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; 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 Cr < 0 Mfx < 0 Ly > 0 and 0< ту <1 L, < 0 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 a. increase in G on TB. b. decline in world interest rate (r*) on TB.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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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;
0 < Cy
i' < 0
C = c(y,r)
I = i(r)
Ex = x(fx)
Im = m(fx,y)
Md = L(y,r, fx)
< 1
and
Cr < 0
0 < x'
Mfx <0
аnd
0 < m, < 1
Ly > 0
and
L, < 0
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
a.
increase in G on TB.
b.
decline in world interest rate (r*) on TB.
Transcribed Image Text: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; 0 < Cy i' < 0 C = c(y,r) I = i(r) Ex = x(fx) Im = m(fx,y) Md = L(y,r, fx) < 1 and Cr < 0 0 < x' Mfx <0 аnd 0 < m, < 1 Ly > 0 and L, < 0 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 a. increase in G on TB. b. decline in world interest rate (r*) on TB.
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