ECON102 Chapter Notes - Chapter 12: Capital Outflow, Foreign Direct Investment, Real Interest Rate

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scarletpanda765

26 Aug 2016

School

University of Waterloo

Department

Economics

Course

ECON102

Professor

Maryann Vaughan

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ECON102 Full Course Notes

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An open economy interacts with other economies in 2 ways: It buys and sells goods and services in world product markets it buys and sells capital assets such as stocks and bonds in world financial markets. Trade surplus is when there"s a positive trade balance exports are greater than imports. Trade balance is basically the same thing as net exports. Factors that influence a country"s imports, exports, and net exports are: Domestic consumer taste (for domestic and foreign goods) Exchange rate at which people can use domestic currency to buy foreign goods. There is a flow of goods (in terms of the world market) for example when a canadian person buys a. And there is the flow of capital, like when a canadian person buys stock in the toyota. Net capital outflow is the purchase of foreign assets by domestic residents minus (-) the purchase of domestic assets by foreigners.

Related Questions

2. Which of the following is not used as an argument for trade restrictions?

a. Emerging domestic industries, especially those with economies of scale, could not gain entry in some world markets without protection during the early years

b. Trade restrictions are required to prevent some countries from exporting a commodity at a price below its cost of production.

c. Consumer surplus is maximized when import tariffs and quotas promote exports over imports.

Since the United States has negative net foreignâ investment, its

A. net capital flow must be negative.

B. domestic saving must be less than its domestic investment.

C. exports must be greater than its imports.

D. domestic investment must be less than its domestic saving.

Expansionary fiscal policy is less effective in an open economy because

A. increases in the money supply will reduce interest rates and lower the value of theâ dollar, reducing aggregate demand.

B. increases in government spending can increase interestâ rates, which increases the value of the dollar and crowds out net exports.

C. increases in government spending will be partly spent on importedâ goods, which do not benefit the domestic economy.

D. increases in taxes reduceâ consumption, which in turn reduces consumption of imports and increases net exports.

When the Federal reserve uses contractionary monetary policy to reduceâ inflation, it

A. sells treasury securities increasing interestâ rates, leading to a stronger dollar that lowers net exports in an open economy.

B. buys treasury securities decreasing interestâ rates, leading to a weaker dollar that lowers consumption of durables in a closed economy.

C. sells treasury securities decreasing interestâ rates, leading to a stronger dollar that lowers domestic investment in a closed economy.

D. buys treasury securities increasing interestâ rates, leading to a weaker dollar that increases net exports in an open economy.

If a country saves more than it investsâ domestically, then its net foreign investment must be (positive, negative, or zero)?

ECON102 Chapter Notes - Chapter 12: Capital Outflow, Foreign Direct Investment, Real Interest Rate

ECON102 Full Course Notes

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