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SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. The supply of loanable funds comes from national saving. The demand for
2. The two markets in the model of the open economy are the market for loanable
3. If Americans decided to spend a smaller fraction of their incomes, the increase in
saving would shift the supply curve for loanable funds to the right, as shown in
Figure 1. The decline in the real interest rate increases net capital outow and
518
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 519
Figure 1
Chapter Quick Quiz
1. c
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 520
Questions for Review
1. The supply of loanable funds comes from national saving; the demand for
loanable funds comes from domestic investment and net capital outow. The
2. Government budget de:cits and trade de:cits are sometimes called the twin
3. If a union of textile workers encourages people to buy only American-made
Figure 2
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 521
4. Capital ight is a large and sudden movement of funds out of a country. Capital
Problems and Applications
1. Japan generally runs a trade surplus because the Japanese saving rate is high
relative to Japanese domestic investment. The result is high net capital outow,
Figure 3
2. a. If Congress passes an investment tax credit, it subsidizes domestic
investment. The desire to increase domestic investment leads :rms to borrow
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 522
b. A rise in the real exchange rate reduces exports.
3. a. A decline in the quality of U.S. goods at a given real exchange rate would
b. The shift to the left of the demand curve for dollars leads to a decline in the
c. The claim in the popular press is incorrect. A change in the quality of U.S.
Figure 4
4. A reduction in restrictions of imports would reduce net exports at any given real
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 523
5. a. When the French develop a strong taste for California wines, the demand for
b. The result of the increased demand for dollars is a rise in the real exchange
rate.
c. The quantity of net exports is unchanged.
Figure 5
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 524
6. An export subsidy increases net exports at any given real exchange rate, causing
the demand for dollars in the foreign exchange market to shift to the right as
Figure 6
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 525
7. An export subsidy increases net exports at any given real exchange rate, causing
the demand for dollars in the foreign exchange market to shift to the right as
shown in Figure 7. The resulting increase in the real exchange rate increases
imports to match the increase in exports generated by the export subsidy. Thus,
Figure 7
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
r
Quantity of
Loanable
Funds
S1
D
(I + NCO)
r
NCO
NCO
S1
Quantity of
Dollars
D2
D
1
real e*1
real
e
real e*2
S2
r*2
r*1
S2
real e*3
Chapter 32/A Macroeconomic Theory of the Open Economy ❖ 526
8. Higher real interest rates in Europe lead to increased U.S. net capital outow.
Higher net capital outow leads to higher net exports, because in equilibrium net
Figure 8
9. a. If the elasticity of U.S. net capital outow with respect to the real interest rate
b. Because an increase in private saving reduces the real interest rate, inducing
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
