Exam 5: The Open Economy

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100, does investment change? What is the level of investment after the change? b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much? c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much? d. Will the real exchange rate rise, fall, or remain constant as a result of the change in G?

Net capital outflow is equal to:

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports and net capital outflows .

A small open economy with perfect capital mobility is characterized by all of the following except that:

In a small, open economy if net exports are negative, then:

In a large open economy, the exchange rate adjusts so that net exports equal:

Assume that in a small open economy where full employment always prevails, national saving is 300. a. If domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed? b. If the economy is open and the world interest rate is 10 percent, what will investment be? c. What will the current account surplus or deficit be? What will net capital outflow be?

Suppose a new technology is developed that increases investment demand in both a closed economy and in a small open economy that are in other ways identical. Holding other factors constant, will the quantity of investment spending increase more in the closed economy or in the small open economy? Explain. 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.

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

An "open" economy is one in which:

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports and net capital outflows .

A shrinking U.S. budget deficit in the 1990s coincided with a U.S. trade deficit.

Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment:

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade and net capital outflow.

The real exchange rate:

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

If domestic saving is less than domestic investment, then net exports are and net capital outflows are .

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the:

If the number of dollars per yen rises, this is called a(n):

In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net exports: