Exam 5: The Open Economy

Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports:

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy. a. What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation? b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy. c. What will happen to the trade balance of the small open economy, assuming that it started from a position of balanced trade?

Protectionist policies implemented in a small open economy with a trade deficit have the effect of the trade deficit and the quantity of imports and exports.

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies where:

Major improvements in computer information technology and communications in the late 1990s fueled an increase in investment demand in the United States. What is the predicted impact of this increased investment demand in the U.S., which is a large, open economy, on the U.S. interest rate, the U.S. exchange rate, and U.S. net exports, holding other factors constant? Illustrate your Answer graphically and explain in words.

In a large open economy, the interest rate adjusts so that domestic saving equals:

Starting from trade balance, if the world interest rate falls, then, holding other factors constant, in a small, open economy the amount of domestic investment will and net exports will .

The world interest rate:

If the government of a small, open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

The adoption of an investment tax credit in a small open economy is likely to lead to:

A country's exports may be written as equal to:

In a large open economy, an investment tax credit raises the real interest rate, the trade balance, and net capital outflow.

If the purchasing-power parity theory is true, then:

Compare the impact of an increase in investment demand in a small, open economy and a large, open economy. Assume prices are flexible, factors of production are fully employed in both countries and there is perfect capital mobility in the small, open economy.

Expansionary fiscal policy in a large open economy the real interest rate and the real exchange rate.

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

A "small" economy is one in which the:

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the net-exports schedule and the line representing saving minus investment.

Compare the impact of an increase in the government's budget deficit on investment spending in a small open economy with an otherwise comparable closed economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.