Classical Model of a Small Open Economy Essay Assignment
Order ID |
53563633773 |
Type |
Essay |
Writer Level |
Masters |
Style |
APA |
Sources/References |
4 |
Perfect Number of Pages to Order |
5-10 Pages |
Description/Paper Instructions
Classical Model of a Small Open Economy Essay Assignment
Remember that the module guide states that the exam is covering the last three topics of the module:
- Classical model of a small open economy
- Keynesian model of a small open economy
- Theories of price or inflation expectations
THERE ARE 3 EXAM QUESTIONS.
YOU MUST DO THEM ALL.
TWO ARE 40%, ONE IS 20%.
MAKE SURE YOU CHECK THE WEIGHTINGS ON EACH QUESTION.
Here are some general points to remember that could come up on any question you might get on these areas. I focus mostly on the first two because we’ve covered them and they involve calculation and equations, which some of you have problems with.
Points to remember about the Classical small open economy model topic:
- The model will tell you the various functions (equations) that matter:
C function (where C depends on Y and T).
I function (where I depends on r).
NX or net exports (or ‘trade balance’) function (depends on real exchange rate E.)
- The model will tell you what levels T and G are set at by government.
- The model will also tell you what the ‘natural’ level of output is (Yn- written as Y with a bar above it): this is how you know it is a Classical model.
- The model will finally tell you what the world interest rate r* is. (This is there because it is a ‘small open economy’ model and all small open economies must ‘take’ the world interest rate as their interest rate.)
So ANY question on the Classical small open economy model will give you all this information.
There are many possible things you might have to do with this information.
Here are some things to bear in mind for revision:
[1] It always helps to know the equations for the different concepts of ‘saving’ in this model – private (Sp), public (Sg) and total (which is Sp+Sg or S). You won’t be given these.
[2] You should know what the ‘equilibrium’ condition is in this model:
It is where NX = S- I. If you don’t know [1] you can’t work out [2]. You won’t be given the equilibrium condition.
[3] If you know that NX = S- I, and can work out the numbers for S and I, then you can solve the equation NX = S-I to find the real exchange rate E.
Remember that the key diagram looks like this:
[4] Once the equilibrium NX and E combination has been found, you can be asked to analyse the effects of things changing.
For instance, government policy might change, which means that either the size of T or size of G might change.
You could be asked a question which says
- T [or G] is reduced/increased (either, not both, and no number is given). What is the impact on E and NX? In this case you are being expected to explain in words what happens and use a diagram (which means that the S-I line will shift).
OR
- T [or G] is reduced/increased (either, not both and a new number is given). What is the impact on E and NX? In this case you are being expected to calculate the new levels of E and NX. Only draw a diagram if asked – or if it helps you ‘check’ your calculation. Do explain what you are doing as you do your calculations.
Another possibility is that the policies of governments in the rest of the world might change, which then affect your country. In particular, if the policies of large open economies (like any one of the US or the Eurozone countries or China) change, then this could change world levels of saving. In turn this could change the world interest rate. Since your country ‘takes’ the world interest rates as its own interest rate, changes in the world interest rate r* will affect your country directly.
You should know that a rise [fall] in r* will cause a fall[rise] in I. This will then affect the size of S-I, and so shift the S-I vertical line left [for a rise in I] and right [for a fall in I]. Do this shift for the diagram above yourself.
In your diagram [see above], a new equilibrium NX level [lower if S-I shifts left, higher if S-I shifts right] and a new E equilibrium will result. Draw this for yourself.
Do you understand the economics of this?
Say world savings/loanable funds go down (due to a policy change by the US or China).
(Then r* will rise.
(I in the small open economy will fall.
(So S-I will get bigger: there is a bigger capital outflow.
(This bigger outflow of money abroad increases the supply of the currency, pushing down its ‘price’ – the real exchange rate E.
(When E falls, export prices fall and exports rise, import prices rise so imports fall. Overall then net exports get bigger, that is, NX is higher.
Now do your own analysis for a rise in world savings/loanable funds
Draw a diagram [using the one above] illustrating both possibilities.
Points to remember about the Keynesian small open economy model topic
- The model will tell you the functions (equations) that matter:
C function (which depends on Y and T)
I function (which depends on r)
NX function (which depends on the exchange rate, e or however written)
- The model will tell you what levels T and G are set at by government.
- The model will also tell you about the ‘demand’ for money and the ‘supply’ of money. This is how to tell the model is Keynesian and not Classical.
So the ‘supply’ of money is M divided by P (M/P is the ‘real’ money supply): numbers for M and P will be given.
