Reference no: EM132601336

Use the Mundell-Fleming model to answer the following questions about the state of California (a small open economy).

a. What kind of exchange-rate system does California have with its major trading partners (Alabama, Alaska, Arizona, . . .)?

b. If California suffers from a recession, should the state government use monetary or fiscal policy to stimulate employment? Explain. (Note: For this question, assume that the state government can print dollar bills.)

c. If California prohibited the import of wines from the state of Washington, what would happen to income, the exchange rate, and the trade balance? Consider both the short-run and the long-run impacts.

d. Can you think of any important features of the Californian economy that are different from, say, the Canadian economy, making the Mundell-Fleming model less useful when applied to California than to Canada?