Macroeconomics: Private and Public Choice
15th Edition
ISBN: 9781285453545
Author: Russell Sobel; Richard Stroup; James Gwartney; David Macpherson
Publisher: South-Western College Pub
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Chapter 9, Problem 13CQ
To determine
Identify the factors that determine the exchange rate and explain how net exports be impacted if a nation’s currency appreciates in the foreign exchange market.
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Suppose a country imposes an import tariff (as a topical real-world example, think about the U.S. under
President Donald Trump imposing tariffs on China and a host of other countries). Answer the following
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1. What is the effect on imports, exports, and net exports?
2. What is the effect on net foreign investment and the exchange rate?
Define nominal exchange rate and real exchange rate. What are the two main types of exchange-rate systems? What explains the behavior of net exports represented by the J curve? How does real exchange rate affect net exports? Explain and give one example.
Suppose there is an increase in foreign output. Show the effect on the domestic economy . What is the effect on domestic output? On domestic net exports?
Chapter 9 Solutions
Macroeconomics: Private and Public Choice
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- assume that policymakers at the Bank of England enforce an expansionary monetary policy. Using a correctly labeled graph of the foreign exchange market for the U.S. dollar, show how the relative change in interest rates between the U.S. and England will affect the value of the dollar versus the pound. Explain.What affect will this fluctuation have on net exports in the United States?arrow_forwardIn your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making. How does an increase in Japan’s government budget deficit affect each of the following? The real interest rate in the short run in Japan. Explain. Private domestic investment in plant and equipment in Japan. Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following. Supply of euros. Explain. Yen price of the euro To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchang market? Explain.arrow_forwardStudies indicate that net exports and net capital outflows tend to be equal. 1. Explain why net exports and net capital outflows always tend to be equal. 2. Explain how a change in interest rates can lead to changes in net exports?arrow_forward
- Under a closed system, when net exports equals 0, what must be true about investment spending? A Investment Consumption B Investment = Savings (C) Investment = Government Spending D) Investment Government spending - taxesarrow_forwardSwedish net exports will when the price level in Sweden drops, due to the decrease; international trade effect decrease; exchange rate effect increase; PPP effect increase; exchange rate effect increase; international trade effectarrow_forwardThe effect that a change in the price level has on a country's exports and imports is called the: Exchange rate effect. Interest rate effect. International effect. Multiplier effect.arrow_forward
- Suppose that Thai consumers make several purchases of foreign-produced cosmetic products, ceteris paribus, and that this is the only transaction, answer the following sub-questions only in words.a) What happens in the FOREX market for Thai Baht (THB)?b) What happens to the value of the Thai Baht relative to other currencies in the FOREX market?c) What happens to the Thai net exports eventually?arrow_forward(a) There are two countries in the world, Australia and Japan. Suppose that the central bank of Australia lowers the real interest rate, while the central bank of Japan raises the real interest rate. In this case, the nominal exchange rate (Yen/Dollar) increases. Answer true or false. Please briefly explain your answer. (b) Argentina is an open economy. Suppose that Argentina fixes the value of their currency to US dollars. If Argentina experiences hyperinflation, it can stabilize inflation by using its monetary policy freely. Answer true or false. Please briefly explain your answer.arrow_forwardA rise in interest rates tends to contract the economy by appreciating the currency and reducing net exports. True Falsearrow_forward
- Consider the following equation: NX(ɛ) = S - I(r*) This equation is used to draw the diagram illustrating the foreign exchange market, where there is a negative relationship between NX and ɛ; and S, - I(r*) is perfectly inelastic. Here NX is net exports, ɛ is the exchange rate, S represents the level of savings in the economy, I represent the level of investment in the economy, and r is the interest rate. a. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy at home on savings, interest rate, net capital outflow and the exchange rate b. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy abroad on savings, interest rate, net capital outflow and the exchange ratearrow_forwarda) Would each of the following transactions be included in net exports or net capital outflow? Be sure to say whether it would represent an increase or decrease in that variable. i) An Indian buys a Samsung TV ii) An Indian buys a share of sony stock iii) The sony pension fund buys a bond from the Indian government iv) A worker at a Toyota plant in Japan buys some Nagpur oranges from an Indian farmerarrow_forwardIf the value of the dollar appreciates in value relative to other currencies, this means the dollar becomes "stronger", how are the following groups affected. Please explain your answers. US Importers, hurt or helped? US Exporters, hurt or helped? Will this strengthening of the dollar cause GDP to increase or decrease?arrow_forward
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