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Macroeconomics Canadian 4th Edition Blanchard Solutions Manual
Macroeconomics Canadian 4th Edition Blanchard Solutions Manual
1. True/False/Uncertain
a. Uncertain – they simply reflect high domestic demand. Increases in domestic demand
could be from investment, government spending or consumption.
b. Uncertain or true – looser fiscal policy, all else equal, is usually associated with an
increase in the trade deficit.
c. False.
d. False.
e. True.
f. True.
g. True – at least in part – although there was also a large real appreciation over most of the
decade. We will also see in Chapter 26 that there can be a relationship between large
budget deficits and large trade deficits. This seems to be a part of U.S. fiscal policy under
George W. Bush.
b. If ∆P/P > ∆P*/P* and ∆E/E = 0, then ∆ε/ε <0, then the real exchange rate is decreasing
(appreciating from the point of view of the domestic country) over time. Given the
Marshall-Lerner condition, this implies net exports are falling. The price of domestic
goods is rising faster than the price of foreign goods, while the exchange rate is constant.
As domestic goods are becoming more expensive than foreign goods, consumers in both
countries shift their purchases away from goods in the high-inflation country to the low-
inflation one.
The multiplier is 2 (=1/(1-.8+.3)) when foreign output is fixed. The closed economy
multiplier is 5 (=1/.5). It differs from the open economy multiplier because, in the open
economy, only some of an increase demand falls on domestic goods.
b. Since the countries are identical, Y=Y*=110. Taking into account the endogeneity of
foreign income, the multiplier equals [1/(1-0.8 -0.3*0.6 +0.3)]=3.125. The multiplier is
Macroeconomics, Fourth Canadian Edition
Instructor’s Solutions Manual
higher than the open economy multiplier in part (a) because it takes into account the fact
that an increase in domestic income leads to an increase in foreign income (as a result of
an increase in domestic imports of foreign goods). The increase in foreign income leads
to an increase in domestic exports.
c. If Y=125, then foreign output Y*= 44+0.6*125=119. Using these two facts and
the equation Y = 2(12+G+0.3Y*) yields: 125 = 24+2G+0.6*(119). Solving for G
gives G=14.8. In the domestic country, NX = 0.3*(119)-0.3*(125) = -1.8; T-G =
10-14.8=-4.8. In the foreign country, NX*=1.8; T*-G*=0.
4. Tariffs
a. A tax on foreign goods of rate τ affects the price paid for imports. Instead of ε, it
is now equal to (1+τ)ε. Imports are given by Q((1+τ)ε,Y). The price of exports is
unaffected, so exports are still given by X(ε,Y*).
b. For a given level of domestic income, the higher price of foreign goods to
domestic consumers reduces imports, but does not affect exports, so NX
increases. This shifts the IS curve to the right, increasing domestic equilibrium
income. Higher domestic income offsets some of the initial increase in NX, but
the overall effect is still favorable.
c. The tax has opposite effects in the foreign country, affecting their exports
negatively, shifting the IS curve to the left, which reduces equilibrium income.
d. Each shift in the IS curve will be reversed, but the overall volume of trade,
described by Q+Q* will fall. If agents simply substitute domestic goods for
foreign goods, output will remain the same.
b. You would need to also know that US imports are about 10% of US GDP – see
Figure in the Box on Page 133. A 5% decline in US GDP would be about a 0.5%
decline in US imports which corresponds to 0.18% of Canadian GDP.
6. Dynamics of a Depreciation
7. Export Ratios
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