Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a reduction in foreign output (Y*) will have on the domestic economy. In your graphs, clearly label all curves and equilibria
What will be an ideal response?
A reduction in Y* will cause a reduction in X and NX. This causes the IS curve to shift to the left. As demand falls, production will drop. The drop in Y will cause a reduction in money demand. As money demand falls, i will fall causing a depreciation. So, some of the effects of Y* on NX will be offset by the increase in NX caused by the depreciation. We will observe a reduction in NX, a reduction in Y, a reduction in i, and a reduction in E.
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Real business cycles could be a result of
A) shocks to the aggregate supply side of the economy. B) abrupt changes in monetary policy. C) increases in the budget deficit and national debt. D) discretionary fiscal policy.
In the DMP model, a decrease in the unemployment insurance benefit
A) increases the unemployment rate. B) reduces labor market tightness. C) reduces the unemployment rate. D) reduces the vacancy rate.
Explain why tariffs are a primary revenue source for less-developed countries but not for developed countries
What will be an ideal response?
Why is it unlikely that expansions could be explained by a decrease in labor demand in the classical model?
a. It would be hard to say why productivity decreases. b. Productivity increases are too fast and variable to explain expansions. c. Productivity tends to improve at a constant and steady rate. d. Only unexplained spending changes can lead to changes in output and employment, not the other way around. e. Productivity improvements are rather slow.