ECO 1102 Lecture Notes - Lecture 10: Real Interest Rate, Interest Rate Parity, Open Economy

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rosetermite420

22 Nov 2017

School

University of Ottawa

Department

Economics

Course

ECO 1102

Professor

D R.M A O T A K O N G M O C H A R L E S O L I V I E R

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ECO 1102 Full Course Notes

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Closed economy an economy that does not interact with other economies in the world. Open economy an economy that interacts freely with other economies around the world. The flow of goods: exports, imports, and net exports. An open economy interacts with other economies in two ways: It buys and sells goods and services in world product markets. It buys and sells capital assets such as stocks and bonds in world financial markets. Exports goods and services that are produced domestically and sold abroad. Imports goods and services that are produced abroad and sold domestically. Net exports (or trade balance) the (cid:448)alue of a (cid:374)atio(cid:374)"s e(cid:454)ports (cid:373)i(cid:374)us the (cid:448)alue of its imports. Trade balance the (cid:448)alue of a (cid:374)atio(cid:374)"s e(cid:454)ports (cid:373)i(cid:374)us the (cid:448)alue of its i(cid:373)ports (cid:449)hi(cid:272)h is also called net exports. Trade surplus an excess of exports over imports. Trade deficit an excess of imports over exports. Balanced trade a situation in which exports equal imports.

Related Questions

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 OutflowNet Capital Outflow

= =

Net ExportsNet 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 help you understand why this identity must hold.

Suppose you are a software engineer living in the United States, and you just sold your latest product to a Russian consumer for RUB 7,000.

Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.

Hint: The magnitude of change should always be positive, regardless of the direction of change.

Increase/no change/decrease

Imports

Increase/no change/decrease

Net Exports

Increase/no change/decrease

Because of the identity equation that relates to net exports, the in U.S. net exports is matched by in U.S. net capital outflow. Which of the following is an example of how the United States might be affected in this scenario? Check all that apply.

You store the rubles in your safety deposit box at home.

You purchase RUB 7,000 worth of stock in a Russian corporation.

You buy RUB 7,000 worth of Russian bonds.

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Since the United States has negative net foreignâ investment, its

A. net capital flow must be negative.

B. domestic saving must be less than its domestic investment.

C. exports must be greater than its imports.

D. domestic investment must be less than its domestic saving.

Expansionary fiscal policy is less effective in an open economy because

A. increases in the money supply will reduce interest rates and lower the value of theâ dollar, reducing aggregate demand.

B. increases in government spending can increase interestâ rates, which increases the value of the dollar and crowds out net exports.

C. increases in government spending will be partly spent on importedâ goods, which do not benefit the domestic economy.

D. increases in taxes reduceâ consumption, which in turn reduces consumption of imports and increases net exports.

When the Federal reserve uses contractionary monetary policy to reduceâ inflation, it

A. sells treasury securities increasing interestâ rates, leading to a stronger dollar that lowers net exports in an open economy.

B. buys treasury securities decreasing interestâ rates, leading to a weaker dollar that lowers consumption of durables in a closed economy.

C. sells treasury securities decreasing interestâ rates, leading to a stronger dollar that lowers domestic investment in a closed economy.

D. buys treasury securities increasing interestâ rates, leading to a weaker dollar that increases net exports in an open economy.

If a country saves more than it investsâ domestically, then its net foreign investment must be (positive, negative, or zero)?

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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ECO 1102 Lecture Notes - Lecture 10: Real Interest Rate, Interest Rate Parity, Open Economy

ECO 1102 Full Course Notes

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