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    the interest rate parity

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    Assume the government cuts its purchases by $120 billion. As a result, the budget deficit is reduced by $40 billion, private domestic saving decreases by $10 billion, disposable personal income decreases by $80 billion and the trade deficit is reduced by $15 billion. By how much has national income (Y) changed?

    . Using demand and supply analysis to assist you, what are the effects on the exchange rate between the British pound and the Japanese yen from:
    a. an increase in Japanese interest rates?
    b. an increase in the price of British goods?
    c. an increase in British interest rates?

    Consider a country that initially consumes 100 pairs of shoes per hour, all of which are imported. The price of shoes is $40 per pair before a ban on importing them is imposed. Use a graph to explain what happens to the price of shoes and the quantity of shoes consumed after a total ban on imports.

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    Solution Summary

    The interest rate parity is applied in this case.