quanda32 - Practice Questions to accompany Mankiw...

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Unformatted text preview: Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 32 1. This problem is composed of the examples found in the chapter except the direction of the change in each case has been reversed. Use the model described by Exhibit 1 to answer the following questions. a. Suppose the government reduces its budget deficit. Describe the sequence of events in the model by describing the shifts in the curves in Exhibit 1 and discuss the movements in the relevant macroeconomic variables. Answer: Panel (a), supply of loanable funds shifts right, real interest rate decreases. NCO increases, increasing the supply of pounds in the foreign currency exchange market and causing the real exchange rate to depreciate. Saving and domestic investment have increased and the trade balance has moved toward surplus. Practice Questions to accompany Mankiw & Taylor: Economics 2 b. Suppose an existing quota on the importing of Japanese cars is removed. Describe the sequence of events in the model by describing the shifts in the curves in Exhibit 1 and discuss the movements in the relevant macroeconomic variables. Answer: Panel (c), NX fall at each exchange rate as imports increase causing the demand for pounds in the foreign currency exchange market to shift left; the real exchange rate falls increasing NX to their original level. No change in trade balance, but a higher volume of trade (more imports and more exports). c. Suppose there is a sudden inflow of capital into the United Kingdom because the country is believed to be more politically stable than other countries. Describe the sequence of events in the model by describing countries....
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quanda32 - Practice Questions to accompany Mankiw...

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