352 hw 8
Net factor payments are equal to $5 billion and the statistical discrepancy is equal to 0. a. At a world real interest rate of 8%, what is the level of net exports if Desired Inv=60 and Des S=45?
'NX'? -20 billion
An increase in foreign taxes
1. no changes on saving 2. no changes on investment CA: no change real interest rate: no change
17. Number of workers Number of Garmets produced 0 0 1 10 2 19 3 26 4 31 5 34 If the company hires 4 workers, which of the following could be the real wage rate?
4 *On test the answer is 13, chart is different
no NFP or NUT
CA = NX = Sd- Id C= Y - (I + G +NX) Absorption = C + I + G
S= I + CA = I + NX Y= Cd + Id + G + NX NX = Y - (Cd + Id + G)
Savings = Y - (Cd + G) Absorption = Cd + Id + G Net exports = Y - absorption = Y-(Cd + Id + G)
23. Consider two large open economies, the home economy and the foreign economy. Which of the following lowers the world real interest rate (r^w)?
a. A decrease in the domestic expected marginal product of capital
25. In a large open economy, an increase in desired national saving causes the world real interest rate to _____, and an increase in desired investment causes the world real interest rate to _______.
decline; increase
Current account balance of one country equals
the capital and financial account balance of the other country
c. The Federal Reserve sells yen to, and buys dollars from, a Swiss bank:
+ entry in capital and financial account
g. A U.S. company borrows from a British bank
+ entry in capital and financial account
a. The U.S. government sells F—16 fighter planes to a foreign government:
+ entry in current account
d. A New York bank receives the interest on its loans to Brazil
+ entry in current account
Consider two large open economies the home economy and the foreign economy. Which of the following lowers the world real interest rate?
- A decrease in the domestic expected marginal product of capital
types of changes that lead to large account deficit in small open economy
- an increase in the expected future marginal product of capital - a temporary adverse supply shock - an increase in government purchases to finance a military expansion
e. A U.S. collector buys some ancient artifacts from a collector in Egypt:
- entry in capital and financial account
f. A U.S. oil company buys insurance from a Canadian insurance company to insure its oils rigs in the Gulf of Mexico:
- entry in current account
stagflation
-is the phenomenon that high unemployment and high inflation are obsereved simultaneously -was a result of the oil price hike in the early 1970s -cannot be resolved by Keynesian-type demand shifting policies
Desired Investment I^d: $250 Current Account Balance CA: $580 Net Exports NX: $580 Domestic Output Y: $1,200 Government Expenditure G: $200 1. Calculate the value of Desired Consumption C^d: 2. Calculate the value of domestic absorption
1. value of Desired Consumption C^d: $170 2. value of domestic absorption: $620
20. The graphs below show the saving and investment schedules for two large open economies. The equilibrium world real interest rate is: At this equilibrium interest rate, 'Home' is
10% a net borrower and has a current account deficit.
14.The income elasticity of money demand is 1.00 and the interest elasticity of money demand is -0.05. real income is expected to grow by 4.4% over the next year, and the real interest rate is expected to stay constant . Rate of inflation is 0. If the central bank wants to zero inflation over the next year, what growth rate of nominal money supply should it choose?
4.4
17.The money supply is 1,050,000, currency held by the public is $50,00 and the reserve deposit ratio is 0.025. Then monetary base is ___ and the money multiplier is ____;
75,000;14
Assuming, for simplicity, that net factor payments, NFP, and net unilateral transfers are zero and given the following: Output (Y): $1,000 Government Purchase (G): $120 Desired Consumption (C^d): 700 Desired Investment (I^d): $110 If the goods market is in equilibrium for an open economy, what is the current account balance, CA?
CA= $70
16. When a person gest an increase in current income, what is likely to happen to consumption and saving?
Consumption increases and saving increases
4. Identify how the following transaction would enter the U.S. balance of payments accounts. Do not be concerned with possible offsetting transactions. Transaction: The U.S. government sells F—16 fighter planes to a foreign government
Current Account.
23.Suppose that the FED were committed to following the Taylor Rule: i=pie+0.02+0.5y+0.5(pie-0.2), where I is the nominal interest rate, pie is the rate in inflation, and y is the percentage deviation of the output from its full employment level. Then, a decrease in export demand would cause output to _____ and inflation to ____. According to the Taylor rule, the nominal interest rate would ____.
Decrease, decrease, decrease
_______(3) are main sources of economic growth, according to growth accounting system
Growth in capital, growth in labor, growths in productivity
Of the three sources of growth identified by growth accounting, which one is primarily responsible for the slowdown in US economic growth after 1973?
Growth in productivity
23. According to Okun's law, if unemployment increases by 1%, the gap between actual output and full employment output will.
Increase by 2% (I think its in terms of decreasing on test)
6. In an open economy you find that desired savings S^d is exactly equal to desired investment. a. What must be true with respect to the current account balance 'CA?
It's equal to zero.
