ECON 4002.02 Study Guide - Final Guide: Real Interest Rate, Autarky

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harlequinprairie-dog105

5 Oct 2018

School

Ohio State University

Department

Economics

Course

ECON 4002.02

Professor

All

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Document Summary

We add one more piece to the classical model; open economy: exports increase economic activity. I = id+ if: c = cd+ cf, g = gd+ gf, x = x. The demand for domestic production is given by: y = c + i + g + nx, can be re-written as, nx = y c i g. If output exceeds domestic spending, the net exports will be positive. If output is less than domestic spending, the net exports will be negative. The net exports are the difference between saving and investment: nx is the trade balance, s i is the net capital outflow or net foreign investment. If s > i, the country is a net lender: trade surplus. In a small open market economy, we no longer assume that the real rate of interest balances saving and investment: because capital is mobile, r=r* If r > r*, domestic residents will borrow from foreign lenders rather than domestic.

Related Questions

An economy with zero net exports is described below:

C	= 100 + 0.6 (Y 'T)
I ^p	= 70
G	= 120
NX	= 0
T	= 150
The multiplier in this economy is 2.5.

A. Find short-run equilibrium output.

Instruction: Enter your response as an integer value.

Short-run equilibrium output: .

B. Economic recovery abroad increases the demand for the country's exports; as a result, NX rises to 80.

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select)decreases/ increases to ________ .

C. Assume that foreign economies are slowing, reducing the demand for the country's exports so that NX = -80. (A negative value of net exports means that exports are less than imports.)

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select)increases/decreases to ___________ .

D. Which of the following best describes the tendency of recessions and expansions to spread across countries?

1. Lower planned aggregate spending in one nation will reduce the amount of goods it exports abroad, thereby lowering the value of imports for its trading partners, which will reduce its short-term equilibrium output as well.

2. Lower planned aggregate spending abroad means that fewer goods will be exported from a specific nation, leaving more goods available for domestic consumption (C) in that nation, which will increase its short-term equilibrium output.

3. Lower planned aggregate spending abroad will reduce the amount of investment that flows into domestic industries from other countries, thereby reducing domestic short-term equilibrium output.

4. Lower planned aggregate spending in a nation means fewer imports of foreign goods, thereby reducing the short-term equilibrium output of its trading partners through lower net export (NX) values in those nations.

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5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

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1. In the actual economy, households

a. spend all of their income.

b. divide their income among spending, taxes, and saving.

c. buy all goods and services produced in the economy.

d. Both (a) and (c) are correct.

2. Gross domestic product is defined as

a. the quantity of all final goods and services demanded within a country in a given period of time.

b. the quantity of all final goods and services supplied within a country in a given period of time.

c. the market value of all final goods and services produced within a country in a given period of time.

d. Both (a) and (b) are correct.

3. GDP adds together many different kinds of products into a single measure of the value of economic activity by using prices determined by

a. banks.

b. economists.

c. the government.

d. markets.

4. Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has

a. caused measured GDP to fall.

b. not caused any change in measured GDP.

c. caused measured GDP to rise.

d. probably changed measured GDP, but in an uncertain direction; the direction of the change depends on the difference in the quality of the cleaning that has resulted.

5. A steel company sells some steel to a bicycle company for $150. The bicycle company uses steel to produce a bicycle, which it sells for $250. Taken together, these two transactions contribute

a. $150 to GDP.

b. $250 to GDP.

c. between $250 and $400 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle.

d. $400 to GDP.

6. The total sales of all firms in the economy for a year

a. equals GDP for the year.

b. is larger than GDP for the year.

c. is smaller than GDP for the year.

d. Any of the above is possible.

7. GDP is equal to

a. the market value of all final goods and services produced within a country in a given period of time.

b. Y.

c. C + I + G + NX.

d. All of the above are correct.

8. The consumption component of GDP includes spending on

a. durable goods and nondurable goods, but not spending on services.

b. durable goods and services, but not spending on nondurable goods.

c. nondurable goods and services, but not spending on durable goods.

d. durable goods, nondurable goods, and services.

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ECON 4002.02 Study Guide - Final Guide: Real Interest Rate, Autarky

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