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Case: Capital Flight and a decrease in exports

Suppose the country of Freedonia is a small open economy and its economy is mainly based on the export of sesame. Suddenly, a major frost destroys the nation's sesame crops and this dramatically reduced the exports of sesame from Freedonia. On the other hand, discouraged by the economic situation in the country, investors have withdrawn their capital from Freedonia and moved to other neighboring countries.

a. What would happen in Freedonia to saving, investment, interest rate, NCO, exchange rate, and net export?

b. The citizens of Freedonia like to travel abroad. How will this change in the economy affect them?

c. What kind of fiscal and monetary policy would be recommended to return back the exchange rate its previous level? (Please analyze the effects of each recommended monetary and fiscal policies using the market for loanable funds, NCO and the market for foreign currency exchange).

d. Other than monetary & Fiscal policies, what kind of policy advises would you recommend for countries like Freedonia.

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