A Suppose That Governments Around the World Begin to Engage

question 76

Essay

a. 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 initia equilibrium values
iv. the direction the curves shift
v. the new long-run equilibrivm 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:

Price Capital

Generally refers to the financial assets invested in a business entity to cover the initial and operational costs, influencing its market pricing strategies.

Marginal Productivity Theory

An economic theory suggesting that the wage or value of a factor of production is determined by its marginal contribution to the output of goods or services.

Income Inequality

The unequal allocation of financial resources among a community, resulting in disparities between affluent individuals and those in poverty.

Imperfectly Competitive Firms

Companies that operate in market settings where individual sellers have some control over the price of their products, contrary to perfect competition.