432 PART VII THE MACROECONOMICS OF OPEN ECONOMIES 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. \A/hat will happen to the U.S. real interest rate and real exchange rate? 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, wil- this increase in private saving have a large or small effect on the U.S. real exchange rate? Over the past decade, some of Chinese saving has been used to finance American investment. That is, the Chinese have been buying American capital assets. a. If the Chinese decided they no longer wanted to buy U.S. assets, what would happen in the U.S. market for loanable funds? In particular, what would happen to U.S. interest rates, U.S. saving, and U.S. investment? b. \A/hat would happen in the market for foreign-currency exchange? In particular, what would happen to the value of the dollar and the U.S. trade balance? In 1998, the Russian government defaulted on its debt payments, leading investors worldwide to raise their preference for U.S. government bonds, which are considered very safe. What effect do you think this "flight to safety" had on the U.S. economy? Be sure to note the impact on national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance. Suppose that U.S. mutual funds suddenly decide to invest more in Canada. a. What happens to Canadian net capital outflow, Canadian saving, and Canadian domestic investment? b. What is the long-run effect on the Canadian capital stock? c. How will this change in the capital stock affect the Canadian labor market? Does this U.S. investment in Canada make Canadian workers better off or worse off? d. Do you think this will make U.S. workers better off or worse off? Can you think of any reason the impact on U.S. citizens generally may be different from the impact on U.S. workers? t2. 10. 13. 11.
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