Hi, I need to know the answer to these questions for an upcoming final. Please s

Question

Hi, I need to know the answer to these questions for an upcoming final. Please show your work.

3. Country X's major trading partner is Country Y, a large open economy. The economy of Country Y is sufficiently large that it determines the world interest rate. (Thus the world interest rate is determined by the intersection of Country Y's IS and LM curves.) Country X, on the other hand, is economically small so that the interest rate in Country X does not deviate from the world interest rate. Changes in Country X have no effect on Country Y. a. Assuming flexible exchange rates and a fixed price level, what are the effects on Country X of a mon- etary expansion in Country Y? b. Assuming flexible exchange rates and a fixed price level, what are the effects on Country X of a fiscal expansion in Country Y?

Explanation / Answer

A. Monetary expansion would lead to more money supply in people's hand in country Y, hence, demand would be generated in country Y leading to need of more imports from country X.

B. Fiscal expansion would lead to more government spending in country Y, again money supply in people's hand would increase leading to generation of demand and requirements of imports would increase. Hence imports from country X would increase.

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