08 Jun Question 1. What will be the impact of an increase in taxes on interest rate, investment, real exchange rate and trade balance in a large economy like the U.S
Question
1. What will be the impact of an increase in taxes on interest rate, investment, real exchange rate and trade balance in a large economy like the U.S.?
2. The government increases spending by $100 billion and increases tax by $100 billion. If the marginal propensity to consume is 0.5, what happens to the following:
a) Public Saving
b) Private Saving
c) National Saving
d) Investment in a closed economy, as well as in a small, open economy
Do they rise or fall? By what amounts?
3. Suppose that developing countries like China and India start promoting consumption, and as a result there is sudden decline in world savings.
a) What happens to investment in a small, open economy like Singapore?
b) What happens to trade balance of Singapore?
c) What happens to the real exchange rate of Singapore?
4. The recent financial crisis has led to an unprecedented increase in government spending across the world. Using models you have learnt in Chapters 3 and 6, explain the long-run impact of this increase in spending on an economy like the U.S. Would the impact
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