Given the following data: Desired Savings S^d: $700 Current Account Balance CA: $600 Net Exports NX: $575 1. Calculate the value NFP: 2. Calculate the value of Desired Investment I^d:
NFP: 25 I^d: 100
In a small open economy GDP is 30 bill, gov purchases 6 bill, NFP=o. Desired C and Desired Inv related to the world real interest rate in following table: r^w C^d I^d Nat Sav NX 5% 14 6 ? ? 4% 15 7 3% 16 8 2% 17 9
Nat Savings (down): 10,9,8,7, NX: 4,2,0,-2
Given the following data: Desired Investment I^d: $100 Current Account Balance CA: $750 Net Factor Payments from abroad NFP: $20 1. Calculate the value of Net Exports 'NX': 2. Calculate the value of Desired Savings S^d:
Net Exports 'NX': $730 Desired Savings S^d: $850
Current Account Balance = Balance of Payment Accounts - consists of the current account and the capital and financial account - any transaction involving a flow of funds into a country is a credit item - Any transaction involving a flow of funds out of a country is a debit item
Net Exports + Net Income from abroad
2. Assuming zero net unilateral transfers, how is the current account balance related to net exports?Current Account Balance =
Net Exports + Net income from abroad
25. How do Keynesians and Classicals differ is their beliefs about how long it takes for the economy to reach long run equilibrium? What implications do these differences in beleifs have for Keynesian and classical views about the usefulness of antirecessionary policies? Classical economists think prices adjust ___and that antirecessionary policies are _____, whereas Keynesian economists think the opposite.
Rapidly;not necessary
11.Consider an economy with a constant growth rate of nominal money supply and a constant real interest rate equal to 0.06. Which of the following statements about the inflation rate of the economy would be valid?
The faster the economy's real output grows, the lower the inflation rate
16.Which of the following would increase monetary supply?
The reserve requirement ratio goes down
11. The diagram to the right shows equilibrium in the goods market of a small open economy at point A. ?? Assume that this small open economy is under capital controls; meaning domestic residents are prohibited from borrowing and lending from the world capital market. a. World real interest rate below the closed-economy domestic rate. b. The amount of desired saving at this world real interest rate (B) c. The amount of investment at this world real interest rate (C)
The situation is one with a current account deficit.
he diagram to the right shows equilibrium in the goods market of a small open economy at point A. Assume that this small open economy is under capital controls; meaning domestic residents are prohibited from borrowing and lending from the world capital market. a. World real interest rate below the closed-economy domestic rate. b. The amount of desired saving at this world real interest rate (B) c. The amount of investment at this world real interest rate in (C)
The situation is one with a current account deficit.
Which is an incorrect statement about the balance of payment accounts? a The capital and financial account measures a country's trade in currently produced goods and services b Any transaction involving a flow of funds into a country is a credit item in the country's balance of payments c Any transaction involving a flow of funds out of a country is a debit item in the country's balance of payments d The balance of payments accounts consist of the current account and the capital and financial account
a The capital and financial account measures a country's trade in currently produced goods and services
1. Which of the following types of changes in desired saving and desired investment does NOT lead to a large current account deficit in a small open economy?
a. An increase in taxes to finance government infrastructure investment projects.
5. How each of the following transactions would enter the U.S. balance of payments accounts? Consider only the transaction described. Do not be concerned with possible offsetting transactions.
a. The U.S. government sells F—16 fighter planes to a foreign government: + entry in current account b. A London bank sells yen to, and buys dollars from, a Swiss bank: no entry c. The Federal Reserve sells yen to, and buys dollars from, a Swiss bank: + entry in capital and financial account d. A New York bank receives the interest on its loans to Brazil: + entry in current account e. A U.S. collector buys some ancient artifacts from a collector in Egypt: - entry in capital and financial account f. A U.S. oil company buys insurance from a Canadian insurance company to insure its oils rigs in the Gulf of Mexico: - entry in current account g. A U.S. company borrows from a British bank: + entry in capital and financial account
Next exports equal output (Y) minus
absorption (Cd + Id +G)
3. An American publisher sells $200 worth of books to a resident of Brazil. By itself, this item is a credit item in the US current account. Which of the following transactions does NOT offset this to ensure that the US current account and the capital account balances would continue to sum to zero? a. A U.S. firm imports $200 worth of coffee beans from Brazil b. A U.S. citizen working for a Brazilian subsidiary of a U.S. firm gets $200 bonus c. A U.S. citizen buys $200 worth of stock in a Brazilian company d. A U.S. citizen donates $200 to a Brazilian organization in support of its rain forest preservation efforts
b. A U.S. citizen working for a Brazilian subsidiary of a U.S. firm gets $200 bonus
The diagram to the right shows the current account balance as a percentage of nominal GDP for the U.S. from 1959 to 2004. Which of the following is NOT a plausible explanation for the trend in this data? a. The growth in the U.S. budget deficits b. Greater demand for U.S. exports c. Increased opportunities for international investment d. Increased saving activity by foreign households
b. Greater demand for U.S. exports
24. In a world with two large open economies, in equilibrium, desired international lending by one country must equal desired international _______ by the other country. The equilibrium, real world interest rate is determined by the point at which the current account balance of one country equals the _________ account balance of the other country.
borrowing; the capital and financial account balance of the other country.
increase in desired national saving cause the world real interest rate to ______, and an increase in desired investment causes the world real interest rate to _________
decline; increase
15. Consider a small open economy with zero net unilateral transfers and zero net factor payments. b. An increase in the expected future marginal product of capital will
decrease the current account balance.
