Question

The open-economy macroeconomic model takes

a. GDP, but not the price level as given.
b. both the price level and GDP as given.
c. the price level, but not GDP as given.
d. the price level and GDP as variables to be determined by the model.

Answer 1

The correct answer is option b.

Step-by-step explanation:

The open-economy macroeconomic model is used to determine the trade balance and exchange rate. This model assumes both GDP as well as the price to be given.

The exchange rate is determined through the demand and supply of loanable funds. The supply of loanable funds in an open economy comes from national savings. The demand for loanable funds comes from domestic investment and capital outflow.