Homework ch 28 ECO 201: Principles of Macroeconomics Questions 5 Exercises 9, 10 Note for Question 5 This question gives you the reason for the capital in “international capital flows.” Suppose a country has very little income and therefore very little savings. But it needs capital goods (machines, etc.) precisely to get out of poverty. From where will the purchasing power come? Note for Exercise 6 Be careful to answer the entire question: • What happens to NX (i.e., what happens to X, IM, or both)? • What happens to KI (is capital flowing in or flowing out or not at all)? • If NX changes, does KI change in the opposite direction? (It should, to keep NX + KI = 0) Here are two answered problems: a. The U.S. export creates a trade surplus (NX > 0). The purchase of Israeli stock is a capital outflow in the same amount (KI < 0). The capital outflow (negative inflow) just offsets the trade surplus. b. Here the U.S. import of oil creates a trade deficit (NX < 0). The Mexican purchase of U.S. government debt is a capital inflow to the United States (KI > 0), which offsets the trade deficit.Note for Exercise 7 Make sure to state what happens to r and to the quantity of investment. Draw GRAPHS!!!! Here is a solved problem: b. An increase in the government budget deficit shifts the saving curve (S+KI) to the left, which leads to a decrease in investment and an increase in the domestic real interest rate. The increase in the real interest rate will lead to an increase in the capital inflow, which will help to partially offset the decline in national saving brought about by the increase in the government budget deficit, but overall investment will decline. Dr. Gabriel Martinez Henkels 2056 [email protected] 280-1611 I, S I S+KI S’+KI
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