macro econ chapter 19

trade policy

a government policy that directly influences the quantity of g&s that a country imports or exports 1.tariff 2.quota

quota

a limit on the quantity of good produced abroad that can be sold domestically -voluntary export restrictions: a form of quota ex. the U.S. government has sometimes pressured Japanese automakers to reduce the number of cars they sell in the U.S.

tariff

a tax on imported goods

budget deficit

negative public saving reduce national saving reduce supply of loanable funds drives up the interest rate crowds out investment

capital flight

such a large and sudden reduction in the demand for assets located in a country

the market of Loanable Funds

-national saving is the source of the supply of loanable funds -domestic investment and net capital outflow are the sources of the demand for loanable funds.

the real equilibrium in an open economy

1. the supply and demand for loanable funds determine the real interest rate 2. the interest rate determines net capital outflow, which provides the supply of dollars in the market for foreign-currency exchange. 3. the supply and demand for dollars in the market for foreign-currency exchange determine the real exchange rate. so its loanable funds ->real interest rate ->net capital outflow->supply of dollars for foreign-currency exchange->real exchange rate

the market for foreign-currency exchange

-supply of dollars to be exchanged into foreign currency comes from net capital outflow. -since NCO does not depend on real exchange rate, the supply curve is vertical. -demand for dollars comes from net exports (downward sloping)