You are the economic advisor to the Government of Sweden, a country that is not a member of the European Union but trades quite a bit with EU countries and with whom there is a high degree of capital mobility. (a) Suppose that the members of the European Union enact a large tax cut financed by a large increase in their deficit. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market. (b) Suppose instead that the European Central bank increase the money supply. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market. (c) If you are very interested in keeping the Swedish exchange rate constant at the rate it was before the EU tax cut, what specific policy would you recommend to do this, i.e. to keep your currency from becoming overvalued or undervalued?
You are the economic advisor to the Government of Sweden, a country that is not a member of the European Union but trades quite a bit with EU countries and with whom there is a high degree of capital mobility.
(a) Suppose that the members of the European Union enact a large tax cut financed by a large increase in their deficit. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market.
(b) Suppose instead that the European Central bank increase the money supply. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market.
(c) If you are very interested in keeping the Swedish exchange rate constant at the rate it was before the EU tax cut, what specific policy would you recommend to do this, i.e. to keep your currency from becoming overvalued or undervalued?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
