1. As a result of Korea's recent recession and currency problems the Korean media has been encouraging people to increase their savings rate (and consume less).
a. show the short run impact of a higher savings rate using Aggregate Supply and Aggregate Demand. What happens to Korea's National Income and Price level?
This decrease in consumption would decrease AD (shift to the left)-- lowering National income and prices. It makes their economy worse in the short run
b. show the long run impact using the open economy macro model we discussed in class. What happens to real interest rates, net foreign investment, the balance of trade, and real exchange rates?
In the long run, more savings would increase the supply of loanable funds which lowers the real interest rate. Lower interest rates increase Net Foreign Investment. More net foreign investement increases the supply of Korean won on the international currency markets. This leads to depreciation of the won and a growing trade surplus (or shrinking deficit.)
2. Another response to the economic problems in Korea has been widespread concern about imports.
a. If people buy fewer imports, what short run effect will there be on Korea's Aggregate Supply or Aggregate Demand? How would this effect their National Income and Price level?
Decreasing imports will increase AD. This leads to higher income and price level in the short run.
b. Use the open economy macro model to examine the long run effect of purchasing fewer imports.
Purchasing fewer imports will increase the Net Exports, leading to an increase in demand for the Korean won. The real exchange rate would increase (the won appreciates) but no change in the balance of trade, net foreign investment or real interest rates.
3. Calculations
a. In 1972, The Hamilton Pulsar, a newly invented digital
watch, sold for $2100.
If the CPI in 1972 was 46.5, what was the real price
of this watch?
$4516.13
b. In 1990, a luxury cruise cost $5500. The CPI in 1990 = 131.5. What was the real price of the cruise?
$4182.51
c. In relative terms which was more expensive, the watch or the cruise?
the watch
d. A treasury bill pays 5.4% interest in 1998. The inflation rate is 1.9%. What is the real rate of interest?
3.5%
XXX
c. what would the be the value of net foreign investment?
Net exports = net foreign investment, so NFI = -1
(negative implies more foreign investment in US)
6. If gold is selling for $300 and the US dollar is worth 110 yen, how much would gold cost in yen?
300 x 110 = 33000 yen
7. If the CPI in the US is 210 and the price index for the same goods in Canada is 250, use the idea of purchasing power parity to predict the exchange rate.
e = P*/P
e = 250/210 = $1.19 Canadian per US dollar
return to Winter classes