ongolia experienced in 2017 a greater demand for coal from

other countries. The greater demand incentivized an investment surge in the mining sector. You

can assume that Mongolia is a small open economy in the international funds market and that

Mongolia has a current account deficit,

CA

MNG

<

0.

a) State and briefly explain the effects of the exogenous increase in current investment on i)

current full-employment,

N

1

, ii) current full-employment output,

Y

1

, and iii) future full-

employment output,

Y

2

.

b) If households are myopic, what would be the effects on desired saving,

S

(

.

)? Briefly explain.

c) Illustrate the effect of the exogenous increase in current investment in a

S

I

-diagram for

Mongolia's funds market.

d) State the effects on Mongolia's i) domestic saving,

S

, ii) domestic investment,

I

, and iii)

current account?

Suppose the Mongolian government is concerned about the country's current account deficit,

CA

MNG

<

0, and asks you to advise them on fiscal policies that would increase Mongolia's current

account balance. You can assume that Mongolia is a small open economy.

f) Would you advise to increase or decrease current government spending,

G

? Briefly explain.

g) Would you advise to increase or decrease firms' capital income tax rates in the future,

t

f ut

c

?

h) Would you advise to increase or decrease labor income tax rates temporarily,

t

w

?

i) Illustrate the

S

I

-diagram for Mongolia's funds market and indicate the effects of your three

policy recommendations.