Interest-rate parity is best described by the equation | B.
The sum of net exports of goods
and services plus net income from abroad plus net unilateral current
the balance on current account.
Suppose the U.S. has domestic savings
of $10 billion, domestic investment of $160 billion, and a
government budget deficit of $250 billion. Based on these figures, the amount of net foreign
investment is $____ billion.
Explain how a shock in one country can be transmitted to other countries. List three ways this can
happen and give an example of each. |
Shocks are transmitted internationally via trade effects,
interest-rate effects, and exchange-rate effects. Trade effects occur when the demand for exported
goods changes; for example, when an increase in income taxes in country A reduces people's after-tax
income, they buy fewer goods, including imported goods, so net exports in country B decline and
income in country B declines. Interest-rate effects occur because investors can move investments into
different countries; for example, if country A eases monetary policy, reducing its interest rate,
investors will move their financial investments to other countries, reducing interest rates in those
countries and influencing investment and consumption decisions in those countries. Exchange-rate
effects occur when the exchange rate changes, changing the relative prices of imported and exported