1. Use the long-run model developed in Chapter 6 to predict what would happen to imports, exports, trade balance, the real exchange rate, and the nominal exchange rate of a small open economy if domestic residents spend more vacations overseas. [3 points]

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Kristelle BalandoLv10

29 Sep 2019

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1-Use the model of the small open economey to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events.

a- a fall in consumer confidence about the future induces consumers to spend less and save more.

b-the introduction of a stylish line of toyotas makes some consumers prefer foreign cars over domestic cars.

c-the introduction of automatic teller machines reduces the demand for money.

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A) If the marginal propensity to consume is 0.8, explain what thelong-run effects would be on real GDP, public saving, and nationalsaving.
B) The US is a large open economy with a trade deficit. Use theappropriate graphs to illustrate and state what the reduction inSocial Security benefits would do to each of the following inthelong run: national saving, investment, the US real interest rate,net capital outflows, the real exchange rate, and the tradedeficit.
C) Now, consider the small open economy of Norway, which has atrade surplus. If the US, a large open economy, were to reduce itsSocial Security benefits, use the appropriate graphs to illustrateand state what would happen in the long run to Norwayâs nationalsaving, investment, interest rate, real exchange rate, and tradesurplus.

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Mundell-Fleming Model:

Use the Mundell-Fleming Model to predict what happens to aggregate income y, the exchange rate e, and the trade balance NX, under both floating and fixed exchange rates in response to each of the following shocks:

a.A fall in consumer confidence about the future induces consumers to spend less and save more.

b.The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.

The introduction of automatic teller machines reduces the demand for money.