Question

Assume that the country of Rokovoko is a closed economy and it is currently in a situation of short and medium run equilibrium. 1. Assume that the government of Rokovoko wants to decrease the public deficit without decreasing the level of public expenditures a. i. ii. Which policy should the government adopt? [2pl Explain the short-run effects of this policy on interest rate, money demand, and money supply. [6pl ii. Explain the medium-run effects of the policy on the price level and on the real money supply. [4pl b. Suppose now that Rokovoko is an open economy i. Does Rokovoko currency appreciate or depreciate after the policy defined in point a.i.? In particular, describe what happens in the international capital market. [4pl What happens to Rokovoko imports and exports? [3p] ii.

PLEASE ANSWER ALL THE POINTS AND WRITE CLEARLY AND EXPLAIN .. THANKS A LOT

Answer 1

1)if the government wants to decrease deficit without decreasing expendicture it should raise tax revenue from the public so that the revenue will be more than expenditure and the deficit will decline and the government would not have to reduce the expenditure.

2) the short run effect will be such that, as the government expenditure has not been reduced but the taxes has been increased the disposable income of the people as well as there saving will decline so the moneysupply will also decline in the economy. as we know when supply of money increases demand for money also increases as rate of interest declines the reverse will be true for a decline in supply of money. the demand for money will also decline as rate of interest will increase.

3) in the medium run the real money supply and the price level will remain constant as government expenditure will create enough employment and output for the economy the price levelwill not be increased so the real money supply will also be constant.

4) as the disposable income of public has been declined after tax the import will also decline and export will increase makong the currency appriciate in terms of other currencies. currency outflow will happen in international capital market because of low rate of interest in the country.

5) as i have mentioned earlier the export will increase and import will decrease.