So far, for simplicity, we described a closed economy, i.e., an economy that does not trade...

 

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So far, for simplicity, we described a closed economy, i.e., an economy that does not trade with other countries. Suppose we reintroduce exports (EX) and imports (IM). Exports are given by Equation (11.5) in your textbook. Imports are given by: IM = āimỸ + Xim(Y−Y) Explain the meaning of the different terms in this equation. Derive the new IS equation. Is the government purchase multiplier larger or smaller in an open economy? Explain. Suppose the Federal Reserve lowers the Federal Funds rate. Give a graphical representation. How does it affect short-run output and the balance of trade? So far, for simplicity, we described a closed economy, i.e., an economy that does not trade with other countries. Suppose we reintroduce exports (EX) and imports (IM). Exports are given by Equation (11.5) in your textbook. Imports are given by: IM = āimỸ + Xim(Y−Y) Explain the meaning of the different terms in this equation. Derive the new IS equation. Is the government purchase multiplier larger or smaller in an open economy? Explain. Suppose the Federal Reserve lowers the Federal Funds rate. Give a graphical representation. How does it affect short-run output and the balance of trade?

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Terms of trade for a country can be calculated by dividing its price index of exports by its price index of imports This ratio is then multiplied by 100 TOT PexportsPimports x 100 Imports should be gr... View the full answer