Question: II. Problems - You have to show your work. No credit without an explanation (20 marks each). 1. Consider a small open economy, like Canada.

II. Problems - You have to show your work. No credit

II. Problems - You have to show your work. No credit without an explanation (20 marks each). 1. Consider a small open economy, like Canada. Suppose that the United States, a large open economy, experiences an investment surge. Analyze the effects of this development on the Canadian economy. In particular, discuss the effects on the current account, savings, investment, and the domestic interest rate. 2. The following table displays (fictional) quantities of final goods produced and prices in the United States and Argentina in 2021: U.S. prices are expressed in dollars and Argentine prices in pesos. The typical basket of goods in both countries includes 1 unit of tradable goods and 2 units of nontradable goods. Tradable goods are freely traded internationally. For this type of good PPP holds (4 marks each): (a) Calculate the market exchange rate, expressed as the dollar price of one peso. (b) Calculate the price levels in the United States and Argentina, expressed in dollars and pesos, respectively. (c) What is the dollar/peso real exchange rate? In which country is it cheaper to live? (d) Calculate GDP in the United States and Argentina at market prices. According to this measure, how big is Argentina relative to the United States? (e) Calculate the PPP exchange rate and GDP at PPP prices

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