(Solution) If A War Broke Out Abroad, It Would Affect The U. Economy In Many Ways. Use The Model Of The Large Open Economy To Examine Each Of The Following... | Snapessays.com


(Solution) If a war broke out abroad, it would affect the U. economy in many ways. Use the model of the large open economy to examine each of the following...


If a war broke out abroad, it would affect the U.S. economy in many ways. Use the model of the large open economy to examine each of the following effects of such a war. What happens in the United States to saving, investment, the trade balance, the interest rate, and the exchange rate? (To keep things simple, consider each of the following effects separately.)

 

1. The U.S. government, fearing it may need to enter the war, increases its purchases of military equipment.

 

2. Other countries raise their demand for high-tech weapons, a major export of the United States.

 

3. The war makes U.S. firms uncertain about the future, and the firms delay some investment projects.

 

4. The war makes U.S. consumers uncertain about the future, and the consumers save more in response.

 

5. Americans become apprehensive about travelling abroad, so more of them spend their vacations in the United States.

 

6. Foreign investors seek a safe haven for their portfolios in the United States.

 

On September 21, 1995,"House Speaker Newt Gingrich threatens to send the United States into default on its debt for the first time in the nation's history, to force the Clinton Administration to balance the budget on Republican term". The same day, the interest rate on 30- year U.S. government bonds rose from 6.46 to 6.55 percent, and the dollar fell in value from 102.7 to 99.0 yen. Use the model of the large open economy to explain this event.

 


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This question was answered on: May 23, 2022

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