Open Economy Model 1. Imagine two countries, Home and Foreign. Suppose Home is a
ID: 1140421 • Letter: O
Question
Open Economy Model 1. Imagine two countries, Home and Foreign. Suppose Home is a sma country that cannot affect world prices. Consider Foreign a stand-in for the rest of the world: rates and prices in Foreign are synonymous with the worldwide prevailing ones (a) Assume Foreign's output is characterized by a CRS Cobb-Douglas function of the form Y What will happen to the worldwide interest rate if Foreign experiences a population increase? Hint: Remember real interest rates are equivalent to the marginal product of capital. (b) Given happened above in Foreign, does the Home interest rate change and how? What happens in Home's savings and investment market? Will savings and investment stil be equal? Why or why not? Please use a graph of the investment market in your explanation (c) Now, ignore the prior to sections and suppose Foreign's government purchases increase (its taxes do not change). What will happen to the interest rates and why? What effect will this have on the world interest rate? And, what effect will it have on Home's 1) investment/savings market and 2) trade balance? (d) Finally, if, instead, Home undergoes a fiscal expansion, what will be the effect in Foreign? What about in Home?Explanation / Answer
Marginal analysis involves a cost-versus-benefits comparison of various business activities. In marginal analysis, the cost of an activity is measured against incremental changes in volume to determine how the overall change in cost will affect the bottom line of a business. Marginal analysis can show the cost of additional production by a business all the way up to the break-even point. This is generally the maximum cost that a business can sustain without losing money.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.