Suppose a small open economy with perfect capital mobility faces a rise in real interest rates abroad (for an unspecified reason). We assume that inflationary expectations are constant around the world.
a) If this small open economy has a flexible exchange rate, what will be the effects on its real GDP, its real interest rate, its exchange rate and its net exports?
b) If this small open economy has a fixed exchange rate (and decides to keep it fixed), what will be the effects on its real GDP, its real interest rate and its net exports?
c) If the government wants to protect the value of the currency in part a), what fiscal policy would you recommend? What will be the consequence on domestic GDP?
d) If the government wants to protect the value of the currency in a) but prefers to do so through monetary policy, what would you recommend? What will be the consequence on the Domestic GDP?
Suppose a small open economy with perfect capital mobility faces a rise in real interest rates abroad (for an unspecified reason). We assume that inflationary expectations are constant around the world.
a) If this small open economy has a flexible exchange rate, what will be the effects on its real GDP, its real interest rate, its exchange rate and its net exports?
b) If this small open economy has a fixed exchange rate (and decides to keep it fixed), what will be the effects on its real GDP, its real interest rate and its net exports?
c) If the government wants to protect the value of the currency in part a), what fiscal policy would you recommend? What will be the consequence on domestic GDP?
d) If the government wants to protect the value of the currency in a) but prefers to do so through monetary policy, what would you recommend? What will be the consequence on the Domestic GDP?
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| 14. | (2.0 pts) Explain why in the MundellâFleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in net exports. Answer: |
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Assume that in a small open economy where full employment always prevails, national saving is 300.
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