Question
Use the Mundell-Fleming model to predict what would happen to GDP, the exchange rate and the trade balance in Canada in response to the following
Use the Mundell-Fleming model to predict what would happen to GDP, the exchange rate and the trade balance in Canada in response to the following shocks: (1) Suppose that Canadians become more environmentally conscious. As a result, Canadian sales of Tesla cars produced in the US and China increase at the expense of lower sales of traditional gasoline cars produced domestically.(2) Suppose credit cards become more popular and this reduces the demand for money. Support your answers with graphs. Briefly explain how and why the curves move. Keep in mind that Canada is a small open economy with free capital markets and a flexible exchange rate regime.
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