Question

please help with question 8

8) Use the Mundell-Fleming model to answer the following questions about the province of Alberta (a small open economy). a) What kind of exchange-rate system does Alberta have with its major trading partners (the provinces of British Columbia and Ontario)? b) If Alberta suffers from a recession, should the provincial government use monetary or fiscal policy to stimulate employment? Explain. (Note: For this question, assume that the provincial government can print dollar bills). c) If Alberta prohibited the import of wines from the Province of Ontario, what would happen to income, the exchange rate, and the trade balance? Consider both the short. run and the long-run impacts.

Answer 1

a) An open economy would prefer a floating exchange rate that is defined by the Investment and the money supply in the economy and the global scenario as well. We start with adjustment under a floating exchange rate system, in which case there is no central bank intervention in the foreign exchange market.

b) Accoding to Fleming model, only monetary policies that are devised by the government can cause any help to achieve the objectives in an economy. Hence, because Alberta is using an open economy, the best way to get through the problem is to use monetary policy.

c) While the trade balance will be a bit hard for the short run, the exchange rate willfall with the decrease in imports. However, with the increasing demand for wine there are possibilities that the exchange rate might again level up. Overall income will not be affected to a huge extent in long run, though short run trade deficit is bound to take place.