Answer to Question #157841 in Macroeconomics for Asmat Ullah

Question

If domestic price level decreases and foreign price level remains same, how it would affect the nominal and real exchange rate? Illustrate through an example. 2. Given the following functions: C=250+0.75(Y-T), I=150, G=250, T=200, if government increases its expenditures by 60 and finances half of it through taxes, by how much would the output change? 3. Consider a situation in which yield of tomatoes in a given year is destroyed by some pest attack on crop due to which price of tomatoes is being affected. Explain how would GDP deflator and CPI account for the price of tomatoes? 4. If taxes imposed by the government are assumed to increase, how would it affect the output and employment under Classical and Keynesian framework? 5. Show the adjustment of economy from short run to long run, if initially economy is operating at a more than full employment level of output. 6. If US government introduces investment tax credit scheme for the investors, how would it affect the domestic US economy and its trade partner like Pakistan? 

Answer 1

(1)The nominal an real exchange rate will rise.

An example is whereby the price for domestic x reduces. People will then exchange too much foreign currency for domestic currency hence the country gets foreign reserves.

(2) $1/(1-b)* \Delta E$

Whereby E is the government expenditure$=1(1-0.75)*60$

The output increases by 240

(3)Both GDP and CPI will reduce.

(4)GDP will reduce as the rate of unemployment increases.

(5) Intervention by policy makers where they take an active approach to stabilize the economy.

(6) The domestic economy will grow as the pakistan foreign investors bring foreign reserves.