Case I: The Effect of War on the Economy of El Dorado If a war broke out abroad, it would affect the El Dorado economy in many ways. Use the model of the large open economy to examine each of the following effects of such a war. What happens in the El Dorado to saving, investment, the trade balance, the interest rate, exchange rate, price level, and unemployment? (To keep things simple, consider each of the following effects separately.)

Questions

a. The El Dorado government, fearing it may need to enter the war, increases its purchases of military equipment.

b. Other countries raise their demand for high-tech weapons, a major export of the El Dorado.

c. The war makes El Dorado consumers uncertain about the future, and the consumers save more in response.

d. Analyze the combined effects of (a) & (b) on Aggregate Demand (AD), Money Supply and Money Demand in the El Dorado Economy