Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 19, Problem 3CQQ
To determine
The impact of cutting government spending to reduce deficit on interest rate, capital, and real exchange rate.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany’s GDP; private savings is 20% of GDP; and physical investment is 18% of GDP. a. Based on the national saving and investment identity, what is the current account balance? b. If the government budget surplus falls to zero, how will this affect the current account balance?
Other things the same, an increase in the U.S. interest rate causes U.S. net capital outflow to
A. rise, so demand in the market for foreign-currency exchange shifts right...
B. fall, so demand in the market for foreign-currency exchange shifts left.
C. fall, so supply in the market for foreign-currency exchange shifts left.
D. rise, so supply in the market for foreign-currency exchange shifts right..
4. A “small” open economy is small because
Their exchange rates do not adjust to equilibrate net exports
They have tiny populations
They have poor terms of trade
They take world real interest rates as given
Chapter 19 Solutions
Principles of Macroeconomics (MindTap Course List)
Knowledge Booster
Similar questions
- Use the demand-and-supply of foreign currency graph to determine what would happen to a small, open economy that experienced capital outflows.arrow_forwardSuppose that Congress is considering an investment tax credit, which subsidizes domestic investment. a. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance?b. Representatives of several large exporters oppose the policy. Why might that be the case?arrow_forward(A) Government spending rises to 1,250. Compute the investment, trade balance, national savings and the equilibrium exchange rate and illustrate graphically. (B) Suppose that the world interest rate rises from 5 to 10 percent (G is again 1,000). Solve for national saving, investmentm trade balance and the equilibrium exchange rate. Explain what you find compared to part (A) and explain graphically.arrow_forward
- Is a trade deficit bad? Check all that apply. a. Yes, if current consumption is lower, and investment is higher. b. No, if economy provides an attractive investment environment. c. Yes, if borrowing from foreigners is used to increase current consumption. d. No, if it increases current consumption.arrow_forwardAn appreciation of the dollar against all currencies in the foreign exchange market would result in all of the following, except: a) a decrease in the dollar prices paid by U.S. importers. b) an increase in the cost of vacations in Florida for Japanese tourists. c) foreign holidays for U.S. residents to be less expensive. d) an increase in the foreign currency prices paid for U.S. exports. e) an increase in the demand for U.S. exports.arrow_forwardWhat is the relationship between the current account and the capital account in the balance of payments? Select one: a. The current account shows all income and expenditure and the capital account shows investment and how it is funded. b. The capital account shows how a current account deficit is funded or a surplus is disbursed. c. There is no relationship between them as they measure different things. d. The current account balance is the difference between exports and imports and the capital account balance shows net foreign income.arrow_forward
- a) A war suddenly breaks out abroad causing foreign investors to seek safe haven for their investments in the U.S. As a result, foreign capital rushes in to buy U.S. assets - U.S. stocks, bonds, real estates, factories and businesses. Illustrate the effect of this massive capital inflow to the U.S. dollar exchange rate using a supply and demand model. Label all curves and axes properly for full credit. Does this cause the U.S. dollar to depreciate or appreciate? b) Assume the U.S. exports finished products heavily to the world and imports raw materials heavily from the world. How will the change in the U.S. dollar exchange rate resulting from events in a) affect the U.S. real GDP and price level? Show the changes using an AD/AS model, ignoring the LRAS curve. Clearly justify in words the shift of each curve that shifts. Mark the initial equlibrium as A and the new equilibrium resulting from the the exchange rate change as B. What happens to the U.S. real GDP and the U.S. price level as…arrow_forward1. Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events, a. A fall in consumer confidence about the future induces consumers to spend less and save more. b. A tax reform increases the incentive for busi nesses to build new factories. c. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars. d. The central bank doubles the money supply. e. New regulations restricting the use of credit cards increase the demand for money.arrow_forwardWhich of these would cause the value of the Euro to rise? a. A rise in the Euro zone inflation rate relative to the rest of the world. b. An increase in US interest rates relative to European rates. c. An increase in the money supply in the Euro zone d. An increase in the demand for European made goods. Bracket creep (or fiscal drag) arises from a combination of a. real wage rises and a regressive tax system. b. Increasing government spending and taxes C. inflation and a progressive tax system. D tax cuts and inflationarrow_forward
- In a short-run model of a large open economy with a floating exchange rate, if business expectations become pessimistic, this leads to a fall in: A) the exchange rate and a fall in net exports but has no effect of income B) the money supply and an increase in income but has no effect on the exchange rate C) income, the interest rate, and net exports but a decrease in investment and in the exchange rate D) income, the interest rate, and the exchange rate but an increase in net exportsarrow_forwardUnder a system of flexible exchange rates, what will correct a deficit in a country's balance of payments? a. an appreciation in the nation's currency b. a decline in the nation’s domestic price level c. a depreciation in the nation's currency d. an increase in the nation’s inflation rate 2. Which of the following would supply Canadian dollars to the foreign exchange market? a. an increase in the number of Canadians going to Las Vegas over the holidays b. an increase in spending due to American tourists in Canada c. the sale of a Canadian corporation to a German investor d. the sale of wheat from Manitoba to a European bakeryarrow_forwardContrast floating exchange rates, a soft peg, hard peg, and merged currency as options that a country’s economy has in terms of managing it’s exchange rate relative to the rest of the world. For each, give a benefit as well as a drawback.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781305971509Author:N. Gregory MankiwPublisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Economics 2eEconomicsISBN:9781947172364Author:Steven A. Greenlaw; David ShapiroPublisher:OpenStax
Principles of Economics, 7th Edition (MindTap Cou...
Economics
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:9781305971509
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:9781285165912
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Economics 2e
Economics
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:OpenStax