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Consider the policy assignment problem for a country with flexible exchange rates. In this case, the policy instruments become government spending (G) and interest rates (i).
a. In a diagram, derive the internal balance (IB) and external balance (EB) curves (with G on the horizontal axis and i on the vertical) and show why each has the slope that it does. Assuming that the EB curve is steeper (it is!) identify the two regions where policy directions are consistent and the two where they aren’t.
b. How would you solve the assignment problem? Why did you make this choice?
c. Using your solution show how an economy escapes from an initial situation of recession and CAB deficit. What would happen if you reversed the assignment?
Suppose that the US dollar interest rate and the Swiss Franc interest rate are the same, 5 percent per year, but that there is a risk premium of 1 percent associated with holding Swiss Franc rather than US dollars over the year. (b) If the expected f..
The price of good A is Eur 20,the quantity demanded is 500 units at yhis price,and price elasticity of demand is Ep=1,8,then a reduction in price of the good by eur 5 would increase the total revenue of seller by
2 companies are competing for output. The leader firm knows the market demand to be P=1200-Q. The demand for the other company is Q2=400-0.5Q1. Both companies are have marginal cost $200. How much output will the leader company produce?
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What would happen if no one tried to manage the business cycle? What role do you see for the executive branch of the US government managing the business cycle? How does fiscal policy work? What are its limitations?
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