Exam 13: A Macroeconomic Theory of the Small Open Economy

Suppose the market for loanable funds is described by the equations I = 180 - 16r and S = 8 + 24r. Suppose also that the world interest rate is 8 percent. a) Calculate domestic investment, domestic saving, and net capital outflow. b) If the net exports curve is given by NX = 142 - 2X, where X is the real exchange rate, calculate the equilibrium real exchange rate and net exports. c) How does the real exchange rate change when the world interest rate decreases to 7 percent? d) Discuss your results.

Figure 13-2 -Refer to Figure 13-2. Suppose that these diagrams refer to Canada. If the interest rate was initially at r0 and Japan voluntarily restricted its exports to Canada, what would happen to the interest rate?

If the quantity of loanable funds supplied is greater than the quantity demanded, what best describes the difference?

If the world real interest rate was lower than the interest rate that would occur if the Canadian economy were closed, then what would the Canadian net capital outflow be?

What will decrease Canadian net capital outflow?

Using the macroeconomic model studied, analyze the impact of the following events on the Canadian economy: a. a voluntary export restraint (VER) by Japanese car producers b. an export subsidy by Canadian government for Canadian lumber producers c. an increase in U.S. GDP

If the Canadian government imposes an import quota on French Brie cheese, which statement would best predict the consequences?

Suppose that Canada imposes restrictions on the importation of textiles into Canada. According to the open-economy macroeconomic model, what would be the most likely result?

Figure 13-1 -Refer to Figure 13-1. In the figure shown, if the world real interest rate went from 7 to 6 percent, what changes would occur?

What term refers to a large and sudden reduction in the demand for assets located in a country?

Mexico suffered from capital flight in 1994. Which statement best describes the effects of this event on the Canadian economy?

What is the real exchange rate equal to?

What is the price that balances supply and demand in the market for foreign-currency exchange in the open-economy macroeconomic model?

Which of the following would tend to shift the supply of dollars in the foreign-currency exchange market model to the right?

Using the macroeconomic model of a foreign-currency exchange market, (a) analyze the situation in which a government imposes a fixed exchange rate, and (b) determine what that government should do in order to maintain the fixed exchange.

If Great Britain suffers from capital flight, British domestic investment will fall and British net exports will increase.

Mexico suffered from capital flight in 1994. What happened to Mexico's net capital outflow and net exports?

In an open economy, the demand for loanable funds comes from both domestic investment and net capital outflow.

If the government started with a budget deficit and moved to a surplus, which statement would best describe the effects of these changes?

What is most likely to increase exports in the country of Nowhere?