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Principles of Macroeconomics

N. Gregory Mankiw

Chapter 19

A Macroeconomic Theory of the Open Economy - all with Video Answers

Educators

Chapter Questions

02:33

Problem 1

Japan generally runs a significant trade surplus. Do you think this surplus is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese saving rate relative to Japanese investment, or structural barriers against imports into Japan? Explain your answer.

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
03:41

Problem 2

Suppose 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?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
04:19

Problem 3

The chapter notes that the rise in the U.S. trade deficit during the 1980 s was largely due to the rise in the U.S. budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products.
a. Assume that U.S. products did decline in relative quality during the 1980 s. How did this decline affect net exports at any given exchange rate?
b. Draw a three-panel diagram to show the effect of this shift in net exports on the U.S. real exchange rate and trade balance.
c. Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of U.S. products have any effect on our standard of living? (Hint: When we sell our goods to foreigners, what do we receive in return?)

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
01:36

Problem 4

An economist discussing trade policy in The New Republic wrote, "One of the benefits of the United States removing its trade restrictions [is] the gain to U.S. industries that produce goods for export. Export industries would find it easier to sell their goods abroad - even if other countries didn't follow our example and reduce their trade barriers." Explain in words why U.S. export industries would benefit from a reduction in restrictions on imports to the United States.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
02:41

Problem 5

Suppose the French suddenly develop a strong taste for California wines. Answer the following questions in words and with a diagram.
a. What happens to the demand for dollars in the market for foreign-currency exchange?
b. What happens to the value of the dollar in the market for foreign-currency exchange?
c. What happens to U.S. net exports?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
03:37

Problem 6

A senator renounces his past support for protectionism: "The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness." Using a three-panel diagram, show the effect of an export subsidy on net exports and the real exchange rate. Do you agree with the senator?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
03:29

Problem 7

Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a three-panel diagram, show what happens to national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance. Also explain in words how this U.S. policy affects the amount of imports, exports, and net exports.

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
03:16

Problem 8

Suppose that real interest rates increase across Europe. Explain how this development affects U.S. net capital outflow. Then explain how it affects U.S. net exports by using a formula from the chapter and by drawing a diagram. What happens to the U.S. real interest rate and real exchange rate?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
07:18

Problem 9

Suppose that Americans decide to increase their saving.
a. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very high, will this increase in private saving have a large or small effect on U.S. domestic investment?
b. If the elasticity of U.S. exports with respect to the real exchange rate is very low, will this increase in private saving have a large or small effect on the U.S. real exchange rate?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis