Reference no: EM1330182

How capital mobility facing an unstable county is different from England

1. England has not joined the European Monetary Union, but it is a member of the European Union. As a result, England has a flexible exchange rate and retains its own currency, the pound sterling. Suppose England's unemployment rate began to rise and the government passed an investment tax credit to help stimulate the economy. Explain the effect this policy would have on the nation's real and nominal interest rates, real and nominal GDP, gross private domestic investment, unemployment rate, inflation rate, exchange rate, current account balance, financial account, and reserves and related items account. (Definition of Investment Tax Credit: A company may claim an investment tax credit for a percentage of the net costs paid in a taxable year for tangible assets that qualify under government rules. In short, if you invest, a portion of your investments can be used to reduce taxes and increase your after tax profits. Usually, these assets are eligible for depreciation or amortization treatment, like new buildings and machinery)

2. How would your answer to question #2 change if a politically unstable country (e.g., Zimbabwe) and not England passed an investment tax credit. To answer this question, think in terms of how capital mobility facing an unstable county is different from England and the effect it would have.

3. How would your answers to questions #2 change if England pursued contractionary monetary policy?

4. What factors will increase or decrease the level of international capital mobility between one nation and the rest of the world?