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CH14 ANSWERS TO.. - Chapter 14 1 Answers to Selected...

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Chapter 14: Answers to Selected “Reinforcing the Concepts” Questions Posted with “Brief Review” 1. Japan generally runs a trade surplus because the Japanese savings rate is high relative to Japanese domestic  investment. The result is high net capital outflow, which is matched by high net exports, resulting in a trade surplus.  The other possibilities (high foreign demand for Japanese goods, low Japanese demand for foreign goods, and  structural barriers against imports into Japan) would affect the real exchange rate, but not the trade surplus. 2. a. A reduction in the U.S. government budget deficit would increase national saving, shifting the supply curve of loanable funds to the right in the following figure. This would reduce the real interest rate in the United States, thus increasing net capital outflow, and reducing the real exchange rate. The real value of the dollar would decline, not increase as the president suggested. However, the trade deficit will decline. b. The increased confidence would lead to a reduction in net capital outflow as shown in the following figure. The  demand for loanable funds will fall, along with the real interest rate. The decline in net capital outflow will also 
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reduce the supply of dollars, increasing the real exchange rate. Thus, the trade balance will move toward 
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