Answer to Question #221488 in Macroeconomics for oheneba joseph

Question

B.    Now, assuming the economy is open with government (G) participation and  external trade which is summarized as follows; export(X)= 100-0.10Y, import(M)=50, G=100, Taxes(T)= 100 and C, I, M_S, M_t, and M_z the same as defined in (a) above. Calcula  i. The equilibrium income and interest rate in this new econom ii The level of C, I, M_t, and M_z when the economy is in equilibrium ii Assuming capital is perfectly mobile in this economy, graphically sketch the IS-LM-BOP frame work of this economy. Comment on the balance of payment situation in this economy.

What exchange rate policy should government implement in (iii) to enhance income and why?                                                

Answer 1

The overall balance of payment is in equilibrium. This means that the current and capital account balances of payments sum to zero. In an open economy, a part of the increase in income is spent on imports rather than on domestically produced goods. Therefore, the government should implement a Monetary policy. This is because the outward shift of the LM curve invites an additional outward shift of IS. Both LM and IS cooperate to increase income.