Question

1. In a small open economy, given X - M = 100
   1. NFI = 0
   2. S – I = 100
   3. Trade balance is in equilibrium
   4. All of the above

2. In a small open economy, given S = 200 and I = 150
   1. Trade balance is in equilibrium
   2. Trade balance is in deficit
   3. NFI = -50
   4. NFI = 200
   5. Trade balance is in surplus

                     

3. The multiplier in a small open economy is
   1. Larger than the multiplier in a large open economy
   2. Smaller than the multiplier in a large open economy
   3. Larger than the multiplier in a closed economy
   4. The same as the multiplier in a large open economy

Answer 1

✓B)S—I=X—M

you can solve this model for equilibrium Y either in terms of demand (Y = C + I_d + G + X - M) or in terms of the balance of payments (S - I_d = If = X - M). If X-M=100, S-I=100.

National income accounts identities:Y= C+ I+ G + NX

trade balance NX = S —I net capital outflow.

✓E) trade balance is in surplus because S>I

Y= C+I+NX, Y—C= I+NX , S= Y—C, S= I+NX, S=I+NFI

✓B) smaller than the multiplier in a large open economy.

	Y = a + bY + I + X - mY Y = (a + I + X)/(1 - b + m)
	Foreign trade multiplier mX = 1/(1 - b + m) = 1/(s + m) < 1/(1 - b) For instance, if b = 0.9, the multiplier is 10 in a closed economy. If m = 0.1, then it reduces to 5. Thus, the open economy multiplier is very sensitive to the marginal propensity to import.