ECON 4020 Midterm: ECN4020_PS4_ans.pdf
Document Summary
This problem set is due on oct 8, wednesday in class. An increase in saving shifts the (s-i) schedule to the right, increasing the supply of dollars available to be invested abroad. The increased supply of dollars causes the equilibrium real exchange rate to fall. Because the dollar becomes less valuable, domestic goods become less expensive relative to foreign goods, so exports rise and imports fall. The nominal exchange rate falls following the movement of the real exchange rate, because prices do not change in response to this shock. Nx1 nx2 nx: the introduction of a stylish line of toyotas makes some consumers prefer foreign cars over domestic cars. The introduction of a stylish line of toyotas that makes some consumers prefer foreign cars over domestic cars has no effect on saving or investment, but it shifts the nx schedule in ward (imports rise). The trade balance does not change, but the real exchange rate falls.
