Directions: Please answer each of the following questions in a paragraph for each. Explain your thoughts with theory and examples where applicable.
List the factors that might influence a country's exports, imports, and trade balance.
Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what direction this changes U.S. net exports and U.S. net capital outflow.
What is the logic behind the theory of purchasing-power parity?
Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?
State what, if anything, each of the following does to the supply or demand of loanable funds.
Net capital outflow increases at each interest rate
Domestic investment increases at each interest rate
The government deficit increases.
Private saving increases.
Suppose that U.S. investors decide that investment opportunities in African countries have improved. What happens to U.S. net capital outflow? What happens to the U.S. real interest rate?
Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?
Suppose the U.S. government institutes a "Buy American" campaign, in order to encourage spending on domestic goods. What effect will this have on the U.S. trade balance?
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