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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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