This monograph addresses a number of practical current policy issues in the areas of open economy macro-economic and international trade theory. The questions that are asked and answered include the following: What are the effects of a debt-financed cut in taxes on the real exchange rate, the trade balance, the current account and domestic and foreign real interest rates and stock markets in the short run and the long run? How do variations in public spending (financed through variations in taxations or borrowing) affect these same variables? How do productivity shocks or supply side-friendly tax cuts such as reductions in the rate of taxation on capital income affect the domestic and foreign economies?
While the questions have an obvious immediate practical policy relevance, their treatment is uncompromisingly theoretical. A number of highly abstract and greatly simplified two-country models are presented and put through their paces in order to shed some light on the essential features of the international transmission mechanism.