econ 191 ch.15 managing open economy

Important features of the Australian Model?

• open economy

• large economy

• export focus

• price is real exchange rate (RER)

Answer explanation

correct:

1. 1. small economy

2. 2. tradables and nontradables (both export and import g&s, anything that ca be traded or not traded)

What is absorption comprises of?

• private and public consumption

• private investment

• value of exports and imports

• total income

Answer explanation

correct: private and public investment

Important results of Australian model

• absorption = income/GDP

• macroeconomic equilibrium is balance of demand and supply of tradables and nontradables

• to adjust balance: change RER and absorption

• all of the above

Answer explanation

correct: to adjust balance: change NER and absorption

Do self-correcting work in the Australian model?

• Yes

• No

Answer explanation

bc. of policy contradictions and structural rigidities

what are stabilization tools in the Australian Model?

• exchange rate regime

• fiscal policy

• monetary policy

• health and education

What are the cures to the Dutch Disease (based on model)?

• revalue currency

• contractionary monetary policy

• contractionary fiscal policy

• let the event happen (allow self-correcting)

Answer explanation

correct:

devalue currency (depreciate); reduces deficit (fall in absorption)

What are the cures to debt crisis?

• devalue currency

• expansionary fiscal policy

• contractionary monetary policy

• let self-correcting work

Answer explanation

correct: contractionary fiscal policy