Exam 32: A Macroeconomic Theory of the Open Economy

In the 1980s, both the U.S. government budget and U.S. trade deficits increased.

Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this candidate's promise.

The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is

Scenario 32-1 ​ During a recession government revenues from the income tax fall and government transfers rise as the reduction in income and the rise in unemployment raise the number of people who qualify for benefits. -Refer to Scenario 32-1. This change in the deficit causes net capital outflow to change. How is this change in net capital outflow shown in the market for foreign-currency exchange? What happens to the exchange rate?

Scenario 32-2 ​ Due to concerns about a rising level of debt relative to GDP, Congress and the President cut expenditures and raise taxes. -Refer to Scenario 32-2. What does this policy change do to the equilibrium values of the interest rate and the quantity of loanable funds?

Suppose that the U.S. government budget deficit decreases. What curves in the open-economy macroeconomic model shift? Explain why each curve shifts the direction it does.

Scenario 32-1 ​ During a recession government revenues from the income tax fall and government transfers rise as the reduction in income and the rise in unemployment raise the number of people who qualify for benefits. -Refer to Scenario 32-1. In the market for loanable funds which curve(s) does this change in the deficit shift? Which direction does it shift?

If Argentina suffers from capital flight, Argentinean domestic investment and Argentinean net exports will both decline.

What is the source of the supply of dollars in the market for foreign-currency exchange?

If people thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate

Scenario 32-3 ​ Concerns raised about the declining U.S. shoe industry and unfair labor practices in foreign shoe factories lead the Congress and President to impose a quota on shoe imports. -Refer to Scenario 32-3. As a result of the quota, is there initially a surplus or a shortage in the market for foreign-currency exchange? Carefully explain how people's response to this surplus or shortage and the resulting changes in their behavior leads to a new equilibrium exchange rate.

If the exchange rate rises, foreign residents want to purchase ______ domestic goods and domestic residents want to purchase _____ foreign goods. In the market for foreign-currency exchange, these changes are shown as a _______ in the quantity of dollars ______.

If the real interest rate were above the equilibrium rate, there would be a shortage of loanable funds.

Figure 32-3 Refer to the following diagram of the open-economy macroeconomic model to answer the questions that follow. ​ Graph (a) Graph (b) Graph (c) ​ -Refer to Figure 32-3. Suppose that U.S. firms desire to purchase more equipment and build more factories and stores in the United States. The effects of this are illustrated by

If a county becomes less likely to default on its bonds, what happens to that country's interest rate and exchange rate? Explain.

Scenario 32-2 ​ Due to concerns about a rising level of debt relative to GDP, Congress and the President cut expenditures and raise taxes. -Refer to Scenario 32-2. In the market for loanable funds which curve(s) does this policy change shift? Which direction does it shift?

Which of the following would make both the equilibrium real interest rate and the equilibrium quantity of loanable funds decrease?

Other things the same, if the U.S. interest rate rises, what happens to the net capital outflow of other countries?

If the United States were to impose import quotas

Other things the same, when a Canadian company imports bicycles from the U.S., the open-economy macroeconomic model treats this transaction as part of the demand for dollars in the U.S. foreign-currency exchange market.