A. 1. An increase in the incentive for enterprises to construct new factories is provided by a tax change. Businesses will find it easier and more lucrative to construct new factories as a direct result of the tax change. Because of this, there is a rise in the demand for capital goods, which in turn causes the trade imbalance to expand. 2. Both the actual exchange rate and the nominal exchange rate will experience a decline at the same time. The price of a country's products and services expressed in terms of another currency is referred to as the real exchange rate. The price of one country's currency expressed in terms of another currency is referred to as the country's nominal exchange rate. If the actual exchange rate goes down, it indicates that the country's products and services are becoming more competitively priced in relation to other currencies. If one currency's value is measured in terms of another, a depreciation in the nominal exchange rate results in that country's currency being worth less of the other currency. 3. An rise in the price of capital goods is caused by the increasing demand for capital products, which in turn leads to an increase in the price of capital goods. This results in price increases within the limited scope of the open economy. The price of capital goods is driven up as a result of the rising demand for capital products. This, in turn, contributes to inflation within the limited scope of the open economy. 4. As a consequence of this, the tax reform causes a worsening in the trade balance of the small open economy, as well as a drop in both the real and nominal value of the currency of that nation. Because of the growth in the trade deficit, the tax reform causes the trade balance of the small open economy to worsen. This is because the reform causes the trade deficit to expand. Both the actual and the nominal worth of the currency will decrease as a result of the reduction in the currency's value relative to other currencies. 5. The small open economy may, over the course of time, alter its exchange rate to reflect the new reality brought about by the tax reform; nevertheless, in the short term, the economy will face a reduction in its overall competitiveness. It is possible that the small open economy would adjust its exchange rate in order to reflect the new reality that has been created by the tax reform; nevertheless, in the short term, the economy will see a reduction in its overall competitiveness. This is due to the fact that the value of the currency will decrease in comparison to other currencies, which will lead the tiny open economy's products and services to become more costly in comparison to those of other nations. In conclusion, the tax reform causes a worsening in the trade balance of the small open economy, a drop in both the real and nominal value of the currency of that nation, and an overall reduction in the competitiveness of that nation. B. b. Imports would rise while exports would decline as customer demand for foreign automobiles increased. A trade deficit and a decline in the real exchange rate would result from this. There would be no change in the nominal exchange rate. The trade imbalance would cause domestic currency demand to decline, which would cause domestic currency value to decline. In the small open economy model, the launch of a new line of fashionable Toyota vehicles would result in more imports and lower exports. A trade deficit and a decline in the real exchange rate would result from this. There would be no change in the nominal exchange rate. The trade imbalance would cause domestic currency demand to decline, which would cause domestic currency value to decline.

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