Solution to Questions_Chap 5 and 12_2011

Solution to Questions_Chap 5 and 12_2011 - Lahore School of...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Lahore School of Economics Macroeconomics II In Class Practice Questions Chapter 5 More Problems and Applications 1. a. As shown in Figure 516, an increase in government purchases reduces national saving. This reduces the supply of loans and raises the equilibrium interest rate. This causes both domestic investment and net capital outflow to fall. The fall in net capital outflow reduces the supply of dollars to be exchanged into foreign currency, so the exchange rate appreciates and the trade balance falls. b. As shown in Figure 517, the increase in demand for exports shifts the net exports schedule outward. Since nothing has changed in the market for loanable funds, the interest rate remains the same, which in turn implies that net capital outflow remains the same. The shift in the net exports schedule causes the exchange rate to appreciate. The rise in the exchange rate makes U.S. goods more expensive relative to foreign goods, which depresses exports and stimulates imports. In the end, the increase in demand for American goods does not affect the trade balance. c. As shown in Figure 518, the U.S. investment demand schedule shifts inward. The demand for loans falls, so the equilibrium interest rate falls. The lower interest rate increases net capital outflow. Despite the fall in the interest rate, domestic investment falls; we know this because I + CF does not change, and CF rises. The rise in net capital outflow increases the supply of dollars in the market for foreign exchange. The exchange rate depreciates, and net exports rise. d. As shown in Figure 519, the increase in saving increases the supply of loans and d....
View Full Document

This note was uploaded on 02/13/2012 for the course ECON 101 taught by Professor Malrani during the Spring '05 term at Bunker Hill.

Page1 / 9

Solution to Questions_Chap 5 and 12_2011 - Lahore School of...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online