Open-Economy Macro and the Real Exchange Rate

Open-Economy Macro and the Real Exchange Rate

1. 1. In an open economy, if saving exceeds investment (S - I > 0), which of the following must be true?

   The country runs a trade deficit financed by foreign borrowing.The country runs a trade surplus and accumulates foreign assets.The real exchange rate appreciates to clear the goods market.The country must impose tariffs to protect domestic producers.

2. 2. A country experiences an increase in saving with no change in investment. What happens to the real exchange rate and the trade balance?

   The real exchange rate appreciates; the trade balance moves toward deficit.The real exchange rate weakens; the trade balance moves toward surplus.The real exchange rate is unaffected; saving changes do not clear markets.The real exchange rate weakens; the trade balance remains unchanged.

3. 3. Which of the following statements about tariffs in this open-economy framework are correct?

   A protective tariff shifts the net exports curve rightward at any given real exchange rate.A protective tariff causes the real exchange rate to appreciate, offsetting the tariff's trade effect.The equilibrium quantity of net exports changes after a tariff because domestic output rises.A protective tariff leaves the trade balance unchanged because S - I determines NX, not policy.

4. 4. Suppose a country initially has S = 500, I = 400, and NX = 100 (all in billions of dollars). A shock raises investment to I = 450 while S remains 500. What is the new equilibrium value of NX?

   billions of dollars

5. 5. If the world real interest rate rises, what is the channel by which it affects the US real exchange rate?

   Higher world rates directly increase US inflation, weakening the dollar mechanically.Higher world rates attract capital into the US, raising US investment and S - I.Higher world rates attract capital out of the US, lowering US investment and raising S - I, which weakens the dollar to clear trade.Higher world rates eliminate the need for trade adjustment; exchange rates stop moving.