Suppose a small open economy has the following money demand function: M/P = L (r, Y-T), wherer is the interest rate and (Y-T) is the disposable income. Please illustrate graphically the short-run impact of a tax cut on the exchange rate and level of output in the small open economy under both fixed and floating exchange rate systems. Be sure to label: i. the axes, ii. the curves, iii. the initial equilibrium levels, iv. the direction the curves shift, and v. the new short-run equilibrium.
Suppose a small open economy has the following money demand function: M/P = L (r, Y-T), wherer is the interest rate and (Y-T) is the disposable income. Please illustrate graphically the short-run impact of a tax cut on the exchange rate and level of output in the small open economy under both fixed and floating exchange rate systems. Be sure to label: i. the axes, ii. the curves, iii. the initial equilibrium levels, iv. the direction the curves shift, and v. the new short-run equilibrium.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter29: Exchange Rates And International Capital Flows
Section: Chapter Questions
Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...
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