ECON 2410 Chapter 20: Chapter 20.docx

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peachdinosaur178

7 Apr 2015

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Chapter 20: output, the interest rate, and the exchange rate: equilibrium in the goods market, output must be equal to the demand for domestic goods, the demand for domestic goods is equal to consumption, plus investment, plus government spending, minus the value of imports, plus exports, consumption depends positively on disposable income, investment depends positively on output and negatively on the real interest rate, government spending is taken as a given, the quantity of imports depends positively on both output and the real exchange rate. This relation tells us that the current exchange rate depends on the domestic interest rate, on the foreign interest rate, and on the expected future interest rate: an increase in the domestic interest rate leads to an increase in the exchange rate, an increase in the foreign interest rate leads to a decrease in the exchange rate, an increase in the expected future exchange rate leads to an increase in the current exchange rate.

Related Questions

Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, Investment, and Government spending are given by:

C=10+0.8(Y-T), I=10, G=10, and T=10, IM=0.3Y and X=0.3Y* where Y* denotes foreign output.

A) Solve for equilibrium output in the domestic economy

B) Given Y* what is the multiplier in this economy? If we were to close the economy-so exports and imports were identically equal to zero-what would the multiplier be? Why would the multiplier be different in a closed economy?

turquoisebadger177

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.

bronzehyena108

1, Gross Domestic Product is equivalent to the sum of

	consumer spending, investment spending on capital goods, government purchases, exports, and imports.
	consumer spending, investment spending, government purchases and exports.
	consumer spending, capital inventory, government purchases and exports.
	consumer spending, capital inventory, government purchases, and net exports.
	consumer spending, investment spending, government purchases, and net exports.

2. Which of the following is consistent with advocates of rational expectations? If consumers fully anticipate an increase in interest rates, then


	real GDP will decrease by the value of the multiplier.
	real GDP will not change.
	price level will increase.
	unemployment will increase.

3.The government might finance deficit spending by

	borrowing money from the International Monetary Fund.
	issuing bonds.
	raising interest rates.
	increasing the reserve requirement.
	borrowing money from the World Bank.

ECON 2410 Chapter 20: Chapter 20.docx

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