Problem Sheet 1 .com



Spring Term 2018 Yaşar University

Introduction to Economics II (Econ 102)

Problem Sheet 8

Open-Economy Macroeconomics: Basic Concepts

1. Why are net exports and net capital outflow always equal?

2) Suppose that Bill, a resident of the U.S. buys software from a company in Japan. Explain why and in what directions this changes U.S. net exports and U.S. net capital outflow.

3. Explain the relationship among saving, investment and net capital outflow.

4. Suppose that a country has $120 billion of national savings, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go?

5 Complete and explain the following table:

|Trade Deficit |Balanced Trade |Trade Surplus |

|Exports……Imports |Exports……Imports |Exports……Imports |

|Net exports……0 |Net exports……0 |Net exports……0 |

|Y…..C+I+G |Y…..C+I+G |Y…..C+I+G |

|Saving…….Investment |Saving…….Investment |Saving…….Investment |

|Net capital outflow…..0 |Net capital outflow…..0 |Net capital outflow…..0 |

6. Define nominal exchange rate and real exchange rate, and explain how they are related. If the nominal exchange rate goes from 100 to 120 yen per dollar, has the dollar appreciated or depreciated?

7. Suppose a bottle of wine costs 25 euros in France and 20 dollars in the United States. If the exchange rate is 1.25 euros per dollar, what is the real exchange rate?

8. Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

9. Describe the economic logic behind the theory of purchasing-power parity.

10. Suppose the price of a pair of Lee jeans is $40 in the U.S. and 60,000 TL in Turkey.

a. What is the nominal lira/dollar exchange rate if purchasing power parity holds?

b. Suppose Turkish central bank is politically pressured to double its money supply which doubles the level of prices. If purchasing power parity holds, What is the new lira/dollar exchange rate? Did the TL appreciate or depreciate?

c. Suppose the Fed now doubles the U.S. money supply which doubles the level of U.S. prices. If purchasing power parity holds, What is the new lira/dollar exchange rate? Did the dollar appreciate or depreciate?

d. Compare your answer to part (a) and (c). What has happened to the exchange rate? Why?

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