BECO 2000: Intermediate Economics: Section 001 & 002
Assignment 2:
20th October, 2022
Please submit a HARD COPY on 3ed Nov (001) & 4th Nov (002) 2022 at the beginning
of the class (the first 30 minutes of the class)
1. Use the simple upward sloping AD/ZZ function and the NX function in the open
economy (such as PPT ch18, Figure 18.2) to explain the impacts of an increase in
foreign income level on output and trade balance, explain if there is “Twin Deficit”
problem. 25%
2. If a country in the open economy is facing unemployment and trade deficit problems,
do you suggest fiscal expansion or real depreciation, why? Please use a flow chart
and a few sentences to explain. 25%
3. Use an open market IS-LM diagram with horizontal LM to explain the result of fiscal
expansion under fixed exchange rate system. What will happen to the IS and LM
functions, equilibrium output, domestic interest rate, exchange rate level and net
exports? Explain your answer. 25%
4. Given the saving, investment and current account balance identity 𝑆=𝐼+ (𝐺−𝑇)+𝐶𝐴
in the open economy, explain what is called “Twin Deficit” of budget deficit and
trade deficit. If a country’s government spends more than its tax revenues, with very
low level of local private saving, what will happen according to this identity ? 25%
END
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