Answer to Question #102718 in Macroeconomics for Janet Potts

Question

Tax cuts in the US cause and increase in the price levels relative to the price in Canada.
a. draw side by side model showing changes
b. explain the effect on the currencies
c. explain the effect on US net exports based on the changes in the foreign exchange market

Answer 1

a. AD₁ and AS₁ corresponds to situation after tax cuts

b. Tax cuts boosting spending devaluating currencies

c. A higher price level increases the relative price of domestic exports to other countries while decreasing the relative price of foreign imports from other countries. This results in a decrease in exports and an increase in imports and thus a decrease in net exports.