Answer to Question #227270 in Macroeconomics for Bongiwe

Question

1. In an open economy, the impact of an increase in the interest rate on the demand for goods

and the level of output in the goods market can be illustrated by the following chain of events:

1. i↑ → E↓ → X↑ → NX↓

2. i↑ → E↑ → X↓ → Z↓ → Y↓

3. E↓ → X↑ → NX↑ → Z↑ → Y↑

4. i↑ → I↓ → Z↑ → Y↑ → NX↓

Answer 1

1. Interest rate is increased, expenses are reduced, Exports are increased, net exports are reduced, demand for goods is high and the output level is also high due to low expenses incurred in production.
2. Interest rate is increased, expenditure is increased, exports reduce, demand for goods also reduces as the income level falls. Demand for goods will remain low due to reduction in income and the level of output will be reduced due to higher expenditure levels.
3. Expenditure decreases, level of exports increases, net exports increase. The level of output rises due to low expenditure on production. The level of demand rises due to rise in the level of income.
4. An increase in interest rate results in lower savings hence a fall in the level of investment. However, the consumption level is high shown by a high demand and increase in level of income. Net exports are cut down because more of the products are consumed domestically.