Suppose That Governments Around the World Begin to Engage in Expansionary

question 25

Essay

Suppose that governments around the world begin to engage in expansionary fiscal policy (run large budget deficits) in order to stimulate economic activity in their countries. Use the long-run model of a small open economy to illustrate graphically the impact of this expansionary fiscal policy by foreigners on the U.S. exchange rate and the trade balance. Assume that the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of the foreign expansionary fiscal policy on the U.S. exchange rate and the U.S. trade balance.

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Definitions:

Olfaction

The sense of smell, an important chemical sensing system in humans and animals for detecting environmental odors.

Sense of Smell

The ability to perceive and identify different odors through the olfactory system.

Neural Impulses

Electrical signals that travel along the neurons, serving as the means of communication within the nervous system.

Sensory Interaction

The principle that one sense can influence or interact with another, affecting how we perceive the world around us.