a. Suppose there is an increase in foreign output. Show the effect on the domest

Question

a. Suppose there is an increase in foreign output. Show the effect on the domestic economy. What is the effect on domestic output? On domestic net exports?

b. If the interest rate remains constant, what will happen to domestic investment? If taxes are fixed, what will happen to the domestic budget deficit?

c. Using equation CA = S + 1T - G2 - I, (derived from Y = C + I + G - IM>P + X), what must happen to private saving? Explain.

d. What are the Marshall Lerner Condition and the J curve effect and what does they mean?

Explanation / Answer

D) marshall learner condition states that any exchange rate devaluation or depretiation will cause balance of trade to improve by making export cheaper and import costlier.

J curve effect means that if a currency devalue what happens is that initially import doesn't decline because the economy take some time to adjust but as the time moves slowly slowly the economy starts improving that is exports increase and imports decrease. This is the J effect.

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