Question 5. Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I= 400 – 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100, does investment change? What is the level of investment after the change? Explain your answer. b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much? Explain your answer. c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much? Explain your answer. d. Use the long-run model of a small open economy in chapter 5 (the model that shows how exchange rate is determined) to illustrate graphically the impact of increasing the government spending on the exchange rate and the trade balance.

Question 5. Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I= 400 – 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100, does investment change? What is the level of investment after the change? Explain your answer. b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much? Explain your answer. c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much? Explain your answer. d. Use the long-run model of a small open economy in chapter 5 (the model that shows how exchange rate is determined) to illustrate graphically the impact of increasing the government spending on the exchange rate and the trade balance.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter20: Exchange Rates And The Macroeconomy

Section: Chapter Questions

Problem 3TY

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