1. Using the IS/LM/BP model and assuming perfect capital mobility, explain: a. how a decrease in foreign income affects domestic output. A decrease in foreign income encourages domestic exports to go...

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1. Using the IS/LM/BP model and assuming perfect capital mobility, explain: a. how a decrease in foreign income affects domestic output. A decrease in foreign income encourages domestic exports to go down as foreigners b. how an appreciation of the domestic currency affects domestic output. 2. The US has experienced large and growing current account deficits for more than 20 years, whereas Japan has experienced large and growing current account surpluses for roughly the same period. The US economy has grown at faster rates than Japan’s over the past 10 years. a. Use the relationship between the current account and GDP to explain the difference in growth rates between the two economies. b. In trade negotiations with the Japanese over the large US trade deficit with Japan, the US administration has urged the Japanese government to undertake a more expansionary fiscal policy. Explain how this might affect the US trade deficit with Japan. 3. Using appropriate models or theories, explain the economic intuition (logic) behind the following events. a. An increase in money supply leads to a fall in short-run interest rate. b. An increase in real income leads to a rise in short-run interest rate.