Ch19 TUQ - 31-OCT-2886 FROM HKCC CPOlgU) THE MACROECONOMICS...

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Unformatted text preview: 31-OCT-2886 FROM HKCC CPOlgU) THE MACROECONOMICS 0F OPEN ECONOMIES 12384 430 PART7_ T0 23643145 p, QUES’I'IONS FOR REVIEW" 1. Describe supply and demand in the market for loanable funds and the market for foreign—nirrency exchange. How are time markets linked? 2. Why are budget deficits and trade deficits some- times called the twin deficits? - 3. Suppose that a textile workers’ union encourages people to buy only American-made clothes. What PROBLEMS AND APPLICATIONS 1. Japan generally runs a significant trade surplus. Do you think this is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese sav- ing rate relative to Japanese investment, or structural barriers against imports into Japan? . Explain your answer. 2. An article in USA Today (December 16, 2004) began "President Bush said Wednesday that the White House will shore up the sliding dollar by working to cut record budget and trade defiCits.” a. According the model in this chapter, would i 5. a reduction in the budget deficit reduce the trade deficit? Would it raise the valueof the dollar? Explain. b. Suppose that a reduction in the budget deficit made international investors more confident in the US. economy. How would this increase in confidence affect the value of the dollar? How w0uld it affect the trade deficit? 3. Suppose that Congress passes an investment tax credit, which subsidizes domestic investment. 6. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance? ' 4. The chapter notes that the rise in the US. trade deficit during the 19805 was due largely to the rise in the US. budget deficit. On the other hand, the popular press sometimes claims that ~ the increased trade deficit resulted from a decline in the quality of US. products relative to foreign products. ' 31-DCT-2886 11:46 HKCC (PolgU) would this policy do to the trade balance and the real exchange rate? What is the impact on the tex- tile industry? What is the impact on the auto industry? ' What is capital flight? When a country experi- ences capital flight, what is the effect on its inter- est rate and exchange rate? a. Assnme that US. products did decline in rel— ative quality during the 19805. How did this affect net exports. at any given exchange rate? b_. Draw a three-panel diagram to show the effect of this shift in net exports on the Us. real exchange rate and trade balance. . c. Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of US. products have any effect on our standard of living? (Hint: When we sell our goods to foreigners, what do we receive in return?) . An economist discussing trade policy in The New Republic wrote: "One of the benefits of the United States removing its trade restrictions [is] the gain to US. industries that produce goods for export. Export industries would find it easier - to sell their goods abroad—even if other coun- tries didn’t follow our example and reduce their trade barriers.” Explain in words why US. export industries would benefit from a reduction ‘ in restrictions on imports to the United States. Suppose that Us, consumers increase their ' demand for extra virgin olive oil imported from Italy. Answer the following questions in words I ‘ and with a diagram. a. What happens to the demand for dollars in the market for foreign-currency exchange? b. What happens to the value of dollars in the market for foreign-currency exchange? c. What happens to the quantity of net exports? A senator renounces her past support for protec- tionism: "The US. trade deficit must be reduced. but impert quotas only annoy our trading part- 65 P.85 ~2'9: $1.? ‘_-‘ r Via ., 45A. 1/) 31-DCT—2BBE 1 114'? 3 1 ~DCT-2286 12185 ERoM HKCC (Pol un CHAPTER, 1 9 ners. If we subsidize US. exports instead, we can reduce the deficit by increasing our compet- itiveness. Using a three-panel diagram, show ' the effect of an export subsidy on net exports 10. and the real exchange rate. Do you agree with the senator? Suppose that real interest rates increase across Europe. Explain how this development will affect US. net capital outflow. Then explain how it will affect us. net exports by using a formula from the chapter and by drawing a diagram. What will happen to the U5. real interest rate and real exchange rate? Suppose that Americans decide to increase their saving. ‘ a. If theelasticity of US. net capital outflow with nesPect to the real interest rate is very high, will this increase in private saving have a large or small effect on US. domestic investment? b. If the elasticity of US. exports with respect to the real exchange rate is very law, will this increase in private saving have a large or Small effect on the U5. real exchange rate? Over the past decade, some of Japanese saving has been used to finance American investment. That is, the Japanese have been buying Ameri- can capital assets. _. a. If the Japanese decided they no longer wanted to buy US. assets, what would hap- pen in the-US. market for loanable funds? In HKCC ceo1gu> IQ ..?3543.145 ms . ‘Z| A MACROECONOMIC THEORY OF THE OPEN ECONOMY particular, what would happen to US. inter- est rates, U.S.v saving, and US. investment? ' b. What would happen in the market for foreign- 11. currency exchange? In particular, what would happen to the value of the dollar and the US. trade balance? In 1993, the Russian government defaulted on its debt payments, leading investors worldwide to raise their preference for US. government bonds, which are considered very safe. What effect do you think this "flight to‘safety” had on the US. economy? Be sure to note the impact on national saving, domestic investment, net capital outfl0w, the interest rate, the exchange rate, and the trade balance. 12 Suppose that US. mutual funds suddenly decide to invest more in Canada. . a. What happens to Canadian net capital out- flow, Canadian saving, and Canadian domes— tic investment? b. What is the long—run effect on the Canadian capital stock? ' c. How will this change in the capital stock affect the Canadian labor market? Does this US. investment in Canada make Canadian . workers better off or worse off? d. Do you think this will make US. workers better off or worse off?- Can you think of any reason the impact on US. citizens generally may be different from the impact on Us. workers? , - P.86 431 ...
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This note was uploaded on 11/02/2009 for the course FB cc2105 taught by Professor Alan during the Spring '07 term at École Normale Supérieure.

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Ch19 TUQ - 31-OCT-2886 FROM HKCC CPOlgU) THE MACROECONOMICS...

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