Exam 5: The Open Economy

In a small open economy,starting from a position of balanced trade,if the government increases domestic government purchases,this produces a tendency toward a trade ______ and ______ net capital outflow.

If the real exchange rate of a country decreases,then net exports will:

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

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.Use the basic version of the open-economy model that abstracts from foreign debt accumulation.

In the small open economy in equilibrium:

If corporate downsizing and lack of job security cause consumers to spend less and save more,what will be the impact on the exchange rate and trade balance? a.Use the basic version of the long-run model of a small open economy to illustrate graphically the impact of this decline in consumer confidence on the exchange rate and the trade balance.Assume the country starts from a position of trade balance,i.e.,exports equal imports.Be sure to label: i.the axes ii.the curves iii.the initial equilibrium values iv.the direction the curves shift v.the new long-run equilibrium values.b.Based on your graphical analysis,explain the predicted impact of a decline in consumer confidence on the exchange rate and the domestic economy's trade balance.

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

Suppose that governments around the world begin to engage in expansionary fiscal policy (run large budget deficits)in order to stimulate economic activity in their countries. a.Use the basic version of the long-run model of a small open economy to illustrate graphically the impact of this expansionary fiscal policy by foreigners on the Canadian exchange rate and the Canadian trade balance.Assume that the country starts from a position of trade balance,i.e.,exports equal imports.Be sure to label: i.the axes ii.the curves iii.the initial equilibrium values iv.the direction the curves shift v.the new long-run equilibrium values. b.Based on your graphical analysis,explain the predicted impact of the foreign expansionary fiscal policy on the Canadian exchange rate and the Canadian trade balance.

In a long-run model of a small open economy,deficit reduction I: leads to higher living standards. II: leads to a fall in the country's real exchange rate once the new full-equilibrium level of foreign debt is reached.

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 ______.

If 5 Swiss francs trade for $1,the U.S.price level equals $1 per good,and the Canadian price level equals 2 francs per good,then the real exchange rate between Swiss goods and Canadian goods is ______ Swiss goods per Canadian good.

A "small" economy is one in which the:

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?

Net exports equal GDP minus domestic spending on:

A country's real exchange rate:

Consider a small open economy whose demand and domestic supply of capital relationships are R = 30 - (1/2)K and K = 7R,respectively (where K and R denote capital and its marginal product).Capital is perfectly mobile internationally,and the yield on capital (R)in the rest of the world is 6. I: This country's GDP exceeds 900. II: This country's GNP exceeds 800.

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

If the real exchange rate is high,foreign goods:

Use the following to answer questions : Exhibit: Policies Influence Real Exchange Rate -(Exhibit: Policies Influence Real Exchange Rate)Which of the graphs illustrates the impact on the real exchange rate of contractionary fiscal policies abroad in the basic version of the small open economy model?

Compare the impact of an increase in the government's budget deficit on investment spending in a small open economy with an otherwise comparable closed economy.Assume prices are flexible and that factors of production are fully employed in both economies.Use the basic version of the open-economy model that abstracts from foreign debt accumulation.