Consider a large open economy with a flexible exchange rate and free capital flo

Question

Consider a large open economy with a flexible exchange rate and free capital flows. Suppose the country is enjoying full employment, a healthy budget surplus, and a large trade surplus. However, the large trade surplus is creating trade friction and political tension with the nation’s trading partners. Suppose the nation’s macroeconomic policymakers want to maintain the level of real GDP in the short run but change the real exchange rate to lower the trade surplus. Analyze what specific monetary and/or fiscal policies would be required to achieve these objectives in the short run. Briefly explain using the appropriate graphs.

Explanation / Answer

free capital flows helps the nation to become more stronger

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