1. Using the Macroeconomic Model of an Open Economy, answer the following questions. What happens to...

1. Using the Macroeconomic Model of an Open Economy, answer the following questions. What happens to each of the following if investment becomes more desirable at each interest rate?

The interest rate (rises or falls):

Net capital outflow (rises or falls):

The exchange rate (rises or falls):

2. Using the Macroeconomic Model of the Open Economy, answer the following questions. What happens to each of the following if people in the U.S. choose to save a smaller percentage of income?

The interest rate (raises or falls):

Net capital outflow (raises or falls):

The exchange rate (raises or falls):

Net exports (raises or falls):

Expert Solution

Answer.) if investment becomes more desirable at each interest rate , it means profitability increases at the given interest rate levels, therefore, investors are more inclined towrads borrowing more funds for investments at current interest rate levels.

The interest rate rises:

Net capital outflow falls

The exchange rate falls

Increase in demamd of money for investmemt with no change in the supply of money force the interest rate to rise to reinstitute equilibrium in money market. Now, This increase in interest rate attract more foreign capital as its more profitable thus, this leads to rise in net capital inflow and fall in net capital outflow. As more and more foreign capital coming into your country, this increase demand of home currency in foreign exchange market and hence your currency appreciates meaning fall in exchange rate.

Rahul Sunny answered 2 years ago

Classical small open economy model: According to the Classical small open economy model, what happens to...

Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) a)...

In the open economy macroeconomic model, which of the following is included in the supply of...

In the open economy macroeconomic model, which of the following is included in the supply of U.S. dollars in the market for foreign-currency? (x) Nebraska Life, a U.S. life insurance company, wants to buy a Japanese government bond. (y) ABC Securities, a U.S. stock brokerage, wants to purchase stock issued by a French corporation. (z) Tony, a U.S. citizen, wants to hold more currency in case of emergencies. A. (x), (y) and (z) B. (x) and (y) only C. (x)...

In the open economy macroeconomic model which of the following is included in the demand for...

In the open economy macroeconomic model which of the following is included in the demand for U.S. dollars in the market for foreign-currency? (x) A retail outlet in Canada wants to buy computers from a U.S. computer manufacturer. (y) ABC Securities, a U.S. stock brokerage, wants to purchase stock issued by a French corporation. (z) A United States bank that has branch offices in Mexico and Canada loans dollars to Tom, a resident of the United States, who wants to...

6. According to the open economy macroeconomic model, which of the following statements is (are) correct?...

6. According to the open economy macroeconomic model, which of the following statements is (are) correct? (x) The usual effects of capital flight include a rightward shift of demand in the loanable funds market and a rightward shift of the NCO curve, (y) Capital flight typically causes a decrease in the domestic interest rate and an increase in NCO. (z) Capital flight typically causes the real exchange rate of the domestic currency to depreciate because capital flight causes an increase...

4. According to the open economy macroeconomic model, which of the following statements is (are) correct?...

4. According to the open economy macroeconomic model, which of the following statements is (are) correct? (x) Capital flight requires the cooperation of the country’s airlines to move precious metals to safe areas. (y) A large and sudden movement of funds out of a country is called capital flight (z) Capital flight is frequently caused by an increase in political or economic instability. A. (x), (y) and (z) B. (x) and (y) only C. (x) and (z) only D. (y)...

In the macroeconomic model of the open economy developed in the text, if the central bank...

In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will: Select one: a. rise, the real interest rate will rise, the nominal interest rate will rise, the real exchange rate will rise and the nominal exchange rate will rise b. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate...

1. Suppose that the Italian government budget deficit increases. What curves in the open-economy macroeconomic model...

1. Suppose that the Italian government budget deficit increases. What curves in the open-economy macroeconomic model shift? Explain why each curve shifts the direction it does.

6.According to the open economy macroeconomic model, which of the following statements is (are) correct? (x)The...

6.According to the open economy macroeconomic model, which of the following statements is (are) correct? (x)The usual effects of capital flight include a rightward shift of demand in the loanable funds marketand a rightward shift of the NCO curve, (y)Capital flight typically causes a decrease in the domestic interest rate and an increase in NCO. (z)Capital flight typically causes the real exchange rate of the domestic currency to depreciate because capital flight causes an increase in the supply of the...

14. According to the open-economy macroeconomic model, which of the following statements is (are) correct? (x)...

14. According to the open-economy macroeconomic model, which of the following statements is (are) correct? (x) In the open-economy macroeconomic model, if for some reason foreign citizens want to purchase more U.S. goods and services at each exchange rate, then the demand for dollars in the market for foreign-currency exchange shifts right. (y) If foreign citizens want to buy fewer U.S. bonds, then the demand for U.S. dollars in the market for foreign currency exchange will shift to the right...

4.According to the open economy macroeconomic model, which of the following statements is (are) correct? (x)Capital...

4.According to the open economy macroeconomic model, which of the following statements is (are) correct? (x)Capital flight requires the cooperation of the country’s airlines to move precious metals to safe areas. (y)A large and sudden movement of funds out of a country is called capital flight (z)Capital flight is frequently caused by an increase in political or economic instability .A.(x), (y) and (z) B. (x) and (y) only C.(x) and (z) only D.(y) and (z) only E.(x) only 5.According to...

Question