Answer to Question #320969 in Macroeconomics for Amoh

Question

Use the Mundell-Fleming model to answer the following questions about France.

a) If France suffers from a recession, should the state government use monetary or fiscal policy to stimulate employment?

b) If France prohibited the import of wines from Ukrain , what would happen to income, the exchange rate, and the trade balance? Consider both the short-run impacts

Answer 1

a) The state government will use fiscal policy which uses government spending and tax policies to influence the economic conditions through employment, inflation and others.

b) Prohibition of import of wines will mean a reduction in imports, this imply a shift of supply curve to the left. With this, the supply of wine in France will reduce and its price will raise and thus reduced equilibrium quantity. Therefore the exchange rates will increase and thus the currency will appreciate.