Exam 6: The Open Economy

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.

Use the following to answer questions : Exhibit: Policies Influence Real Exchange Rate A) B) C) D) -(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies abroad?

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?

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

Assume that the following equations characterize a large open economy: (1) Y = 5,000 (2) Y = C + I + G + NX (3) C = 1/2(Y - T) (4) I = 2,000 - 100r (5) NX = 500 - 500 $\varepsilon$ (6) CF = -100r (7) CF = NX (8) G = 1,500 (9) T = 1,000. Where NX is net exports, CF is net capital outflow, and $\in$ is the real exchange rate. Solve these equations for the equilibrium values of C, I, NX, CF, r, and $\varepsilon$ . (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and $\varepsilon$ . Check your work by seeing that all of these equations balance given your answers.)

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

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

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

A "small" economy is one in which the:

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

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______.

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______.

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

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

Net exports equal GDP minus domestic spending on:

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

An "open" economy is one in which:

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