Problem 2. Consider the small open-economy Mundell-Fleming model under floating ex- change rate. How will equilibrium income, nominal exchange rate, consumption, net exports, and money supply change when: • Import quotas (quantitative restrictions on imports) are removed? • There's an increase in taxes? . There's a decrease in money supply? • The government implements an investment subsidy? • For some reason the country's clothing exports have become more popular than before? For each case, distinguish between a floating exchange rate regime and a fixed exchange rate regime. A. For each case, write "increase", "decrease", or "no change" for each variable. (Note: use our notation for the nominal and real exchange rates.) 2 B. For each case, draw a graph that shows the change in equilibrium income and nominal exchange rate. C. For each case, explain succinctly the mechanisms behind the variables' movements.

Problem 2. Consider the small open-economy Mundell-Fleming model under floating ex- change rate. How will equilibrium income, nominal exchange rate, consumption, net exports, and money supply change when: • Import quotas (quantitative restrictions on imports) are removed? • There's an increase in taxes? . There's a decrease in money supply? • The government implements an investment subsidy? • For some reason the country's clothing exports have become more popular than before? For each case, distinguish between a floating exchange rate regime and a fixed exchange rate regime. A. For each case, write "increase", "decrease", or "no change" for each variable. (Note: use our notation for the nominal and real exchange rates.) 2 B. For each case, draw a graph that shows the change in equilibrium income and nominal exchange rate. C. For each case, explain succinctly the mechanisms behind the variables' movements.

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter21: International Finance

Section: Chapter Questions

Problem 4QP

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