Macroland Is a Small Open Economy with Perfect Capital Mobility

question 108

Essay

Macroland is a small open economy with perfect capital mobility and a flexible-exchange-rate system. Macroland is initially in equilibrium at the natural level of output with balanced trade. Compare the impact of a tax cut in the short run (when prices are fixed) and in the long run (when prices are flexible) on: (a) output, b) consumption, (c) investment, (d) net exports, and (e) the exchange rate.

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Definitions:

Days

Units of time that represent a 24-hour period, used to measure durations and intervals.

Interest Earned

The amount of money gained as interest from savings, investments, or loans, over a specific period.

Account

A record or statement showing the financial transactions and status of an individual or entity with a financial institution.

Days

Units of time equal to 24 hours, used as a measurement of the duration of events or the interval between them.