APEC 3006 A3 - APEC 3006 Assignment 3 Yan Li 1 a In a small open economy Y=C I G NX That is NX=Y-C-I-G=S-I and NX represents the international flow of

APEC 3006 A3 - APEC 3006 Assignment 3 Yan Li 1 a In a small...

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APEC 3006 Assignment 3 Yan Li 1. a. In a small open economy, Y=C+I+G+NX. That is NX=Y-C-I-G=S-I, and NX represents the international flow of goods and services. Due to the existence of the import and export (open economy), there can be cash outflow or cash inflow, because people can borrow money or invest money to foreign countries. Money will flow from the place, which has a lower interest rate to the place, which has a higher interest rate freely. Due to the differences in the interest rates, investment may not equal to saving. b. NX=S-I c. 2. a. Real exchange rate is the relative price of the goods of two contrives, which shows the exchange rate between two goods in different countries. b. “The law of one price applied to the international marketplace is called purchasing-power parity. It states that if international arbitrage is possible, then a dollar must have the same purchasing power in every country. ”(Mankiw, 159) c. The predictions are far from exact the real situations. Because it measures the currency exchange rate that is nominal exchange rate. Consequently, it doesn’t
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