I.  Investment, Savings, NX and fiscal policy.

1.  Are the following statements true, false or do they depend.
a) "In a small open economy, an increase in national savings will increase investment and reduce the real interest rate".
b) "Expansionary fiscal policy in Germany (a large country) will reduce the value of the Canadian dollar and increase net exports in Canada (small economy)".
c) "If capital mobility is perfect across countries, the real interest rate in the U.S. should be approximately be equal to the real interest rates in Germany and Afghanistan".
 

II.  Determinants of Net exports.

2.  What determines exports and imports?
3.  If the value of the dollar falls, what happens to prices of imported goods and how is Net exports affected? Give an example.
4.  If income in Japan falls, how would that affect imports in Japan? How would it affect exports from the U.S.? What if income fell in Angola, how would that affect exports from the U.S.?

III.  Multipliers in an open economy.

5.  Consider the following short-run macroeconomic model.
Y=C+G+NX                            Y=income (or GDP), C=consumption, G=government expenditure (exogenous), NX=Net Exports
C=C₀ + C_y(Y-T)                      C₀=autonomous consumption, C_y =MPC, T=lump-sum taxes
NX = X-M                               X=exports (exogenous), M=imports
M = M₀ + M_y(Y-T) + M_EE
M₀=autonomous imports, M_y=marginal propensity to import (i.e. for every dollar increase in income, imports will increase by My), E=Exchange rate (exogenous), defined as the value of the U.S. dollar (U.S. being the domestic economy),
M_E=response of imports to changes in the value of the U.S. dollar.

Derive the government expenditure and the tax multipliers for this open economy.  Compare them to the closed economy multipliers.  Are the open economy multipliers larger or smaller than the closed economy ones?  Show this graphically using the AS-AD model (assume interest rates and the price level are fixed).