CH5 ECO 3203 - Chapter 5 The Open Economy In this chapter...

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Chapter 5 The Open Economy In this chapter we revisit the loanable funds model in the context of an open economy. If there is a trade surplus what does this mean? Make note of the definitions in table 5-1 of your text. The international investor: A person, firm, government with funds to save Funds seek the highest rate of return Perfect capital mobility results in one world interest rate What is a small open economy? A price taker in the loanable funds market: takes the world interest rate as given Changes in saving and investment do not result in permanent changes in the interest rate Capital flows adjust to maintain the interest rate at the world level The exchange rate adjusts What is the difference between the nominal and the real exchange rate? The nominal exchange rate is the relative price of the currencies of two countries The real exchange rate is the relative price of the goods of two countries See the formula in the text If prices are not changing then changes in the nominal exchange rate cause
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