CH5 (1) - Import Settings: Base Settings: Brownstone...

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Import Settings: Base Settings: Brownstone Default Information Field: Level Information Field: Sub Topic Information Field: Topic Highest Answer Letter: D Multiple Keywords in Same Paragraph: No Chapter: CH5 Instruction: Name: __________________________ Date: _____________ Short Answer 1. Assume that in a small open economy where full employment always prevails, national saving is 300. a. If domestic investment is given by I = 400 – 20 r , where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed? b. If the economy is open and the world interest rate is 10 percent, what will investment be? c. What will the current account surplus or deficit be? What will net capital outflow be? Ans: a. 5 percent b. 200 c. The trade surplus will be 100. Net capital outflow will be 100. Topic: Numerical Problems
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2. Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 – 20 r , where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100, does investment change? What is the level of investment after the change? b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much? c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much? d. Will the real exchange rate rise, fall, or remain constant as a result of the change in G ? Ans: a. No. 200. b. Yes. It decreases by 100. c. Yes. It decreases by 100. d. It will rise. Topic: Numerical Problems 3. Assume that the following equations characterize a large open economy: (1) Y = 5,000 (2) Y = C + I + G + NX (3) C = 1/2( Y T ) (4) I = 2,000 – 100 r (5) NX = 500 – 500 ε (6) CF = –100 r (7) CF = NX (8) G = 1,500 (9) T = 1,000 where NX is net exports, CF is net capital outflow, and ε is the real exchange rate. Solve these equations for the equilibrium values of C , I , NX , CF , r , and ε . ( Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and ε . Check your work by seeing that all of these equations balance given your answers.) Ans: C = 2,000; I = 1,750; NX = –250; CF = –250; r = 2.5 percent; ε = 1.5 Topic: Numerical Problems
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4. a. In April 1995, Michel Camdessus, managing director of the International Monetary Fund (IMF), criticized U.S. economic policy for allowing the dollar exchange rate to fall too low. He recommended that the United States reduce its budget deficit in order to raise the exchange rate. Use the long-run model of a small open economy to illustrate graphically the impact of reducing
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CH5 (1) - Import Settings: Base Settings: Brownstone...

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