Answer to Question #201008 in Macroeconomics for BISMARK KWAME

Question

1 In the model of a small open economy showing the link between real exchange rate and net exports, the impact of the government of foreign trade partner aiming at protecting its market, imposing the import tariffs on the domestic economy, is as follows:

Select one from the following options.

i. National savings drop (S-I), which raises the real exchange rate.

ii. Net exports drop which raises the real exchange rate.

iii. Net exports raise which raises the real exchange rate.

iv. Domestic investments drop, national savings increase (S-I), which causes the real exchange rate to fall.

2 If the GDP deflator increases by 5% year on year and real GDP by 3%, it means that nominal GDP Select one from the following options.

i. will increase by about 8%.

ii. will decrease by about 2%.

iii. will increase by about 2%.

iv. will increase by about 5%.

Answer 1

1.

The correct option is i. National savings drop (S-I), which raises the real exchange rate.

Explanation

Imposition of tariffs, households reduce their spending by less than the temporary increase in their tax payment, reducing their savings to smooth consumption.

The reduction in national saving causes the NFI curve to shift the left thereby reducing net exports and causing the real exchange rate to increase.

2.

The correct option is i. will increase by about 8%.