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Suggested answers to end of chapter questions and problems
1. Mexico. The United States and Mexico have close trading ties, with
most of Mexico’s exports destined for the United States. If national
2. Disagree. The recession in the United States reduces U.S. national income, so U.S.
residents reduce spending on all kinds of things, including spending on imports. The
3. a. The spending multiplier is 1/(0.2 + 0.1) = 3.3, so domestic product will
b. For a closed economy, the spending multiplier is 1/0.2 = 5, so domestic
product will increase by $5 billion. The spending multiplier is larger for
a closed economy than for a small open economy because there is no
4. a. The spending multiplier in this small open economy is about 1.82 (= 1/(0.15 + 0.4)). If
b. If domestic product and income decline by $3.64 billion, then the country's imports will
c. The decrease in this country's imports reduces other countries' exports, so foreign product
174
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
d. The decline in foreign product and income reduce foreign imports, so the first country's
5. The intersection of the IS and LM curves indicates a short-run
equilibrium in the country’s market for goods and services (the IS
curve) and a short-run equilibrium in the country’s market for money
(the LM curve). The intersection indicates the equilibrium level of the
6. External balance is the achievement of a reasonable and sustainable makeup of a
country's overall balance of payments with the rest of the world. While specifying a
7. a. A decrease in the money supply tends to raise interest rates (and lower
b. An increase in the interest rate does not shift the LM curve. Rather, it
8. a. A decrease in government spending tends to decrease domestic product (and decrease
b. An increase in foreign demand for the country's exports increases the country's domestic
c. An increase in the interest rate does not shift the IS curve. Rather, it results in a
9. a. An increase in foreign demand for the country’s exports tends to drive
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
b. An increase in the foreign interest rate tends to drive the country’s
overall international payments into de>cit because of capital out;ows
c. An increase in the country’s interest rate does not shift the FE curve.
10. a. Imports increase, according to the marginal propensity to import.
b. Our exports decrease, as foreign imports decrease according to the foreign marginal
propensity to import.
c. This makes our products relatively more expensive, and foreign products relatively less
expensive. The relative price of foreign products (or the real exchange rate value of
d. This makes our products relatively less expensive. The relative price of foreign products
(or real exchange rate value of foreign currency) Pfe/P increases if Pf increases more
11. The real exchange rate value of the dollar decreased from 110 to 100,
so the U.S. dollar had a real depreciation. The United States gained
international price competitiveness. (For the import and export functions
shown in equations 22.13 and 22.14, the ratio (Pfe/P) is an indicator of
176
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
12. The size of the spending multiplier for this nonstandard small open economy is smaller.
Consider the situation in which the government purchases an extra $1 of goods and
services. How much of this initial increase in spending and income will be transmitted
177
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
