Answer to Question #141811 in Macroeconomics for Michella

Question

Suppose individuals spend MPC ∗ x fraction of their disposable income on electricity consumption and MPC ∗ (1 − x) fraction on apples consumption where 0 < x < 1. Electricity is only produced by foreign producers who sell one unit of electricity in return for one apple. With new advances in solar panel technology, the price of electricity decreased by half at time t∗ permanently. How would this affect net exports, consumption of apples and electricity, investment, real exchange rate, nominal exchange rate and price level in long run and very-long run?

Answer 1

the net exports will increase due to the the increase in the consumption of apples in the long run as well as the very long run.

the consumption of apples is also set to increase due to the increase in the consumption of electricity.

the real exchange rate will increase due to the changes in the pricing of electricity , electricity consumption would also increase due to decrease in their prices.