Question

Imagine a world with two countries, a large economy home and a small economy Foreign. Evaluate how Home's macroeconomic policies affect Foreign (Consider both permanent monetary and fiscal policies.)

Answer 1

Large scale home economy like US can have an contractionary monetary policy which increases interest rates as compared to smaller foreign economy like Cuba and subsequently this leads foreign investment getting back to USA for better return on investment and causes appreciation of US dollar.

Similarly government policies on placing trade tarriffs and embargoes cam lead to lower imports from Cuba and thus trade deficit worsens for Cuba. Simultaneously the trade deficit and net exports widen for US.

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