a. Suppose an economy in Asia is facing with a massive capital outflow because of the sovereign debt crisis in Europe. Explain (with the aid of diagrams) its effects on domestic interest rate, real exchange rate, national saving, domestic investment, net capital outflow and net exports.
Whrn an economy faces massive capital outflow it pressurizes the currency and causes its depreciation which further results in decrease in domestic interest rates. Since interest rates decrease domestic savings are lower and domestic investment is higher because of cheap credit availability in economy .
Since the currency depreciates it forces the sellers and suppliers to export more and averse the situation from further depreciation of real exchange rate. As results net capital inflow increases and hence net capital outflow decreases. Thus balance of payments remains constant.
a. Suppose an economy in Asia is facing with a massive capital outflow because of the...
14. Consider the open-economy loanable funds model with flexible prices and capital mobility. Suppose that the world consists of a small open economy (we call this domestic) and the rest of the world (we call this foreign). Answer the following questions with the aid of figures where appropriate a. How does an increase in domestic government expenditure affect trade balance and real exchange rate? (2 points] b. How does an increase in foreign government expenditure affect the trade balance and...
3. Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol)...
Consider a reduction in (domestic) taxes (T). a. Consider the event in the long-run closed economy model. How will private and public savings be affected? Explain. Illustrate graphically using the domestic loanable funds market how such an event will affect the equilibrium domestic national savings, domestic investment spending and domestic real interest rate. Explain. b. Consider the same event, but now in the long-run small open economy model(Assume the economy is originally running a trade deficit.) I llustrate graphically using...
8. In a small open economy, if the world real interest rate is above the rate at which national saving exceeds domestic investment, then there will be a trade _and net capital outflow. A) surplus; negative B) deficit; positive C) surplus, positive D) deficit; negative
4. Net capital outflow and net exports An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true Net Capital Outflow - Net Exports In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will...
2. An appreciation of a nation's currency can be the result of which of the folowing? a. an increase in net exports b. a decrease in net exports c. a fal in national saving d. a decrease in domestic demand for investment 3. The government n an open economy increases spending. As a resut, the supply of loanable funds from national saving_ leading to an). . net capital outflow and a real exchange rate / a. fals, reduced, appreciation b....
In a large open economy, what is the source of the domestic supply of loanable funds? A. Net capital outflow B. National saving and investment C. National saving D. Investment
QUICK CHECK multiple choice 1. Holding other things constant, an increase in the world interest rate increases which of the following? a. national saving and domestic investment b. national saving and the net capital outflow c. domestic investment and the net capital outflow d. national saving only 2. An appreciation of a nation's currency can be the result of which of the following? a. an increase in net exports b. a decrease in net exports c. a fall in national...
In an open economy, what is the source of demand for dollars in the foreign-currency exchange market? Net exports Net capital outflow National saving Imports
1. Consider a small open economy where an increase in business confidence leads to an increase in investment expenditure. Examine the loanable funds market and show what happens to Investment, National Saving, real interest rates, capital flows and the current account (net exports). Examine the market for foreign exchange and show what happens to the real exchange rate. Now consider that the country is not so small, what else might change, how might your answer differ?