CH5aSQ - Mankiw, Chapter 5 Study Questions 1. (15 points)...

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Study Questions 1. (15 points) Suppose a small country is running a trade surplus. For each of the following statements, explain whether or not the statement is consistent with this fact: a. (5 points) Statement #1: The world real interest rate is lower than the real interest rate that would equate domestic loan supply and domestic loan demand in the country. b. (5 points) Statement #2: Net foreign investment is negative. c. (5 points) Statement #3: Real GDP is greater than domestic spending. 2. (15 points) Suppose Congress has promises to take actions to reduce significantly the budget deficit of the Federal government. a. (8 points) If they keep this promise, what will happen to the U.S. trade deficit? Explain. b. (7 points) If they keep this promise, what will happen to the U.S. real exchange rate? Explain. 3. (10 points) Suppose the republics of the former Soviet Union begin to make significant progress in their attempts to become free-market economies. Because these countries have capital stocks that are obsolete, this will create a large set of profitable investment opportunities in these countries. What will happen to the trade surplus/deficit of these countries as a result? Explain. 4. (10 points) Consider two countries, country A and country B. In country A, the average rate of money growth has been 30% per year over the last few years, while in country B, the average rate of money growth has been 5% per year. Over the last few years, what has probably been happening to the nominal exchange rate between the currency of country A and the currency of country B? Explain. 5. Suppose the world real interest rate (r*) decreases. Explain in 2 or 3 sentences the implications of this change for the net exports (NX) of a small open economy. 6. Suppose a technological innovation increases Real GDP in the US. Explain in 2 or 3 sentences the effect of this change on U.S. net foreign investment. (You may assume for purposes of this question that the U.S. is a "small open economy.") 7. Japan trades heavily with other east Asian countries such as Korea, Thailand, Singapore, Hong Kong, China, and Taiwan. In the last few years Japanese net foreign investment in these countries has decreased. What does this fact imply about
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CH5aSQ - Mankiw, Chapter 5 Study Questions 1. (15 points)...

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