In the open-economy IS-LM model, an increase in the domestic interest rater will, other things equal, cause domestic investment to and the trade balance to O increase; increase decrease; increase increase; decrease O decrease; decrease
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- Suppose the United States decides to subsidize theexport of U.S. agricultural products, but it does notincrease taxes or decrease any other governmentspending to offset this expenditure. Using a threepanel diagram, show what happens to nationalsaving, domestic investment, net capital outflow, theinterest rate, the exchange rate, and the trade balance.Also explain in words how this U.S. policy affects theamount of imports, exports, and net exports.ProblemYou are given the following information about an open economyGross private domestic investment:40Government purchases of goods and services:30Gross national product(GNP):200Current account balance:-20Taxes:60Government transfer payment to the domestic private sector:25Interest payments from the government to the domestic privatesector:15Factor in come received from the rest of the world:7Factor payments made to the rest of the world:9Calculate the following:a)Consumptionb)NetExportsc)GDPd)Net factor payments from abroade)Private savings (f) Government savings (g) National savingsA case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?
- Suppose that Americans decide to increase theirsaving.a. If the elasticity of U.S. net capital outflow withrespect to the real interest rate is very high, willthis increase in private saving have a large orsmall effect on U.S. domestic investment?b. If the elasticity of U.S. exports with respect to thereal exchange rate is very low, will this increase inprivate saving have a large or small effect on theU.S. real exchange rate?If a country is running a government budget surplus, why is (T - G) on the left side of the saving-investment identity?Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy. Living In an especially large country Having a domestic investment rate much higher than the domestic savings rate Having many other large economies geographically nearby Having an especially large budget deficit Having countries with a tradition of strong protectionist legislation shutting out imports
- Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?Evaluate the following statement: "if lower exchange rates increase a nation's exports, the govermment should do everything in its power to anure that the exchange rate for its cumency is an low as it can possbly be This statement does nat acknowledge that lower exchange rates OA couid result in a reluctance from other countries to accept this nation's currency for payment of any goodn or services OB. could make a currency virtually worthless. O C. make a nation's imports more expensive. COD. None of the above responses are acknowledged by the statement.If the price level recently increased by 19% in Englandwhile falling by 6% in the Canada, by how much mustthe exchange rate change if PPP holds? Assume that thecurrent exchange rate is 0.58 pound per dollar
- In an open economy, a permanent beneficial suply shock (s< 0)implie tha the domestic real exchange rate wil: Oappreciate as the est of the word buys the domestic curency Oremain unchanged because of fsetig movements n he domestic prie level Oremain unchanged because of ffseting movements in realinteret rates Odepreciate so as to crowd-in net exportsIn the open circular flow diagram, O a. Domestic Savings - Domestic Investment = Trade Balance Ob. Domestic Savings- Domestic Investment = Foreign Investment Oc. Domestic Savings- Domestic Investment = Foreign Savings Od. Domestic Savings - Domestic Investment = Trade DeficitAccording to the open-economy macroeconomic model, import quotas increase which of the following O a. net exports and net capital outflow O b. net exports but not net capital outflow. O c. net capital outflow but not net exports. O d. neither net exports nor net capital outflow.