Explain the long-run impact of the increase in investment demand on the real exchange rate and net exports. Briefly explain your answers by referring to the affected curves in the market for foreign exchange.

Consider the classical model of a small open economy with perfect capital mobility. Suppose domestic political stability improves and optimism about future conditions increases, causing firms to raise their investment sharply.Based on the above information, answer the following questions.What impact will the increase in investment demand have on the real interest rate of the small open economy? Briefly explain your answer. (2 marks)What impact will the increase in investment demand have on net capital outflow in the small open economy? Briefly explain your answer. (2 marks)Explain the long-run impact of the increase in investment demand on the real exchange rate and net exports. Briefly explain your answers by referring to the affected curves in the market for foreign exchange. (2 marks)

The impact of changes in exchange rates on import and export levels can lead to:Question 21Answera.Trade imbalances and shifts in international competitivenessb.Changes in fiscal policy and government spendingc.Alterations in labor force participation ratesd.Determining interest rates and inflation

Denmark's net exports will _________ when the price level in Denmark's trading partner countries rises, due to the __________. increase; international trade effect decrease; interest rate effect decrease; PPP effect decrease; inflation effect increase; exchange rate effect

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium, ______________.a.imports will decrease while exports remain constant, leading to a rise in net exports.b.imports will decrease while exports will increase, leading to a rise in net exports.c.imports and exports will decrease by the same amount; thus, net exports remain unchanged.d.both imports and exports will remain unchanged; thus, net exports remain unchanged

The economy is initially at its long-run equilibrium. A diplomatic dispute with its trading partner countries now leads to a decline in its exports. In the short run, the aggregate demand curve shifts left. In the long run, the price level decreases, the output returns to its potential, and real wages decrease. In the short run, the aggregate demand curve shifts right. In the long run, the price level increases, the output returns to its potential, and real wages do not change. In the short run, the aggregate demand curve shifts right. In the long run, the price level increases, the output returns to its potential, and real wages increase. In the short run, the aggregate demand curve shifts right. In the long run, the price level increases, the output returns to its potential, and real wages decrease. In the short run, the aggregate demand curve shifts left. In the long run, the price level decreases, the output returns to its potential, and real wages do not change.