Exam 6: The Open Economy

The Canadian dollar exchange rate (units of foreign currency per Canadian dollar) for currencies of countries with high inflation rates relative to Canada has tended to _____, and the Canadian dollar exchange rate (units of foreign currency per Canadian dollar) for currencies of countries with low inflation rates relative to Canada has tended to _____.

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

If 5 Swiss francs trade for $1, the Canadian price level equals $1 for a good, and the Swiss price level equals 2 francs for the same good, then the real exchange rate between Swiss goods and Canadian goods is _____ Swiss good(s) per Canadian good.

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.

Why is the domestic output not equal to the domestic spending in an open economy? Explain.

Holding other factors constant, legislation to cut taxes in an open economy will:

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate (measured in units of the home currency divided by units of foreign currency):

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

When the real exchange rate rises:

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.

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.

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of an increase in household saving on the real exchange rate?

What is the difference between the strengthening and weakening of domestic currency? Explain.

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

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

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

In a large open economy, the real interest rate is determined by:

What is the difference between trade surplus and trade deficit? Explain.

What is the effect of investment enhancement measures on the trade balance of a small open economy?

Net capital outflow is equal to the amount that: