QUESTION 1 In the equilibrium small open-economy model, suppose that total factor productivity increases temporarily. Required: a) If the exchange rate is flexible, determine the effects on aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price level b) Repeat part (a) for the case of a fixed exchange rate. If the goal of the domestic govemment is to stabilize the price level, would it be preferable to have a fixed exchange rate or a flexible exchange rate regime when there is a change in total factor productivity?

QUESTION 1 In the equilibrium small open-economy model, suppose that total factor productivity increases temporarily. Required: a) If the exchange rate is flexible, determine the effects on aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price level b) Repeat part (a) for the case of a fixed exchange rate. If the goal of the domestic govemment is to stabilize the price level, would it be preferable to have a fixed exchange rate or a flexible exchange rate regime when there is a change in total factor productivity?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: A Macroeconomic Theory Of The Open Economy

Section: Chapter Questions

Problem 2PA

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