Answer to Question #178840 in Macroeconomics for Fabian Afumbom Ntumsi

Question

Present answer using graphs and short explanations.

Assume that the economy is open and that CF=0. Assume that Y*<Y full.

A) describe using four diagrams (interest rates -Y, CF-r, Import surplus - real exchange rate, inflation rate -output) the initial point of the short run aquilibruim. Is there an import surplus or export surplus? If no shocks occur, what will happen to inflation rate, interest rate, the capital flow, real exchange rate and import-export in the long run?

Answer 1

The initial point of the short-run equilibrium in interest rates -Y diagram is where the LM (interest rate and income)and IS (investment and saving) curve intersect "A".

The initial point of the short-run equilibrium in CF-r diagram is where the demand and supply curve intersect "E1".

The initial point of the short-run equilibrium in import surplus-real exchange rate diagram is where the demand and supply curve intersect "E".

The initial point of the short-run equilibrium in inflation rate -output diagram is where the SAS(aggregate supply) and DAD(aggregate demand) curve intersect "E".

There is both import and export surplus.

If there is no shocks in the economy inflation rate, interest rate, capital flow, real exchange rate, import and export will remain constant in the long run. Demand and supply shocks cause Increase or decrease of inflation rate, interest rate, capital flow, real exchange rate, import and export in the long run and when there are no shocks they won't change.