1. Write a review essay on the Twin Deficits, that focuses on whether a government deficit causes a current account deficit. (50 marks)
2. Consider the IS/LM/BP scenario, and suppose that the government imposes a proportional tax rate .
(a) Show that the effect on the IS curve is to leave the intercept on the r-axis unchanged, but that the slope changes. (4 marks)
(b) Why is there no effect on the LM curve? (2 marks)
(c) For a closed economy, explain the shift to the new equilibrium. (4 marks)
(d) For an open economy, what is the effect on imports? In a fixed exchange rate system, for the current account to return to 0, what must be the net effect on output? (4 marks)
(e) Explain the shift to the new equilibrium under fixed exchange rates for (i) no capital mobility; (ii) perfect capital mobility. (8 marks)
(f) Explain the shift to the new equilibrium under floating exchange rates for (i) no capital mobility; (ii) perfect capital mobility. (8 marks)
