Assume U.S. and Europe are large trading partners. Furthermore, suppose that since recent financial crisis in 2008, European economies should undertake austerity measures (meaning a decline in Gov’t spending and an increase in European taxes) to avoid bankruptcy. While European economies implement austerity measures, assume the U.S. increases gov’t spending and cuts tax rates. Use IS/LM model (including the goods and asset market graphs when suitable) and Foreign exchange graph to fully describe the effects of each country’s policy on the following:
a. Each country’s domestic interest rates and GDP
b. The dollar/euro exchange rate.
c. Effects on exports and imports for each country.
suppose that China and the US have a floating exchange rate. Assume that U.S. macroeconomic environment improves such that risk in the US economy declines and the Chinese government increases spending on infrastructure projects in China (increase in Gov’t spending). Use IS/LM model (including the goods and asset market graphs when suitable) and Foreign exchange graph to fully describe the effects of each country’s policy on the following:
a. Each country’s domestic interest rates and GDP
b. The dollar/Yuan exchange rate.
c. Effects on exports and imports for each country.