a)In the two-period small open economy model, explain how the nation makes its choices. b) In the two-period SOE model, suppose that the country is initially running a current account deficit. Then, suppose that the real interest rate falls. Determine the equilibrium effects, and explain.
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- Assume that a nation initially has an output level of 150 units per period and that consumption is also 150 (there is no investment or government spending). Suppose there is a temporary (i.e. one-period) increase in GDP of 16% in period 0. Assume the country has access to global financial markets with an interest rate of 8%. Assume an infinite time horizon for all questions. The United States has experienced large and growing current account deficits for more than 20 years, whereas Japan has experienced large and growing current account surpluses for roughly the same period. The U.S. economy has grown at faster rates than Japan's over the past 10 years. What might explain the difference? Relate your answer to the relationship between the current account, GNDI, and GDP.Please use the AD-AS model to analyze the effects of monetary policy and fiscal policy on economic outcome in an open economy: a. Please show graphically the shifting of the AD curve after the Fed conducts an expansionary monetary policy in a closed economy (A closed economy means there is no international trade.). How do the price level and the real GDP change? b. Suppose the economy becomes an open economy. Please revise the result that you get in part (a). Please explain how you get the new result using the AD-AS model. c. Please show graphically the shifting of the AD curve after the federal government conducts an expansionary fiscal policy in a closed economy. Please show the crowding-out effect. How do the price level and the real GDP change? d. Suppose the economy becomes an open economy. Please revise the result that you get in part (c). Please explain how you get the new result based on the AD-AS model.graphically compare effects of monetary or fiscal expansion on equilibrium output in closed and open economy. EXPLAIN your results
- KEYNESIAN OPEN-ECONOMY MODEL IN DYNAMICS This section contains questions about a Keynesian open-economy model: • Recall the static IS equation Y = C +I+ G+ X – M. In this section, we assume that the consumption, the investment and the government expenditure are parameters. The trade balance at year t (X – M) is a linear function of the exchange rate Q; and the income Y; such that: X – Mt = aQt – BY; – YYt-1 where a, B and Y are positive parameters. Derive the difference equation that describes the dynamic behavior of the income Y. | What is correct about the dynamic behavior of the model? Select one or more: Select one or more: The model implies that an increase in the income this year will immediately worsen the net export, keeping other things constant. The model implies that an increase in the real exchange rate will be followed by a series of income rises until a new equilibrium is reached. O It makes sense to assume that 2 < 1. 1+3 The model implies that the immediate multiplier…Short-answer questions 1. Consider the following linear version of the AA-DD model: consumption is given by C = (1- s)(YT) and the current account balance is given by CA =aE-m(YT). (s is sometimes referred to as the marginal propensity to save and m is called the marginal propensity to import.) Then the condition of equilibrium in the goods market is Y=C+I+G+CA = (1-s) (Y-T)+ I+G+aE-m(YT). We will write the condition of money-market equilibrium as M³/P = bY dR. Assume that the central bank can hold both the interest rate R and exchange rate E constant, and assume that investment I is also constant. = a) Consider the equilibrium in the output market. Other things equal, what is the effect of an increase in government spending G by 1 unit on output Y? (This number is often called the open-economy government spending multiplier, but as you can see it is relevant only under strict conditions.) How does a higher value of m affect the government spending multiplier? Explain your result…QUESTION 7 As a result of entering the world economy, Neverland experiences economic boom and its GDP goes up to y=13250: The functions that describe consumption and investment are still the same: cd () = 5000 – 1000r +0.25Y and 1d() = 500 – 1800r+0.2Y: Government spending is also the same: G=1800- What is Neverland's current account balance? Note: Type in your answer approximated to two decimal points, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard will automatically delete it and you should not do anything about it.
- Business executives and policymakers are often concerned about the competitiveness of Pakistani industry (the ability of industries to sell their goods profitably in world markets). i. How would an increase in the nominal exchange rate ($/Rs) affect competitiveness in the short run? Explain. ii. Suppose you wanted to make domestic industries more competitive but did not want to alter aggregate income. According to the Mundell–Fleming model, what combination of monetary and fiscal policies should you pursue? Graphically explain.Problem 1. Consider a small open economy classical model described by the following equations: Y=C+I+G+ NX Y = 5000 G = 1000 T = 4000 C = 250 +0.75(Y - T) I = 1000 - 50r NX = 1000+ 500€ r = r* = 5 where Y is income, C consumption, G government spending, NX net exports, T taxes, € real exchange rate, r real interest rate, r* world real interest rate. A. Solve for private saving, public saving, national saving, investment, trade balance, and real exchange rate in the equilibrium.Consider a small open economy with no perfect capital mobility whose Central Bank is explicitly targeting price level. If the government decides to decrease the tax level, what would happen with a new equilibrium domestic price level and real output? What the response of Central Bank should be? Please show your solutions using the model that we have developed (be sure to use BB and GM curves).
- Sunshine is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G-government spending, NX-net exports, l-investment, C-consumption, r-domestic interest rates, r* - world interest rates. Y = 4000 G = 1250 T = 1000 C = 250 + 2/3 (Y-T) I = 450 - 25r NX = 1250 - 175epsilon r =r^ * =4 a) Required: Select the appropriate answer that represent [i] investment, [ii] national savings, [iii] equilibrium exchange rate and [iv] trade balance. b) Suppose the government of sunshine cut its spending to 2,000. Required: Select the appropriate answer that represent [i] investment, [ii] national savings, [iii] equilibrium exchange rate and [iv] trade balance. c) Now suppose the world interest rate falls from 8 to 3 percent, (G is again 2000). Required: Select the appropriate answer that represent [i] private savings, [ii] public savings, [ii] national savings, [iv] investment, [v] trade balance and [vi]…Which of the following is a plausible effect of a rescue package offered by the IMF after a country gets hit by a financial crisis? I. The rescue package can compensate for the lack of private lending during the crisis. II. The rescue package can restore investor confidence by ensuring that there is no moral hazard problem. III. The rescue package can limit any contagion effects. IV. The rescue package includes conditions from the IMF that are aimed at ending the financial crisis. A) I, II and III B) I, III and IV C) II, III and IV D) I, II, III and IV E) None of the aboveWhen there is no persistence in the productivity shock process, the production economy model with investment can generate a counter - cyclical current account movement. true or false? explain.