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6 Cards in this Set

  • Front
  • Back

Explain the difference b/w:


- the demand for domestic goods


- the domestic demand for goods

- Demand for domestic goods: z=c+I+g-IM(E+X)


- Domestic demand for goods: C+I+G=C(Y-T)+I(Y,r)+G

Explain the determinants of exports and imports

Determinants of imports: IM=IM(Y,E)


- An increase in domestic income, Y, leads to an increase in imports.


- An increase in the real exchange rate, E, leads to an increase in imports, IM.



Determinants of exports: X=X(Ystar,E)


- An increase in foreign income, Ystar, leads to an increase in exports.


- An increase in the real exchange rate, E, leads to a decrease in exports.

Explain why the demand for domestic goods curve (ZZ) has a different shape than the domestic demand curve (DD).

AA is flatter than DD b/c as income increases, domestic demand for domestic goods increases less than total domestic demand. ZZ is simply AA+exports, so it maintains its own shape.

Explain why the multiplier in an open economy is different from the multiplier in a closed economy.

In an open economy, changes in demand falls on domestic and foreign goods. So when something, like income, increases, the effect on demand for domestic goods is smaller than in a closed economy.

Suppose a country is experiencing a situation where output is above the full employment level of output and a trade deficit. Further assume that the policy makers' goals are to achieve full employment output and balanced trade. Given this information, what type of exchange rate and/or fiscal policy can be used to achieve simultaneously these two goals? Explain.

Fiscal policy-wise: gov. spending should decrease. Doing this lowers output (which is too high) and creases output demand for domestic goods. Exchange rate is ambiguous. With an appreciation or depreciation of the exchange rate.

Suppose a country's output is below the policy makers' desired level of output and is experiencing a trade surplus. Assume that the policy makers' goals are to achieve the desired level of output (i.e., full employment output) and balanced trade. Given this information, what type of exchange rate and/or fiscal policy can be used to achieve simultaneously these two goals?

Fiscal policy-wise: gov. spending should increase. This will increase output as well as reduce some of the trade surplus. Exchange rate is still ambiguous.