Exam 5: Elasticity and Its Application

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.

A "small" economy is one in which the:

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

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports and net capital outflows .

A country's exports may be written as equal to:

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 .

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

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

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

When exports exceed imports, all of the following are true except:

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

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

Net exports equal GDP minus domestic spending on:

Major improvements in computer information technology and communications in the late 1990s fueled an increase in investment demand in the United States. What is the predicted impact of this increased investment demand in the United States, which is a large open economy, on the U.S. interest rate, the U.S. exchange rate, and U.S. net exports, holding other factors constant? Illustrate your answer graphically and explain in words.

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?