16. A large current account deficit is most likely to come about when
desired investment increases substantially and if desired national saving declines substantially.
In a small open economy, national saving does/does not have to equal investment and output does/does not have to equal absorption.
does not does not
In a small open economy: S^d= 10 billion + 400billionx r^w; I^d= 20 - (400xr^w) Output: Y= 200 G: 40 r^w=5% Find 1. Nat Saving 2. Investment 3. Net Exports 4. CA Bal 5. Consump 6. Absorption
i. National Saving= $30 ii. Investment= $0 iii. Net Exports= $30 iv. Current Account Balance= $30 v. Consumption= $130 vi. Absorption= $170
b. Owing to a technological innovation that increases future productivity, the country's desired investment rises by $5 billion at each level of the world real interest rate. Find new values of the variables: In a small open economy: S^d= 10 billion + 400billionx r^w; I^d= 20 - (400xr^w) Output: Y= 200 G: 40 r^w=5% Find 1. Nat Saving 2. Investment 3. Net Exports 4. CA Bal 5. Consump 6. Absorption
i. National Saving= $30 ii. Investment= $5 iii. Net Exports= $25 iv. Absorption= $175
26. How would the following event affect national saving, investment, the current account balance, and the real interest rate in a large open economy? a. Event: An increase in the willingness of foreigners to save. i. Saving: ii. Investment: iii. Current Account Balance: iv. Real Interest Rate:
i. Saving: FALLS ii. Investment: RISES iii. Current Account Balance: FALLS iv. Real Interest Rate: FALLS
In SMALL OPEN Whats the relationship between NX and foreign lending? NX are ___to f.lending
identical
Diagram to the right represents desired saving and desired inv in domestic economy 1. at world real int rate of 8% what is desired savings? 45 2. same interest rate level or desired inv? 60 A) at this r^w the CA balance for economy must be in ___ B) If NFP=5 billion and stat discrep=o, real world int rate of 8% results in what level of NX?
in deficit, 20
A one-time improvement in productivity would ____ long run living standards
increase
15. Consider a small open economy with zero net unilateral transfers and zero net factor payments. a. A temporary favorable supply shock will
increase the current account balance
15. Consider a small open economy with zero net unilateral transfers and zero net factor payments. c. A decrease in the government purchases is likely to
increase the current account balance.
. A person is more likely to increase labor supply in response to an _____ in the real wage, the smaller is the income effect and the larger is the substitution effect.
increase; income effect smaller=larger is substitution effect
Midterm 1 1. A simultaneous increase in the productivity of labor and an increase in the population will cause an _____ in the current equilibrium employment, _______ the impact on the current equilibrium real wage is _________.
increase;ambiguous & unclear
Real interest rates? pro,countercyclical?
neither-ambiguous
b. A London bank sells yen to, and buys dollars from, a Swiss bank:
no entry
housing/stock prices
prociprocal and leading
30.The job finding ( says job loss on test) rate is;
procyclical, job loss is countercyclical I think, doublecheck
b. Suppose the foreign country's desired saving rise by 3.0 at each level of the world real interest rate. What is the new equilibrium world interest rate and the current account balance in each country? 22. Consider a world with only two countries, which are designated the home country (H) and the foreign country (F). You are given the following information about each country: (Saving and Investment are in $10 billion and r^w is in %) Hs= 1.5 +.5r^w Hi= 9-1.0r^w Fs=0 + 1r^w Fi=7.5 -.5r^w
r^w=4% CA(H)=-1.5 CA(F)= 1.5
22. Consider a world with only two countries, which are designated the home country (H) and the foreign country (F). You are given the following information about each country: (Saving and Investment are in $10 billion and r^w is in %) Hs= 1.5 +.5r^w Hi= 9-1.0r^w Fs=0 + 1r^w Fi=7.5 -.5r^w a. What is the equilibrium value of the world real interest rate and the current account balance in each country?
r^w=5% CA(H)=0.00 CA(F)= 0.00
39.Which of the following macro variables is acyclical?
real interest rate
38.During the Great Recession;
the real interest rate reached the zero lower bound
19. We distinguish between small open economies and large open economies based on
their influence on the world interest rate
Which of the following was not one of the three main tools the FED used in the Great Recession to avoid problems caused by the zero lower bound?
they used credit easing, quantitative easing, and forward guidance not exchange rate easing
