section8 - ECON 101B: Section 8 Handout Date: 2/11/11...

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ECON 101B: Section 8 Handout Date: 2/11/11 Question 1 If a war broke out abroad, it would affect the U.S. economy in many ways. Use the model of the large open economy to examine each of the following effects of such a war. What happens in the United States to saving, investment, the trade balance, the interest rate, and the exchange rate? (To keep things simple, consider each of the following effects separately.) 1. The U.S. government, fearing it may need to enter the war, increases its purchases of military equip- ment. 2. Other countries raise their demand for high-tech weapons, a major export of the United States. 3. The war makes U.S. firms uncertain about the future, and the firms delay some investment projects. 4. The war makes U.S. consumers uncertain about the future, and the consumers save more in response. 5. Americans become apprehensive about travelling abroad, so more of them spend their vacations in the United States. 6. Foreign investors seek a safe haven for their portfolios in the United States.
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This note was uploaded on 10/04/2011 for the course ECON 101b taught by Professor Staff during the Spring '08 term at University of California, Berkeley.

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