Exam 5: The Open Economy

An effective policy to reduce a trade deficit in a small open economy would be to:

An increase in the trade deficit of a small open economy could be the result of:

Suppose that the large industrial countries of the world are concerned about the depreciating currencies of a number of small open economies. a. What type of fiscal policies must the large industrial countries undertake in order to promote currency appreciation in the small open economies? b. Illustrate graphically the impact of the industrial countries' policies on the exchange rate of the small open economies. c. What will happen to the trade balance of the typical small open economy, assuming that it starts from a position of balanced trade?

In a large open economy, if an import quota is adopted, then:

In the small open economy in equilibrium:

If purchasing power parity holds, then changes in domestic saving will the real exchange rate.

In a country with a small open economy, the real interest rate will always be:

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is Swiss goods per U.S. good.

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade and net capital outflow.

In a small open economy, if consumers shift their preferences toward Japanese cars, then net exports:

The real interest rates and real exchange rates are constant and equal in North Country and South Country. The Fisher equation and purchasing power parity hold in both countries. If the nominal interest rate is 8 percent in North Country and 10 percent in South Country, do you expect North Country's nominal exchange rate to appreciate, depreciate, or remain the same? Explain.

An appreciation of the real exchange rate in a small open economy could be the result of:

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade and net capital outflow.

If domestic saving exceeds domestic investment, then net exports are and net capital outflows are .

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is and net capital outflow equals .

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade and net capital outflow.

In the 2008 global financial crisis, many investors considered the U.S. economy a safe place to move their assets. What is the predicted impact of this inflow of financial capital to the U.S., which is a large, open economy, on the U.S. interest rate and the U.S. exchange rate, holding other factors constant. Illustrate your Answer graphically and explain in words.

Building an economic model based on the assumption of a small open economy is useful because:

If the real exchange rate is high, foreign goods:

If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 pesos now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then: