The economy in this question is a small open economy that adopts a fixed exchange rate system. The...

Question

The economy in this question is a small open economy that adopts a fixed exchange rate system.
The economy is initially in its long-run equili
ium. Use the DD-AA to answer the following
questions and for each part of the question supports your answer by ONE DD-AA diagram.
a) What happens to the short run levels of output and real money balance when there is an equal
eduction in both government spending and taxes? In the long run? Explain. (20 points) Note:
Compare your answer to the initial long-run equili
ium.
Answer – Due to reduction in spending by the government, there will be fall in aggregate
demand of the economy leading to backward/leftward shift of the DD curve. As a result, there
will be rise in the exchange rate of the country along with fall in the national income. It means
that domestic cu
ency will be devalued relative to the foreign cu
ency. Fall in government
spending reduces the transaction demand for...

David · Accepted Answer

The economy in this question is a small open economy that adopts a fixed exchange rate system. 
The economy is initially in its long-run equilibrium. Use the DD-AA to answer the following 
questions and for each part of the question supports your answer by ONE DD-AA diagram. 
a) What happens to the short run levels of output and real money balance when there is an equal 
reduction in both government spending and taxes? In the long run? Explain. (20 points) Note: 
Compare your answer to the initial long-run equilibrium. 
Answer – Due to reduction in spending by the government, there will be fall in aggregate 
demand of the economy leading to backward/leftward shift of the DD curve. As a result, there 
will be rise in the exchange rate of the country along with fall in the national income. It means 
that domestic currency will be devalued relative to the foreign currency.

The economy in this question is a small open economy that adopts a fixed exchange rate system. The economy is initially in its long-run equilibrium. Use the DD-AA to answer the following questions and...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment