EC250 Chapter Notes - Chapter 5: Loanable Funds, Substitute Good, Foreign Exchange Market

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11 Jan 2020

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Open economy: spending need not equal output, saving need not equal investment. Trade surplus and deficit trade surplus: when output greater than spending and exports is greater than imports. Size of the trade surplus = positive net exports. Trade surplus means budget surplus trade deficit: spending is greater than output and imports is greater than exports. Size of the trade deficit = negative net exports. Budget deficit will lead to the crowding out of government spending and net exports. National saving: the supply of loanable funds: national saving does not depend on interest. Assumptions about capital flows: domestic and foreign bonds are perfect substitutes (same risk, maturity, etc. , perfect capital mobility: no restrictions on international trade in assets, economy is small: cannot affect the world interest rate, denoted r* Investment: the demand of loanable funds r = r* r* is exogenous.

Related Questions

Use the word labels to fill the blanks and complete the sentences below. Not all of the words will be used, but all the blanks should be filled.

Assume the world has only the U.S. and Germany, and that trade between them is balanced such that neither runs a trade deficit nor surplus. If exchange rates now change such that the U.S. dollar becomes more expensive for Germans to buy (and all else remains the same), we would expect: U.S. exports to Germany will____, and U.S. imports from Germany will ____. These changes in trade will cause net exports (NX) in the U.S. to______. The U.S would begin to run a trade ______ and experience a net capital_____. U.S. savings will be _______domestic investment.

Word Bank

increase

greater than

surplus

outflow

decrease

less than

deficit

not change

equal to

inflow

bronzesnail983

1. The government saves when it:

A) Has a balanced budget

B) Has a budget deficit.

C) Has a budget surplus.

D) Borrows by selling bonds.

2. In an open economy, total investment spending is equal to:

A) National savings plus the net capital inflow

B) Private savings plus national savings plus net capital inflow.

C) Private savings plus net capital inflow.

D) National savings minus private savings minus net capital inflow.

3. Net capital inflow is equal to:

A) GDP plus exports minus imports.

B) The growth in capital stock minus investment spending.

C) Foreign direct investment.

D) The total inflow of foreign funds minus the total outflow of domestic funds.

chocolateweasel157

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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EC250 Chapter Notes - Chapter 5: Loanable Funds, Substitute Good, Foreign Exchange Market

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