Principles of Economics. Chapter 32. Exercises 6-9. A Macroeconomic Theory of the Open Economy. Gregory Mankiw. 8th edition.
6. A senator renounces his past support for protectionism: “The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness.” Using a three-panel diagram, show the effect of anExport subsidy on net exports and the real exchange rate. Do you agree with the senator?
7. Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a three panel diagram, show what happens to national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance. Also explain in words how this U.S. policy affects the amount of imports, exports, and net exports.
8. Suppose that real interest rates increase across Europe. Explain how this development will affect U.S. net Capital outflow. Then explain how it will affect U.S. net exports by using a formula from the chapter and by drawing a diagram. What will happen to the U.S. real interest rate and real exchange rate?.
9. Suppose that Americans decide to increase their saving. a. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very high, will this increase in private saving have a large or small effect on U.S. domestic investment? b. If the elasticity of U.S. exports with respect to the real exchange rate is very low, will this increase in private saving have a large or small effect on theU.S. real exchange rate?