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Macroland Is a Small Open Economy with Perfect Capital Mobility

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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.


Definitions:

Addition Rule

In probability, a rule that calculates the likelihood of any of two or more mutually exclusive events occurring.

Automobile Accident

An unexpected event involving a vehicle that usually results in damage and/or injury.

Mutually Exclusive

Events or conditions that cannot occur simultaneously or cannot both be true at the same time.

Addition Rule

A principle in probability theory that determines the probability of the occurrence of at least one of two events, taking into account their joint probability if they are not mutually exclusive.

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