Chapter 13

Question 1

what is gross national income?

Answer 1

GDP + net factor income from abroad
includes return on foreign assets

Question 2

what happens if consumers in the small open economy have a subjective discount rate greater than the world real interest rate?

Answer 2

will consume more than their income so they will borrow from foreign households. national income decreases as net interest payments from abroad become negative. eventually accumulates large foreign debt and a large part of GDP used to pay the interest on the foreign debt

Question 3

what does the data find out about savings and investment relative to GDP?

Answer 3

only a weak correlation. international financial markets seem to be quite well integrated

Question 4

why is a current account surplus or deficit not a problem for some countries?

Answer 4

country with low capital stock and high return on investment makes sense to increase capital stock and to finance this invesment by borrowing abroad

Question 5

how is the real interest rate determined in the LR?

Answer 5

determined in the international financial market - independent of savings and investment in the SOE

Question 6

why does the real exchange rate have to adjust in the LR?

Answer 6

since the real interest rate is exogenous to the SOE real exchange rate has to adjust so that Yn = AD

Question 7

what does an increase in domestic consumption and investment lead to? what form will this take with a fixed vs. floating exchange rate?

Answer 7

leads to a reduction in NX and real exchange rate appreciates.
with fixed: form of a increase in price level
with floating: the nominal exchange rate may adjust instead