Questions

What effect on trade balances result when foreign governments increase purchases?

If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

If a small open economy bans the import of Japanese VCRs, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

Is the trade deficit a problem? Explain the common argument for and against.

Define: nominal and real exchange rates. Check out The Economist magazine's Big Mac Index. The latest update for this index is from last July. In real terms, is there much difference between the price of the Big Mac in the U.S. and Brazil? I'd rather buy Big Mac in New Zealand than in Brazil (or in the U.S.). What does that tell us (ceteris paribus) about the relative value of the U.S. dollar, and New Zealand dollar, and the Brazilian real?

What is the relationship between the real exchange rate and the price of foreign goods. Explain the difference between fixed, floating, and managed flexible exchange rates.

Explain how fiscal policies at home and how fiscal policies abroad affect exchange rates. Explain graphically why protectionist policies may increase net exports while having no effect on the trade balance. (Remember, the total amount of trade falls.)

What effect does relative inflation rates have on nominal exchange rates? Why would purchasing power parity mean that these differences are not maintained in the long run?

If Japan has low inflation and Mexico has high inflation, what will happen to the exchange rate between the Japanese yen and the Mexican peso?

Explain how changes in relative price levels, changes in tariffs and quotas, consumer preferences for domestic and foreign goods, and productivity affect international exchange rates?