CHAPTER-6. OPEN ECONOMY MACROECONOMICS

Discuss some of the exchange rate arrangements that countries have entered into to bring about stability in their external accounts.

Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.

Should a current account deficit be a cause for alarm? Explain.

If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed, what is likely to happen to the trade balance between the two countries?

Explain why G - T = (Sg - I) - (X - M).

In the above example, if exports change to X = 100, find the change in equilibrium income and the net export balance.

Suppose C = 40 + 0.8Y D. T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y

(a) Find equilibrium income

(b) Find the net export balance at equilibrium income

(c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 to 50?

Calculate the open economy multiplier with proportional taxes, T = tY, instead of lump-sum taxes as assumed in the text.

Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?

What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?

Are the concepts of demand for domestic goods and domestic demand for goods the same?

Would the central bank need to intervene in a managed floating system? Explain why.

Differentiate between devaluation and depreciation.

How is the exchange rate determined under a flexible exchange rate regime?

Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.

Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in terms of Indian goods). (Hint: First find out the nominal exchange rate as a price of yen in rupees).

Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.

What are official reserve transactions? Explain their importance in the balance of payments.

Differentiate between balance of trade and current account balance.