The U.S. economy and the European recession: If the European crisis also slows down the other economies that import goods from the United States, the effects might be worse. To put a cap on the magnitude of the effect, assume that changes in foreign output cause a 5% decline in U.S. exports within a year. How might a 5% decline in exports affect the US GDP?
In this problem, we have to analyze the statement that U.S. growth will lose momentum because of the slump in Europe.
The U.S. economy and the European recession: The impact could be worse if the European recession also causes a slowdown in the other economies that buy goods from the United States. Assume that in one year, as a result of changes in foreign output, U.S. exports fall by 5% in order to place a limit on the amount of the effect. What would happen to the U.S. GDP if exports fell by 5%?
The U.S. economy and the European recession: Assume that the multiplier in the US is 2 and that a severe downturn in Europe would result in a 5% decrease in output and imports from the US (relative to its normal level). What effect does the European recession have on the U.S. GDP, given your response to the prior question?
Inflation and real and nominal exchange rates: You may demonstrate the following using the real exchange rate definition:
The difference between domestic and international inflation, along with the percentage nominal appreciation, makes up the percentage real appreciation. Assume that the real exchange rate remains stable, for example at the level needed for net exports (or the current account) to equal zero. What has to occur over time in this scenario if domestic inflation is larger than foreign inflation to maintain a trade balance of zero?