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Exam 20: Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

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Question 21

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Why is time a factor in making the trade balance worsen after a depreciation? What impact does the elasticity of exports and imports have on the eventual improvement in the balance of trade as more time passes?

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The impact of depreciation on the price ...

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Question 22

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Suppose that inflation is a problem and the Fed wants to slow it down by contracting the money supply. How can floating exchange rates help the Fed do its job?

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Contractionary monetary policy raises in...

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Question 23

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Definition of equilibrium income Y = AE (a) Calculate the equilibrium level of income for this economy. (b) Based on your answer in Part (a), is the country experiencing a trade surplus or deficit? If so, what is the size of the deficit or surplus? (c) Suppose government spending increases by 100. Calculate what happens to the size of the trade deficit or surplus. Briefly explain any changes in the size of any surplus or deficit. (d) What is the government spending multiplier? (e) What is the size of the deficit response index for this economy? Explain.

-What determines a flexible exchange rate between two countries?

What is the expression for planned aggregate expenditures for an open economy? Briefly explain why and how this is different from the expression of planned aggregate expenditures for a closed economy.

-Using the above graph, compute the marginal propensity to consume.

-Draw a demand for pesos. Assume that the "price" of pesos is in dollars. Explain what happens as the price of the peso falls.

Explain the trade feedback effect.

According to purchasing power parity theory, in the long run what would happen to the exchange rate if the price of a computer in the United States = $1,000, the price of a computer in Japan = 200,000 yen, and the current exchange rate was $1.00 = 100 Yen?

Explain the effect of U.S. expansionary monetary policy on the U.S. economy if exchange rates are flexible. How would the effectiveness of an expansionary monetary policy change if exchange rates were fixed?

-Assume that interest rates for bonds in Canada are 9 percent and 6 percent in the United States. All other things being equal what will be the impact on the value of the dollar as investors seek to take advantage of this interest rate differential.

Assume planned aggregate expenditures are $400 billion, consumption is $120 billion, investment is $60 billion, and government spending is $70 billion. Compute the trade balance.

Give five reasons why demand for a foreign currency may increase.

-Using the above figure draw the new aggregate demand curve and the new aggregate supply curve that are likely to be the result of a currency depreciation. What happens to the price level and aggregate output?

-Using the table above calculate the balance on current account. (1) Net exports of goods $ 700 - 1000 - 300 (2) Net export of services $ 300 - 200 100 (3) Net investment income $ 250 300 - 50 (4) Net transfer payments $ 50

You are given the following information about an economy: C = 200 + .75Yd; I = 50; G = 100; EX = 25; IM = .15Yd; and T = 60. (a) What is the equilibrium level of income? (b) At the equilibrium level of income is the economy running a trade deficit or trade surplus? What is the amount of the trade deficit or surplus? (c) What is the open-economy multiplier? (d) If government spending increases by 100, what will be the change in income? What is the new equilibrium level of income? (e) At the new equilibrium level of income, what is the level of imports and exports?

Explain what effect a fiscal expansion would have in an open economy under flexible exchange rates.

Assume that there is trade only between the U.S. and Mexico. In addition, there is a floating exchange rate. Explain what would happen in the case of an excess demand for pesos. Explain what would happen in the case of an excess supply of pesos.

Explain what the balance on current account means.

Define currency appreciation.