The ‘demand’ for money will be an equation which depends on Y and r. The equation is usually called ‘L’ (meaning ‘Liquidity Preference’ – because the demand to hold money is a demand for holding liquid assets i.e. cash)
- The model will finally tell you what the world interest rate r* is. (This is there because it is a ‘small open economy’ model and all small open economies must ‘take’ the world interest rate as their interest rate.)
So ANY question about the small open Keynesian model will give you all this.
There are many possible things you might have to do with this information.
Here are some things to bear in mind for revision:
[1] In this model, you will always need to know how to find the equilibrium values of Y and the exchange rate ‘e’.
To do this you need to know the equilibrium conditions for the economy in this Keynesian model. You won’t be given these conditions.
Unlike the classical model, there isn’t just one condition i.e. it ISN’T NX = S-I.
In the Keynesian model there are TWO conditions:
- Equilibrium in the goods market
( where output supplied (or national income) = demand for output
( i.e. where Y = C + I + G + NX
( plug in the numbers for the equations C,I,G and NX
( this gives you the ‘IS*’ line, showing that when e falls, Y gets higher
- Equilibrium in the money market
( where money supply = money demanded
( i.e. where M/P = the L equation
( plug in the numbers for M,P, r*
( you’ll get a number which gives you the LM* line [notice it is vertical because it doesn’t depend on e]
So overall equilibrium is where
- [in a diagram] where the IS* and LM* curves cross
- [mathematically] where the LM* equation [just a number]= the IS* equation
At the overall equilibrium, you’ll have
- The level of Y which makes all demands equal all supplies [Y*]
- The level of e which does the same. [e*]
Check the class exercises again if you can’t remember how to work Y* and e* out. The diagram looks like this.
[2] You might be asked to look at the effects of different government policies.
- Suppose the government wanted to increase [or reduce] Y.
- The exchange rate might be fixed or floating. [The floating or flexible exchange rate case example is given below]
- Which policy would work best – fiscal or monetary?
- How does each policy work?
- Why is one policy more effective?
To be able to answer these, you must know the economics:
(If the government uses fiscal or monetary policy, what will happen to the domestic [i.e. home country] interest rate?
(If this happens, why will there be a big capital inflow [outflow]? Think about what being a small open economy means in a globalised world when there is perfect capital mobility. Go back to the lecture notes on this, and the class exercises.
(If there’s a big capital inflow [outflow], what happens to the exchange rate?
(When the exchange rate changes, what happens to NX and why?
(When NX changes, what happens to the level of demand?
(When the level of demand changes, what happens to Y?
You should be able to use the IS*-LM* diagram above to illustrate your reasoning as well.
Points to remember about the topic on expectations.
Unlike the other two areas, this topic is more about you explaining the ideas, possibly using diagrams, and not about calculation at all.
More about this after the lecture and class on it.
This is to focus your revision. This covers what we’ve done anyway, but I’ve packaged it all together in one place here. I hope that it’s helpful.
FINALLY:
- Draw large, well labelled diagrams, showing large shifts in lines for clarity.
- If the question says ‘no calculations required’ then DON’T do any. [There won’t be enough info to anyway.]
- If the question doesn’t ask you to draw a diagram [‘use a graphical analysis’], you do not have to. You won’t be penalised if you do, however, (and it may help clarify your answer).
- If the question says ‘use a graphical analysis’ or some similar wording, you MUST draw at least one diagram and explain it (you will lose marks if you don’t).
FINALLY FINALLY:
- ALWAYS explain what you are doing, especially when you are manipulating equations. DON’T ASSUME that because the markers ‘know the theory’, you don’t have to explain what you are doing. Remember the marker is LOOKING FOR EVIDENCE OF YOUR UNDERSTANDING. If you get some numbers wrong but you correctly explain what you are doing, the maths errors won’t lose you too many marks.
- I suggest that you give a number to each equation. Then you can say something like ‘I now plug equation [2] into equation [3] because the equilibrium condition blah = bleurgh requires this…’ etc.
RUBRIC
QUALITY OF RESPONSE |
NO RESPONSE |
POOR / UNSATISFACTORY |
SATISFACTORY |
GOOD |
EXCELLENT |
Content (worth a maximum of 50% of the total points) |
Zero points: Student failed to submit the final paper. |
20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. |
30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. |
40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. |
50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. |
Use of Sources (worth a maximum of 20% of the total points). |
Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. |
5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. |
10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. |
15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. |
20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. |
Grammar (worth maximum of 20% of total points) |
Zero points: Student failed to submit the final paper. |
5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors |
10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors |
15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. |
20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. |
Structure of the Paper (worth 10% of total points) |
Zero points: Student failed to submit the final paper. |
3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. |
5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper |
7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. |
10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. |
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