lOMoAR cPSD| 48599919
Ex 2: Consider a small open economy with free capital mobility in the long run. Explain what happens
to the trade balance of the economy
( suggest: use the loanable market for a small open economy ) a)
People want to save less due to higher taxes on saving
Initially the loanable is at equilibrium where: Nx1=S1-I(r*)
Event: People want to … saving
Private saving decrease S =Y-C - G
National saving decrease -> the supply of loanable friend curve shift to the left
The loanable find market reaches a new equilibrium where Nx2=S1-I(r*)
Nx2Ex 3: Consider a small open economy with free capital mobility in the long run. For each of the events,
explain. What happens to the real exchange rate and the trade balance of the economy
(Suggest: use the foreign exchange market for small open economy)
a) People want to save less due to higher taxes on saving
Initially the foreign exchange market is the at equilibrium E1 Ε=ε1 ; Nx1=s1-I
Event people saving => comsunption icreases decrease
Supply of domestic currency curve shifts to the left
The foreign exchange market reaches the equilibrium at E2 ∈=∈2; Nx2=S2-I
∈2<∈1: Real exchange rate in creases
Nx2Conclusion: people … saving leads to higher real exchange rate anh lower net exports
Ex 4: Consider a large open econoimy with free capital mobility in the long run. For each of the event,
explain what happens to the economys real interest rate, real exchange rate, trade balance and net foreign investment
a) People want to save less due to higher taxes on saving
Initially the economy is at equilibrium E1 R=r1; ∈=∈1
Event: people … saving -> private saving decrease lOMoAR cPSD| 48599919 -
- G -> National saving decreases In the loanable finds market
National saving decrease lead to supply of loanable find curve shift to the left
equilibrium E2 determine the interest rate at r2 r2>r1
-> real interest rate increase
interest rate lead to net forign investment to fall -
In the foreign exchange market: decrease in net foreign investment make
the supply of domesticurren of curve shift to the left -
The new established equilibrium E2 determine the real exchange rate ∈2
∈2>∈1 -> real exchange rate ∈2
A higher real exchange rate will make domestic good become relatively more expensive
compared to foreign foods which lead to lower export and higher import Net export decrease Bài tập C6:
Use IS-CM model to explain what happen to the economy real interest rate, total
output, unemployment, consumption and investment level a) People want to save less
Initally, the economy is at equilibrium E1 r=r1; y=y1
Event: people want to save less Consumption increase AE = C + I+G
Aggregate expendi ture increases
The IS curve shift to the night
The economy reaches at the new equilibrium E2 r=r2; y=y2 r2>r1: real interest rate increase
y2>y1: total output increase
Total output increase make film employer more workers, lead to unemployment decrease C =C−
Higher income result in higher consimption
Combine , => consumption increase
Higher real interest rate lead to lower investment level lOMoAR cPSD| 48599919
Conclusion: People want to save less lead to higher consumption, higher real interest rate,
higher total output, lower unemployment and lower investment level
b) Films expect higher rate of return on their investment
project Initally, the economy is at equilibrium E1 r=r1; y=y1
Event: Films expect higher rate of return on their investment project Investment increase AE = C + I+G
Aggregate expenditure increase
The IS curve shift to the night
The economy rechest at new equilibriumE2 r=r2; y=y2
r2>r1: real interest rate increase
y2>y1: total output increase
> Total output icrease make film employce more workers, lead to unemployment decrease C =C−
Higher income result in higher consumption I =I−-
Higher real interest rate lead to lower investment level
Combine , => investment level uncurtain
Conclusion: Films expect higher rate of returm on their investment project lead to higher
consumption, higher real interest rate, higher total output, lower unemployment, investment level uncetain