepreciate?
A large open economy has desired national saving of Sd = 1200 + 1000rw, and desired national investment of Id = 1000 - 500rw. The foreign economy has desired national saving of = 1300 + 1000rw, and desired national investment of = 1800 - 500rw. Suppose the foreign country's government increases its spending by 300 and private saving does not change. Then in equilibrium, the foreign country has net exports equal to____
. The government has proposed Rs1,289 billion for the defence budget for the year 2020-21, 5.1% more compared to last year’s revised defence estimates of Rs1,227 billion for the year 2019-20. If Government cut defence Budget, what happens to saving, investment, the trade balance, the interest rate, inflation rate and the exchange rate? And similarly, Government decreases the interest rate due to COVID-19 so explain what impact on consumption, investment and interest rate. Justify the answer with your own word and examples.
Suppose that households decide to save a larger share of their income. Using Mundell - Fleming model for a small open economy, answer the following questions : a. How does it affect IS curve and LM curve ? explain why ? b . What are the changes in total output , exchange rate , consumption , investment and net exports of the economy? Explain why? c . Draw Mundell - Fleming graph to demonstrate your answer ?
Consider an increase in (domestic) taxes (T). a. Consider the event in the long-run closed economy model. How will private and public savings be affected? Explain. Illustrate graphically using the domestic loanable funds market how such an event will affect the equilibrium domestic national savings, domestic investment spending and domestic real interest rate. Explain. b. Consider the same event, but now in the long-run small open economy model. (Assume the economy is originally running a trade surplus.) i. Illustrate graphically using the domestic loanable funds market how such event will affect the equilibrium domestic national savings, domestic investment spending, net capital outflow and domestic real interest rate. Explain how the differences in the results obtained here from the results obtained in (a) come about. ii. Consider again the same event in the long-run small open economy context. Illustrate graphically using the…
Why do people of home country demand foreign currencies and why do they supply foreign currencies in forex market. Assuming that capital inflow in home country increases due to more negative impact of Corona virus in developed countries, explain whether PKR will appreciate or depreciate.
urgent Consider an open economy with a floating exchange rate regime. After a terrorist attack in the country, consumer confidence and business confidence have taken a serious hit, negatively impacting consumption and investment in the economy. To prevent the economy from suffering too badly, the central bank wants to intervene in such a way as to keep output at the same level as before the terrorist attacks. Within the IS-MP framework, explain and illustrate graphically the impact of the drop in consumer and business confidence and subsequent central bank intervention on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate. Is it possible for you to determine the overall impact on consumption and investment. Explain why or why not.
ADVANCED ANALYSIS Assume that the consumption schedule for a mixed open economy is such that consumption is: C = 250 + 0.8Yd Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 50 and Xn = 30. Lastly, assume government spending G = 40 and taxes T = 40. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + G + Xn Given that taxes T are present, the consumption schedule can be rewritten as: C = 250 + 0.8(Y - T) Instructions: Enter your answers as whole numbers.a. Calculate the equilibrium level of income or real GDP for this economy. Equilibrium GDP (Y) = $ . b. What happens to equilibrium GDP if Xn changes to 40? Equilibrium GDP (Y) = $ . What does this outcome reveal about the size of the spending multiplier? Spending multiplier = .
Discuss why the devaluation of domestic currency improves net exports in the extended version of the DD-AA model. Use a diagram in support of your answer.
Which of the following statements is true? A)The open-economy IS curve is derived in the same way that the closed-economy IS curve is derived. B)The closed-economy IS curve is downward sloping, but the open-economy IS curve is upward sloping. C)Some factors that shift the IS curve in the closed economy in one direction will shift the IS curve in the open economy in the opposite direction. D)Factors that raise a country's current net exports, given domestic output and the domestic real interest rate, shift the open-economy IS curve up.
D4) FinanceImagine that the economy is at a point that is below both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is TRUE? The exchange rate will first increase to a point on the AA schedule. The exchange rate will first move to a point on the DD schedule. The output will directly decrease. The output will directly increase. The economy will stay at this level in the short run.