Trade has just begun between the nations of Alpha and Gamma. Country Gamma
exports corns, a land-intensive good, to country Alpha. Country Alpha exports widgets,
a labor-intensive good, to country Gamma.
(一) Analyze the effect of trade on the price, production, and consumption of widgets in
both countries Alpha and Gamma. Draw appropriate diagrams (that is, the demand
and supply curves before and after trade). (15%)
(二) Analyze the effect of trade in widgets on the prices of labor in both countries. Draw
appropriate diagrams. (10%)
According to interest rate parity condition and PPP, what will happen to the nominal
exchange rate if there is an increase in domestic nominal interest rate?
Consider a small open economy with perfect capital mobility. If consumers in this
country experience a permanent preference shift towards increased consumption, what
happens to the long-run equilibrium real exchange rate?
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