4. (a) Analyse how output and net exports are determined in the open economy. In doing so, in addition to presenting the relevant graphs or equations, explain what the nominal and real exchange rates are. (b) In the context of the model in (a) above, analyse the effects of (i) a rise in world income, and (ii) a real appreciation of the domestic currency.

4. (a) Analyse how output and net exports are determined in the open economy. In doing so, in addition to presenting the relevant graphs or equations, explain what the nominal and real exchange rates are. (b) In the context of the model in (a) above, analyse the effects of (i) a rise in world income, and (ii) a real appreciation of the domestic currency.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Economics (a) Indicate whether the following statement is true, false, or uncertain and explain your answer using words, graphs and equations as appropriate. In the Mundell–Fleming model with a floating exchange rate, a rise in the world interest rate will lead to both income and net exports rising. (i) (ii) In a small open economy with a fixed exchange rate, an effective policy to increase equilibrium output is to increase the money supply. (iii) Imposing a tariff on imports will cause output to increase.
Domestic economy: Consider two open economies in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, taxes, imports and exports are given by equations on the right for each economy. Variables with "*" denote values for the foreign economy. C = 11 + 0.7 (Y- T) | = 12 Solve for equilibrium output in the domestic economy Y, and foreign economy Y". (Enter your answer as a whole number.) G = 10 T= 9 Y= 89. IM = 0.3Y Y* = 89. EX = 0.3Y* What is the multiplier for each country? Foreign economy: (For the following numerical responses, round your answer to one decimal place.) C* = 11 + 0.7 (Y*- T") The multiplier for the domestic country is * = 12 The multiplier for the foreign country is G* = 10 T* = 9 IM* = 0.3Y* EX* = 0.3Y .....
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Q.1.11 What is a foreign exchange rate? (a) The rate at which the currency of one country trades for the goods ofanother country.(b) The rate at which one country’s goods trade for those of anothercountry.(c) The rate at which currencies of different countries are exchanged.(d) The rate at which one country’s currency trades for gold provided byanother country.Q.1.12 As a result of more Americans visiting South Africa, we can expect, ceteris paribus:(a) an appreciation of the rand relative to the dollar.(b) a depreciation of the rand relative to the dollar.(c) an appreciation of the dollar relative to the rand.(d) that it will cost South Africans more to visit the United States.Q.1.13 What is a tariff? (a) A form of subsidy.(b) A tax on imported goods.(c) A tax on foreign property.(d) A form of quota.
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