A) Suppose there is an increase in foreign output. In a graph, SHOW the effect o

Question

A) Suppose there is an increase in foreign output. In a graph, SHOW the effect on the domestic economy (hint: look at the graphs provided). What is the effect on domestic output. On domestic net exports?

B) If the interest rate remains constant, what will happen to domestic investment? If taxes are fixed, what will happen to domestic budget deficit?

C) USING EQUATIONS, what must happen to private saving? Explain.

Explanation / Answer

(A) When there is an increase in foreign output then the prices in the foreign country also falls which means that domestic country has an advantage importing from foreign country and foreign country export potential increases. Domestic output reduces and Net Exports reduces.

(B) Domestic investment will get reduced as firms will import cheaper goods from foreign country. So investment in the domestic company will have less charm. And with that the domestic budget deficit will have more as importing leads to flow of foreign exchange more to the foreign country. And the Expenditure exceeds revenue.

(C) Y= C+I+G+(X-M)

C=a+bY

C=a+b(Y-T)

Private saving = disposable income-Consumption

Disposable income= Y-T

Private saving = Y-T-C

Private savings reduces

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.