Exam 6: The Open Economy

Assume that in a small open economy where full employment always prevails, national saving is 300. a. If domestic investment is given by $I = 400 - 20$ r, 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?

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

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate:

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.

If the real exchange rate decreases, then net exports will _____.

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100 , does investment change? What is the level of investment after the change? b. Does the trade balance change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much? c. Does net capital outflow change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much? d. Will the real exchange rate rise, fall, or remain constant as a result of the change in $G$ ?

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 the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:

a. In September 1995, Patrick Buchanan, a Republican candidate for 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. Use the long-run model of a small open economy to illustrate graphically the impact of these trade policics 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 equilibriom 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

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

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______ and U.S. imports ______.

Building an economic model based on the assumption of a small open economy is useful because:

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

Fill in the blanks: According to the national income accounts identity, an economy's ______________ must always equal the difference between its ____________and its _____________ .

a. 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. Use the long-run model of a small open economy to illustrate graphically the impact of this expansionary fiscal policy by foreigners 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 initia equilibrium values iv. the direction the curves shift v. the new long-run equilibrivm values b. Based on your graphical analysis, explain the predicted impact of the foreign expansionary fiscal policy on the U.S. exchange rate and the U.S. trade balance.

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

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 small country, net exports:

In a large open economy, the exchange rate adjusts so that net exports equal:

The value of net exports is also the value of: