Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a reduction in government spending will have on the domestic economy. In your graphs, clearly label all curves and equilibria
What will be an ideal response?
A reduction in G will cause Z to decrease and the IS curve to shift left. As demand decreases, Y will fall causing a decrease in money demand. The decrease in money demand will cause an decrease in i. As i falls, the demand for the domestic currency will decrease causing a depreciation. This depreciation will cause a rise in NX. Any increase in I and the increase in NX only partially offset the effects of the reduction on demand and output.
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An international financial crisis can be precipitated when
A) the rate of money supply growth is not the same in all nations. B) newly-acquired political freedom in a country leads some interest groups to form a coalition limiting competition. C) many international investors look at the behavior of a few large investors to determine when funds should be withdrawn from a particular country. D) there is an increase in portfolio investment.
On average, electricians who work on dangerous high-voltage power lines earn more per hour than similarly skilled electricians who don't work on dangerous high-voltage power lines. The difference in pay is attributed to
a. the marginal product of labor. b. the marginal product of capital. c. diminishing marginal returns. d. a compensating differential.