Open Economy
Chapter 5: The Open Economy 1. In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, how much are net capital outflows?
Answer:–$10 billion NX = capital flows = 20-30 = -$10b 2. In Micronesia, which is a small open economy, if exports equal $5 billion and imports equal $7 billion, what is Micronesia’s trade balance?
Answer: Micronesia has a deficit trade balance of -2 billion. Trade balance = EX – IM = 5-7 = -$2b 3. In a small open economy, if exports equal $15 billion and imports equal $8 billion, find net capital outflow.
Answer: $7 billion Trade balance = EX- IM = 15-8 = $7b
4. If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, calculate the real exchange rate.
Answer:2.5 = 5 × (1/2) = 2.5
5. If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, find the change in the real exchange rate.
Answer: -12 percent. %Δe = %Δε + (* - ) -10 = x + (6-4) %Δε = -12
6. If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1, how much would a Big Mac in Cancun, Mexico cost?
Answer: 20 pesos. P* = 20 pesos
7. Answer the following a. In September 1995, Patrick Buchanan, a Republican candidate for president, proposed a 10 percent tariff on Japanese imports to the United States, a 20 percent tariff on Chinese imports to the United States, and an unspecified “social” tariff on imports from third-world countries. Use the long-run model of a small open economy
Answer:–$10 billion NX = capital flows = 20-30 = -$10b 2. In Micronesia, which is a small open economy, if exports equal $5 billion and imports equal $7 billion, what is Micronesia’s trade balance?
Answer: Micronesia has a deficit trade balance of -2 billion. Trade balance = EX – IM = 5-7 = -$2b 3. In a small open economy, if exports equal $15 billion and imports equal $8 billion, find net capital outflow.
Answer: $7 billion Trade balance = EX- IM = 15-8 = $7b
4. If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, calculate the real exchange rate.
Answer:2.5 = 5 × (1/2) = 2.5
5. If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, find the change in the real exchange rate.
Answer: -12 percent. %Δe = %Δε + (* - ) -10 = x + (6-4) %Δε = -12
6. If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1, how much would a Big Mac in Cancun, Mexico cost?
Answer: 20 pesos. P* = 20 pesos
7. Answer the following a. In September 1995, Patrick Buchanan, a Republican candidate for president, proposed a 10 percent tariff on Japanese imports to the United States, a 20 percent tariff on Chinese imports to the United States, and an unspecified “social” tariff on imports from third-world countries. Use the long-run model of a small open economy