Question: Question 5 (15 marks) Suppose Country X, a small open economy, mainly produces a video game console. Assume Country X is in the long run.

Question 5 (15 marks) Suppose Country X, a small open economy, mainly produces a video game console. Assume Country X is in the long run. a. Suppose the game console becomes more popular. Use a well-labeled foreign exchange rate market (with the real exchange rate on the vertical axis and net export on the horizontal axis) to show the effect of the above event. What happens to net exports and the exchange rate of Country X? Explain (7 marks) b. The government of Country X wants to adjust taxes to maintain the exchange rate at its previous level. What should the government do? If she does this, what are the overall effects on saving, investment, capital outflow and the interest rate? Use words to explain your answers. (8 marks)

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