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- Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?E1 The higher the value of e, the ______________(More or less) units of foreign currency a dollar buys. When a nominal exchange rate goes up, we say the domestic currency is _________(appreciating or depreciating) against the foreign currency. When a nominal exchange rate goes down, we say that the domestic currency is _________(depreciating or appreciating) against the foreign currency.Suppose that Americans decide to increase theirsaving.a. If the elasticity of U.S. net capital outflow withrespect to the real interest rate is very high, willthis increase in private saving have a large orsmall effect on U.S. domestic investment?b. If the elasticity of U.S. exports with respect to thereal exchange rate is very low, will this increase inprivate saving have a large or small effect on theU.S. real exchange rate?
- A case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?In Delhi, a haircut costs 135 rupees (INR). Thesame haircut costs 15 Singapore dollars (SGD) inSingapore. At an exchange rate of 50 IN per SGD,what is the price of an Indian haircut in terms of aSingapore haircut? Keeping all else equal, howdoes this relative price change if the INRdepreciates to 55 INR per SGD? Compared to theinitial situation, does a Singapore haircut become more or less expensive in relation to an Indianhaircut?c. Assume the recession in Braveland causes a decrease in the demand forMacroland dollars in the foreign exchange market. Braveland’s currency is the euro.i. Explain whether the euro will appreciate, depreciate, or remainunchanged against the dollarii. Draw a correctly labeled graph of the foreign exchange market fordollars and show the effect of the decrease in demand for dollars on theexchange rate for dollars. d. Macroland implements a combination of expansionary fiscal and monetary policies. What will be the effect of these policies on each of the following?i. Aggregate demand in Macrolandii. The price level in Macroland iii. Explain the effects of expansionary fiscal policies on interest rates inMacroland.iv. Explain the effects of expansionary monetary policies on interest rates in Macroland.
- None of the above О е. O d. The foreign interest rate goes up О с. The home interest rate goes up O b. The exchange rate (EH/F) goes down The exchange rate (EH/f) goes up O a. EH/F: of home country currency per 1 unit of foreign country currency What happ if prices in the home country (H) go up and prices in the foreign country (F) stay unchanged? Use th Interest Parity Condition and Law of one price questions 1 to 4.How does the appreciation of a currency affect the balance of payments? a. Appreciation of a currency decreases current accounts as exports fall and imports rise O b. Appreciation of a currency decreases current accounts as both exports and imports fall O c. Appreciation of a currency increases current accounts as both exports and imports rise O d. Appreciation of a currency increases current accounts as exports fall and imports rise All of the following fall under the Philippines' capital account except for a. OFW remittances O b. Cash aid from the US for families affected by typhoon Odette O c. Stocks O d. All of the aboveWhat is happening to the U.S. real exchange rate ineach of the following situations? Explain.a. The U.S. nominal exchange rate is unchanged,but prices rise faster in the United States thanabroad.b. The U.S. nominal exchange rate is unchanged, butprices rise faster abroad than in the United States.c. The U.S. nominal exchange rate declines, andprices are unchanged in the United States andabroad.d. The U.S. nominal exchange rate declines, andprices rise faster abroad than in the United States.
- In an open economy under flexible exchange rates where the central bank keeps money supply fixed, a tax cut will cause an increase in which of the following?net exportsthe exchange rate, Eexportsall of the abovenone of the aboveEvaluate the following statement: "if lower exchange rates increase a nation's exports, the govermment should do everything in its power to anure that the exchange rate for its cumency is an low as it can possbly be This statement does nat acknowledge that lower exchange rates OA couid result in a reluctance from other countries to accept this nation's currency for payment of any goodn or services OB. could make a currency virtually worthless. O C. make a nation's imports more expensive. COD. None of the above responses are acknowledged by the statement.The benefits of adopting a flexible exchange rate is that, a.in response to shocks to the demand for Australian exports, the value of the currency would adjust to moderate these effectsb. changes in the interest rate will have no effect on the exchange rate that is determined in the foreign exchange market c.the exchange rate can be more volatile d. an economy will be able to well predict the prices of exports and imports Why A is the correct answer? What is meant by a flexible exchange rate?