In order to prevent economies from the harmful effects of covid-19, governments all around the world increase their spending and central banks lower the interest rate. Investigate the impacts of these two policies on the following small open economy; 2. C = c(y,r) I = i(r) Ex = x(fx) Im = m(fx,y) Md = L(y,r, fx) 0 < Cy i' < 0 0 < x' < 1 and C, < 0 Mfx < 0 Ly > 0 0 < my < 1 L, < 0 and and where r is interest rate, Ex is export, Im is import, fx is exchange rate and Md is money demand. Like Turkey, this small open economy suffers from dollarization problem. Thus, money demand is affected by exchange rate (fx). Equilibrium conditions are Y = C + I + G + Ex - Im, Ms = Md and r = r* (Ms is money supply and r* is world interest rate). Define trade balance as TB = Ex – Im. Find the effect of а. increase in G on TB. b. decline in world interest rate (r*) on TB.

In order to prevent economies from the harmful effects of covid-19, governments all around the world increase their spending and central banks lower the interest rate. Investigate the impacts of these two policies on the following small open economy; 2. C = c(y,r) I = i(r) Ex = x(fx) Im = m(fx,y) Md = L(y,r, fx) 0 < Cy i' < 0 0 < x' < 1 and C, < 0 Mfx < 0 Ly > 0 0 < my < 1 L, < 0 and and where r is interest rate, Ex is export, Im is import, fx is exchange rate and Md is money demand. Like Turkey, this small open economy suffers from dollarization problem. Thus, money demand is affected by exchange rate (fx). Equilibrium conditions are Y = C + I + G + Ex - Im, Ms = Md and r = r* (Ms is money supply and r* is world interest rate). Define trade balance as TB = Ex – Im. Find the effect of а. increase in G on TB. b. decline in world interest rate (r*) on TB.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 3SCQ: State whether each of the following events Involves a financial flow to the Mexican economy or a...

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