Question 6. Canada is a small open economy. Suppose that the Canadian government significantly increases taxes when the world interest rate rises. Use the long- run model of a small open economy (the model with net export and exchange rate we studied) to graphically illustrate and explain in words the impact of this tax increase (when the world interest rate is rising) on the domestic investment, the exchange rate, the export, the import, and the trade balance. Be sure to label: į, the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.

Question 6. Canada is a small open economy. Suppose that the Canadian government significantly increases taxes when the world interest rate rises. Use the long- run model of a small open economy (the model with net export and exchange rate we studied) to graphically illustrate and explain in words the impact of this tax increase (when the world interest rate is rising) on the domestic investment, the exchange rate, the export, the import, and the trade balance. Be sure to label: į, the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 44P: Imagine that the U.S. economy finds itself in the following situation: a government budget deficit...

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