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Answer the following intermediate macroeconomics questions: a) suppose that the economy of Chile is a small...

Answer the following intermediate macroeconomics questions:

a) suppose that the economy of Chile is a small open economy. Suddenly, a change in world fashions makes the exports of Chile unpopular.

i. What happens to the national savings in Chile, investments, net exports, the interest rate and the exchange rate?

ii. The citizens of Chile like to travel abroad. How will this change in the exchange rate affect them?

iii. The fiscal policymakers of Chile want to adjust fiscal policy to maintain the exchange rate at its previous level. What would they do specifically? If they do this, what are the overall effects on savings, investments, net exports and the interest rate?

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Answer #1

1. Chile economy :-

  • National saving - decrease as people have to buy at high price
  • Investment - decrease
  • Net exports - decrease
  • Interest rate - increase
  • Exchange rate - increase

2. This change is exchange rate will lead to inflation in tte country. They will have to buy products at higher cost.

3. The fiscal policymakers have to increase there borrowing or reduce tax rates. the overall effect will be :-

  • Saving - decrease
  • Investment - increase
  • Net exports - increase
  • Interest rate - decrease
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