Problem 2 (Midterm 2020):Mongolia 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<0.

a)State and briefly explain the effects of the exogenous increase in current investment on i) current full-employment,N1, ii) current full-employment output,Y1, and iii) future full- employment output,Y2.

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 aSI-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, CAMNG<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?

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

i)Illustrate theSI-diagram for Mongolia's funds market and indicate the effects of your three policy recommendations.