Exam 6: The Open Economy

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to ______, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to ______.

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

A statement that is generally true about capital in a large open economy is that it is:

The doctrine of purchasing-power parity:

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

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

If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and the United States dollar? Explain.

Net capital outflow is equal to the amount that:

In a large open economy, the interest rate adjusts so that domestic saving equals:

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 ______.

Use the following to answer questions : Exhibit: Saving and Investment in a Small Open Economy -(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r₃, then the economy has:

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

One consequence of high inflation is a(n):

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. Assume there is perfect capital mobility for the small open economy.

Compare the impact of an increase in investment demand in a small open economy and a large open economy. Assume prices are flexible, factors of production are fully employed in both countries and there is perfect capital mobility in the small open economy.

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.

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

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow.

If net capital outflow is positive, then:

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