Assume That the Government Has a Target Value, X, for the Current

question 69

Essay

Assume that the government has a target value, X, for the current account surplus.
(a)What is the goal of external balance?
(b)Assume that we are dealing with only the short run, what are the values of P and P∗?
(c)Given fixed P and P*, what would happen if E rises?
(d)Given P and P*, what would happen if T decreases, i.e., an expansionary fiscal policy?
(e)Given P and P*, what would happen if G increases, i.e., an expansionary fiscal policy?
(f)Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e., an increase in G or a reduction in T?
(g)Assume that the economy is in external balance. What will happen if the government maintains its current account at X, but devaluates the domestic currency?
(h)Assume that the economy is at external balance. What will happen if the government raises E?
(i)Assume that the economy is at external balance. What will happen if the government lowers E?

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Definitions:

Bilingual

The ability to speak and understand two languages fluently.

Bicultural Identity Formation

The process through which individuals who are exposed to two cultures develop a sense of identity that integrates aspects of both cultures.

Ethnocentric

Having the belief that one's own ethnic group or culture is superior to others.

Ethnocentrism

Ethnocentrism is the act of judging another culture solely by the values and standards of one's own culture, often leading to misunderstanding and biases.