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Qualitative impact in the new long-run equilibrium

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Reference no: EM132600886

The Home country is a small open economy with perfect financial capital mobility and no risk premium. Suppose the newly elected Prime Minister of the Home country has decided to accept 200,000 refugees from a war in a foreign country.

Use the long-run classical model of an open economy to answer the following questions. Hint: Assume that prior to this shock the economy of the home country was in long-run equilibrium with balanced trade.

a) Determine the qualitative impact in the new long-run equilibrium to the following variables: real output, real interest rate, national saving, consumption, investment, net exports, real exchange rate, real rental price of capital & the real wage. Note: Qualitative impact means tell us whether the variable declined, was unchanged, or increased in the new equilibrium relative to the initial equilibrium. Don't forget to explain in each case why these changes happen (or not).

b) Draw four diagrams to describe the Home country in long-run equilibrium (if possible label the initial long-run equilibrium point A & the new long-run equilibrium point B. The four diagrams describe the domestic loanable funds market, the market for foreign exchange, the rental market for labour & the rental market for capital.

c) Suppose to help accommodate the refugees the government of Home decides to increase government spending on goods & services. Redo parts (a) and (b). Explain in words whether the governments decisions have improved the economic standard of living of its citizens & why or why not.

Reference no: EM132600886

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