HOMEWORK 2 Macro Model: Open Economy Question 1: How does a $80 billion increase in savings change a, net foreign investment increases by 80 billion b, Net exchange ( trade balance) increases by 80 billion c, the exchange rate decrease by 0.21% Question 2: How does a 0.2% decrease in the world real interest rate change a, Savings remain unchanged b, Investment Increase by 56 billion c, the exchange rate increase by 0.15 % d, the trade balance decreases by 56 billion Question 3: Due to pessimistic economic forecasts, investment demand decreases by $70 billion at every interest rate. How do the following variables change? a. The trade balance increase by 70 billion b. The exchange rate decrease by .18% c. The net foreign investment increase by 70 billion Question 4: How does a $60 billion decrease in the demand for the net exports change a. Savings stay unchanged b. Investment stay unchanged c. The exchange rate decrease by 0.16% d. The trade balance stay unchanged Question 5: If Congress imposes restrictions on imports that result in a $50 billion decrease in the demand for import, what is the change in demand for net exports? Because Net exports = exports – imports. Therefore, when there’s a $50 billion decrease in the demand for import, the demand for net exports increase by the same amount, $50 billion How do the exchange rate and the trade balance change? The exchange rate increase by 0.13% and the trade balance stay unchanged Question 6: a. Restrictions on imports which raise net export demand by $50 billion? The trade balance will stay unchanged b. A $50 billion increase in public saving? The trade balance will increase by $50 billion ➔ The Congress should enact the increase in public saving if they desire a higher trade balance. Question 7: How will a $50 billion decrease in government spending change net foreign investment and the trade balance? Because S = Y – C – G. Therefore, when G decrease by $50 billion, S increase by $50 billion. When S increase by $50 billion, net foreign investment increase by $50 billion, the trade balance increase by $50 billion. Question 8: If the real world interest rate fluctuates between 7.8% and 8.2%, over what range will the trade balance fluctuate? The trade balance will fluctuate between -56 billion and 56 billion. Make investment more sensitive to the interest rate by raising the interest elasticity of investment from -3 to -3.5,the trade balance will fluctuate between -66 billion and 66 billion ➔ It is because the investment more sensitive to the interest rate, when the interest rate decrease from 8.0% to 7.8% the investor less likely to export to the world, therefore the trade balance decrease by -66 billion instead of -56 billion and vice versa Question 9: If the real world interest rate fluctuates between 7.8% and 8.2%, over what range will the exchange rate fluctuate? The exchange rate will fluctuate between 1.15% and 0.85% Change the sensitivity of net exports to the real exchange rate from -380 to -420. How does answer change? The exchange rate will fluctuate between 1.13% and 0.87% Question 10: When the real world interest rate falls by 0.3%, what change to government spending restores the trade balance to its baseline level? The government spending decrease by 80 billion How would your answer differ if the interest elasticity of investment demand were -2.5 instead of -3.0? The government spending decrease by 70 billion instead of 80 billion 1. Double click the Microsoft Edge 2. log into your pace portal 3． Open the document which you want 4．Upper right side under the setting, click the use Internet Explorer to open 5． Just wait the IE to open the model 6．You got it
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