Assume that the government has a target value, X, for the current account surplus.
(a) What is the goal of external balance?
(b) Assume that we are dealing with only the short run, what are the values of P and P∗?
(c) Given fixed P and P , what would happen if E rises?
(d) Given P and P , what would happen if T decreases, i.e., an expansionary fiscal policy?
(e) Given P and P , what would happen if G increases, i.e., an expansionary fiscal policy?
(f) Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e., an increase in G or a reduction in T?
(g) Assume that the economy is in external balance. What will happen if the government maintains its current account at X, but devaluates the domestic currency?
(h) Assume that the economy is at external balance. What will happen if the government raises E?
(i) Assume that the economy is at external balance. What will happen if the government lowers E?

Question

Assume that the government has a target value, X, for the current account surplus.
(a) What is the goal of external balance?
(b) Assume that we are dealing with only the short run, what are the values of P and P∗?
(c) Given fixed P and P  , what would happen if E rises?
(d) Given P and P  , what would happen if T decreases, i.e., an expansionary fiscal policy?
(e) Given P and P  , what would happen if G increases, i.e., an expansionary fiscal policy?
(f) Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e., an increase in G or a reduction in T?
(g) Assume that the economy is in external balance. What will happen if the government maintains its current account at X, but devaluates the domestic currency?
(h) Assume that the economy is at external balance. What will happen if the government raises E?
(i) Assume that the economy is at external balance. What will happen if the government lowers E?

Quizplus · Accepted Answer

The Answer of Assume that the government has a target value, X, for the current account surplus.
(a) What is the goal of external balance?
(b) Assume that we are dealing with only the short run, what are the values of P and P∗?
(c) Given fixed P and P  , what would happen if E rises?
(d) Given P and P  , what would happen if T decreases, i.e., an expansionary fiscal policy?
(e) Given P and P  , what would happen if G increases, i.e., an expansionary fiscal policy?
(f) Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e., an increase in G or a reduction in T?
(g) Assume that the economy is in external balance. What will happen if the government maintains its current account at X, but devaluates the domestic currency?
(h) Assume that the economy is at external balance. What will happen if the government raises E?
(i) Assume that the economy is at external balance. What will happen if the government lowers E?

Assume That the Government Has a Target Value, X, for the Current