Exam 5: The Open Economy

A small open economy is in long-run equilibrium; it has some foreign debt outstanding; and its interest rate exceeds its growth rate. I: The country has a trade surplus. II: The world interest rate exceeds the country's growth rate.

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

In a small open economy,if the world real interest rate is above the rate at which national saving exceeds domestic investment,then there will be a trade ______ and ______ net capital outflow.

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

An effective policy to reduce a trade deficit in a small open economy would be to:

In the basic model of a small open economy,when foreign governments reduce national saving in their countries,the equilibrium real exchange rate:

If the nominal exchange rate falls 10 percent,the domestic price level rises 4 percent,and the foreign price level rises 6 percent,the real exchange rate will fall:

In a long-run model of a small open economy,deficit reduction I: leads initially to increased net exports. II: eventually leads to lower foreign debt and increased consumption.

The nominal exchange rate between the Canada dollar and the Japanese yen is the:

Suppose that the large industrial countries of the world are concerned about the depreciating currencies of a number of small open economies.a.What type of fiscal policies must the large industrial countries undertake in order to promote currency appreciation in the small open economies? b.Illustrate graphically the impact of the industrial countries' policies on the exchange rate of the small open economies.c.What will happen to the trade balance of the typical small open economy,assuming that it starts from a position of balanced trade?

Two reasons why capital may not flow to poor countries are that the poorer countries may:

In the basic model of a small open economy,if the government adopts a policy that lowers imports,then the quantity of exports:

If a dollar bought 1,000 Chilean pesos 10 years ago and 1,500 pesos now,and inflation for that period was 25 percent in the United States and 100 percent in Chile,then:

A depreciation of the real exchange rate in the basic model of a small open economy could be the result of:

The lower our real exchange rate is,the ______ expensive domestic goods are relative to foreign goods,and the ______ the demand is for net exports.

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

Assume that a war breaks out abroad,and foreign investors choose to invest more in a large safe country,the United States.Then,according to the basic open-economy model,the U.S.real interest rate:

In September 1995,Patrick Buchanan,a Republican candidate for U.S.president,proposed a 10 percent tariff on Japanese imports to the United States,a 20 percent tariff on Chinese imports to the United States,and an unspecified "social" tariff on imports from third-world countries. a.Use the long-run model of a small open economy to illustrate graphically the impact of these trade policies on the U.S.exchange rate and the 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 Mr.Buchanan's proposed policies.Specifically state what happens to the exchange rate,the trade balance,the volume of imports,and the volume of exports.

Assume that a small open economy gets involved in a global war,in which its government purchases increase and the rest of the world's government purchases also increase.Then,for the basic model of the small country,net exports:

In the basic model of a small open economy,if the government adopts a policy that lowers imports,then that policy: