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Economics

Paul A. Samuelson, William D. Nordhaus

Chapter 28

Open-Economy Macroeconomics - all with Video Answers

Educators

Chapter Questions

06:28

Problem 1

Assume that an expansionary monetary policy leads to a decline or depreciation of the U.S. dollar relative to the currencies of America's trading partners in the short run with unemployed resources. Explain the mechanism by which this will produce an economic expansion in the United States. Explain how the trade impact reinforces the impact on domestic investment.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
09:46

Problem 2

Explain the short-run impact upon net exports and GDP of the following in the multiplier model, using Table $28-1$ where possible:
a. An increase in investment $(I)$ of $100$ billion dollars
b. A decrease in government purchases $(G)$ of $50$ billion dollars
c. An increase in foreign output which increased exports by $10$ billion dollars
d. A depreciation of the exchange rate that raised exports by $30$ billion dollars and lowered imports by $20$ billion dollars at every level of GDP

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
06:55

Problem 3

What would the expenditure multiplier be in an economy without government spending or taxes where the MPC is 0.8 and the $M P m$ is $0 ?$ Where the $M P m$ is $0.1 ?$ Where the $M P m$ is $0.9 ?$ Explain why the multiplier might even be less than $1 .$

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
01:40

Problem 4

Consider Table $28-3$
a. Explain each of the entries in the table.
b. Add another column with the heading "Change in interest rates" to Table $28-3 .$ Then, on the basis of the graph in Figure $28-7,$ fill in the table for a closed economy.

Stanley Enemuo
Stanley Enemuo
Numerade Educator
03:12

Problem 5

An eminent macroeconomist recently wrote: "Moving toward a monetary union by adopting a common currency is not really about the currency. The most important factor is that countries in the union must agree on a single monetary policy for the entire region." Explain this statement. Why might adopting a single monetary policy cause troubles?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
08:10

Problem 6

Consider the city of New Heaven, which is a very open economy. The city exports reliquaries and has no investment or taxes. The city's residents consume 50 percent of their disposable incomes, and 90 percent of all purchases are imports from the rest of the country. The mayor proposes levying a tax of $100$ million dollars to spend on a public-works program. Mayor Cains argues that output and incomes in the city will rise nicely because of something called "the multiplier." Estimate the impact of the public-works program on the incomes and output of New Heaven. Do you agree with the mayor's assessment?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
04:01

Problem 7

Review the bulleted list of the three interactions of saving, investment, and trade on page $577 .$ Make a graph like that of Figure $28-8$ to illustrate each of the impacts. Make sure that you can explain the reverse cases mentioned in the paragraph that follows the bulleted list.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
04:05

Problem 8

Politicians often decry the large trade deficit of the United States. Economists reply that to reduce the trade deficit would require a tax increase or a cut in government expenditures. Explain the economists' view using the analysis of the saving-investment balance in Figure $28-8 .$ Also, explain the quotation from the Economic Report 2000 on page 565.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
04:44

Problem 9

Look back at Figure $26-2$ and make sure you understand it. Now, consider an emerging-market country like Brazil or Argentina.
a. Draw a diagram like Figure $28-9(b)$ for the country in good times, when the risk premium on its borrowing is low. Call this Figure A.
b. Next, consider a shock that raises the risk premium by a large amount. Draw a new figure with the high premium and the new equilibrium. Call this Figure B.
c. Now compare the equilibria in Figures A and B. Specifically, explain the difference in (i) the equilibrium domestic real interest rate, (ii) domestic investment, (iii) the exchange rate, and (iv) net exports.

Alex Loukas
Alex Loukas
Numerade Educator
04:04

Problem 10

Consider the example of small open economies like Belgium and the Netherlands that have highly mobile financial capital and fixed exchange rates but also have high government budget deficits. Suppose that these countries find themselves in a depressed economic condition, with low output and high unemployment. Explain why they cannot use monetary policy to stimulate their economies. Why would fiscal expansion be effective if they could tolerate higher budget deficits?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
07:05

Problem 11

Advanced problem. After the reunification of Germany, payments to rebuild the former East Germany led to a major expansion of aggregate demand in Germany. The German central bank responded by raising German real interest rates. These actions took place in the context of the European Monetary System, in which most countries had fixed exchange rates and where the German central bank was dominant in monetary policy.
a. Explain why European countries having fixed exchange rates and following the lead of the German central bank would find their interest rates rising along with German interest rates. Explain why other European countries would thereby be plunged into deep recessions.
b. Explain why countries would prefer the European Monetary Union to the earlier system.
c. Trace through why this German monetary tightening would be expected to lead to a depreciation of the dollar. Explain why the depreciation would stimulate economic activity in the United States.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
00:43

Problem 12

Advanced problem. Reread the definition of the fundamental trilemma as well as the discussion by Paul Krugman on page $581 .$ Explain why the three elements cannot go together. Why is there not a fundamental trilemma for the fixed-exchange-rate system between "California dollars" and "Texas dollars"? Explain how the trilemma would apply to China today. Explain the arguments for and against each of the three possible choices in the trilemma described by Krugman.

Jennifer Stoner
Jennifer Stoner
Numerade Educator