Macroland is a small open economy with perfect capital mobility and a flexible-exchange-rate system. Macroland is initially in equilibrium at the natural level of output with balanced trade. Compare the impact of a tax cut in the short run (when prices are fixed) and in the long run (when prices are flexible) on: (a) output, b) consumption, (c) investment, (d) net exports, and (e) the exchange rate.

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The Answer of Macroland is a small open economy with perfect capital mobility and a flexible-exchange-rate system. Macroland is initially in equilibrium at the natural level of output with balanced trade. Compare the impact of a tax cut in the short run (when prices are fixed) and in the long run (when prices are flexible) on: (a) output, b) consumption, (c) investment, (d) net exports, and (e) the exchange rate.

Macroland Is a Small Open Economy with Perfect Capital Mobility