Exam 5: The Open Economy

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.Starting from this situation,suppose that an increase in national savings changes the domestic supply of capital relationship to K = 8R. I: This country's GNP increases by 36. II: Labour's share of GNP falls.

I: The twin deficits prediction is the proposition that a country with a large government budget deficit is likely to have a large trade deficit.II: An increase in foreign interest rates will cause changes in a small open economy that are consistent with the twin deficits prediction.

In a small open economy,if domestic investment exceeds domestic saving,then the extra investment will be financed by:

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

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

According to purchasing power-parity,if the dollar price of oil is higher in Toronto than in London,arbitrageurs will _____ oil in Toronto and _____ oil in London to drive _____ the price of oil in Toronto.

In the basic model of a small open economy,if the introduction of automatic-teller machines reduces the demand for money,then net exports:

If a country has a high rate of inflation relative to Canada,our dollar will buy:

In a small open economy,if the world interest rate increases,then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____,holding all else constant.

In a small open economy,if domestic saving exceeds domestic investment,then the extra saving will be used to:

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

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

An "open" economy is one in which:

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 protectionist trade policies in the basic version of the small open economy model?

One consequence of high inflation is a(n):

What determines the real exchange rate and what determines the nominal exchange rate in a small open economy with perfect capital mobility,fully employed factors of production,and flexible prices?

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

In April 1995,Michel Camdessus,managing director of the International Monetary Fund (IMF),criticized U.S.economic policy for allowing the dollar exchange rate to fall too low.He recommended that the United States reduce its budget deficit in order to raise the exchange rate. a.Use the long-run model of a small open economy to illustrate graphically the impact of reducing the government's budget deficit on the exchange rate and the trade balance.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 whether Mr.Camdessus's policy recommendation will work.Specifically state what happens to the exchange rate and the trade balance as a result of the government budget deficit reduction.

In a small open economy,if domestic saving equals $50 billion and domestic investment equals $50 billion,then there is ______ and net capital outflow equals ______ .

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 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.