Exam 6: The Open Economy

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

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.

The lower the real exchange rate is, the _____ expensive domestic goods are relative to foreign goods, and the _____ the demand is for net exports.

In a small open economy, policies that increase:

Starting from a 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 _____.

If the money supply in Mexico is increasing much more rapidly than the money supply in the Canada, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and Canadian dollar if purchasing power parity holds? Explain.

Net exports equal GDP minus domestic spending on:

The real exchange rate:

Purchasing-power parity theory:

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.

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

In a small open economy in equilibrium:

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

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact on of protectionist trade policies on the real exchange rate?

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

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

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

Net capital outflow in a large country:

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.Graphically illustrate 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?

Explain why government budget deficits crowd out private investment spending in a closed economy but crowd out net exports in a small open economy. Assume that prices are flexible and that factors of production are fully employed in both economies. Assume that there is perfect capital mobility for the small open economy.