Exam 5: The Open Economy

If net capital outflow is positive, then:

The real exchange rate is determined by the equality of:

The law of one price is enforced by:

If the real exchange rate decreases, then net exports will .

If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and the U.S. dollar? Explain.

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate:

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

In an open economy:

In a small, open economy, if the world interest rate falls, then domestic investment will and the real exchange rate will , holding all else constant.

In times of great economic uncertainty and potential job loss, many consumers may increase their saving as a precautionary measure. What is the predicted impact of an increase in national saving on the domestic interest rate and exchange rate in a large, open economy, holding other factors constant. Illustrate your Answer graphically and explain in words.

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was than the expansionary shift in the U.S. investment function, resulting in a trade .

The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called:

Net exports equal GDP minus domestic spending on:

If domestic spending exceeds output, we the difference-net exports are .

The government of a small open economy wishes to promote trade policies that will result in currency appreciation. a. Would protectionist policies (higher tariffs and more quotas) or freer trade policies (tariff reductions and quota eliminations) be more effective in generating currency appreciation? b. Illustrate graphically the impact of the trade policy on the exchange rate of the small open economy. c. What will happen to the trade balance of the small open economy as a result of the trade policies, assuming that the country started from a position of free trade? d. What will happen to the quantity of exports and imports as a result of the trade policies?

In a small open economy, policies that increase:

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:

According to purchasing power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will oil in New York and oil in London to drive the price of oil in New York.

Net capital outflow in a large country: