1. Your company has been considering the possibility of establishing a subsidiary in Ireland to produce a product there and export it to the rest of Europe. You have examined the project and have concluded that it will break even (i.e., it will recover all its costs, but will not make a profit in excess of a normal on capital). Your company decides to put the project on hold. One day you read in The Economist that: "The Irish government has appointed a new finance minister to deal with the country's chronic trade deficit. The new minister has adopted a program for trade deficit has only one provision: a permanent reduction in government expenditure."

(a)How can a reduction in the government expenditure reduce the trade deficit in the long run, when prices fully flexible?

b. Would the adoption of the new finance minister's policy change the assessment of your company's project in Ireland? That is, how would the new policy affect the profitability of your project? Would you recommend implementation of the project now that the new policy has been adopted?