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Econ 100b

Created 4/30/1996
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International Trade

Problem Set #7

Economics 100b; Spring 1996; Brad DeLong


1. In a closed economy, national savings must be equal to national investment. Does the same hold true in an open economy, with international trade. Why or why not?

2. Suppose that a TV set in the US costs $300, and sells for 6000 yuan in China. What would purchasing-power-parity suggest should be the equilibrium exchange rate between dollars and yuan?

3. In a small open economy, what effect does an increase in government purchases have? How about a closed economy? How about a large open economy?

4. Suppose that the government enacts an investment tax credit that boosts investment as a function of the interest rate, and offsets the effect of the credit on overall taxes by raising income taxes enough to replace the lost revenue. What effect does such an ITC have in a large open economy?

5. Why might purchasing-power-parity fail to hold? That is, why might there be systematic differences between the nominal exchange rate and the relative price levels in two countries?

6. The U.S. savings rate is low relative to other industrial countries. If the U.S. was a closed economy, would its rate of investment as a share of GDP be higher or lower than that of other industrial countries? Why?

7. When Francois Mitterand was first elected president in France in 1981, many investors feared that the socialist president would bring higher inflation and renewed instability. French citizens increased their lending outside the country, and their purchases of foreign assets. Foreigners became less willing to lend to the French. How would you analyze such a shift in investors' preferences for assets in one country relative to the rest of the world? What would you expect happened to the French economy (a small open economy) in the wake of Mitterand's election?

8. Canada's nominal interest rates are four percentage points per year above U.S.nominal interest rates. Assuming that investments in Canada and the U.S. are equally risky, what does this differential tell you about investors' expectations of the future course of the Canada-US exchange rate?


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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/