In order to prevent economies from the harmful effects of covid-19, governments all around the world increase their spending and central banks lower the interest rate. Investigate the impacts of these two policies on the following small open economy; <1 C = c(y,r) I = i(r) Ex = x(fx) Im = m(fx,y) Md = L(y,r, fx) 0 < Cy i' < 0 0 < x' mfx < 0 Ly >0 and and and Cr <0 0 < my <1 Lr <0 where r is interest rate, Ex is export, Im is import, fx is exchange rate and Md is money demand. Like Turkey, this small open economy suffers from dollarization problem. Thus, money demand is affected by exchange rate (fx). Equilibrium conditions are Y=C+I+G + Ex - Im, Ms = Md and r = r* (Ms is money supply and r* is world interest rate). Define trade balance as TB = Ex-Im. Find the effect of a. b. increase in G on TB. (Hint: Find OTB/G) decline in world interest rate (r*) on TB. (Hint: Find OTB/ar. )
In order to prevent economies from the harmful effects of covid-19, governments all around the world increase their spending and central banks lower the interest rate. Investigate the impacts of these two policies on the following small open economy; <1 C = c(y,r) I = i(r) Ex = x(fx) Im = m(fx,y) Md = L(y,r, fx) 0 < Cy i' < 0 0 < x' mfx < 0 Ly >0 and and and Cr <0 0 < my <1 Lr <0 where r is interest rate, Ex is export, Im is import, fx is exchange rate and Md is money demand. Like Turkey, this small open economy suffers from dollarization problem. Thus, money demand is affected by exchange rate (fx). Equilibrium conditions are Y=C+I+G + Ex - Im, Ms = Md and r = r* (Ms is money supply and r* is world interest rate). Define trade balance as TB = Ex-Im. Find the effect of a. b. increase in G on TB. (Hint: Find OTB/G) decline in world interest rate (r*) on TB. (Hint: Find OTB/ar. )
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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