ECON 2400 Lecture Notes - Lecture 3: Consumption Function, Import Quota, Exchange Rate
12 May 2016
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Problem set 3: consider the classical model of a small-open economy. Suppose this economy suffers from bureaucratic corruption and as a result has a huge g. suppose, as a result, this country has both a trade deficit and a budget deficit. As a result, government purchases reduces: use the domestic loanable funds market diagram to show what will happen to the trade deficit. How will the trade balance be affected by this investment boom? (consider it separately from the reduction in g). The real exchange rate is 1. 2 ((movie dvd in hong kong)/(movie. Dvd in japan)). (assume the dvd prices are representative of all goods prices in the economies. ) Determine the nominal exchange rate (in yen/hk$): (this is the exercise on the presentation slides, but we do not cover in the lecture. So, here it is as a home exercise. ) A small open economy was originally in a trade deficit position.
