Exam 13: A Macroeconomic Theory of the Small Open Economy

Suppose that the world consists of only two countries, A and B, of relatively equal sizes. The world interest rate in such a model is some average of the autarkic (no trade) interest rates in each of the two countries. a. Draw "parallel" loanable funds markets for the two countries and show the position of the world interest rate. (Hint: What relationship must exist between the NCOs of the two countries?) b. Suppose country A enacts laws that induce people to save more. Show the effects of such laws on each country's domestic amounts saved and invested.? c. In the currency-exchange diagrams for both countries, show the effect of country A's savings policies on both countries' exchange rates and net exports.

What is most likely to increase Canadian exports?

What is consistent with capital flight from Mexico?

If a government increases its budget deficit, which statement would best predict the effects?

What is most likely to increase exports in the country of Turania?

If there is a surplus of loanable funds, what best describes the difference?

If Morocco experienced capital flight, which statement would best explain the effects?

What is the price that balances supply and demand in the market for foreign-currency exchange in the open-economy macroeconomic model?

Although trade policies do not affect a country's overall trade balance, they do affect specific firms and industries.

If Canada imposes an import quota on bicycles, which statement would best predict the consequences?

What effect does a fall in the real interest rate have on the quantity of loanable funds?

In the open-economy macroeconomic model, where does the supply of loanable funds come from?

According to the theory of purchasing-power parity, what is the shape of the demand curve for foreign-currency exchange?

In 2012 and again in 2015, citizens of Greece were reported to be withdrawing their savings from Greek banks because they feared that Greece would leave the European Union. What is consistent with what the open-economy macroeconomic model predicts?

What is the variable that links the loanable funds market and the foreign-currency exchange market?