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Tutorial 5

The document outlines exercises for a macroeconomics tutorial focused on the open economy, including constructing a balance of payments for a domestic country based on various transactions. It also explores the real exchange rate needed for a zero trade balance and examines the impact of fiscal policy changes on output and net exports in different economies. The exercises involve calculations and theoretical analysis of economic parameters and their effects on trade and government spending.

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Luca Ducarmois
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6 views1 page

Tutorial 5

The document outlines exercises for a macroeconomics tutorial focused on the open economy, including constructing a balance of payments for a domestic country based on various transactions. It also explores the real exchange rate needed for a zero trade balance and examines the impact of fiscal policy changes on output and net exports in different economies. The exercises involve calculations and theoretical analysis of economic parameters and their effects on trade and government spending.

Uploaded by

Luca Ducarmois
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

October 2025

Macroeconomics ECGEB270
Tutorial 5 : The open economy
Exercise 1: The balance of payments
Consider two fictional economies, one called the domestic country and the other the foreign country.
Given the transactions listed in (a) to (g), construct the balance of payments for the domestic
country. If necessary, include a statistical discrepancy.

(a) The domestic country purchased oil worth 100 million from the foreign country
(b) Foreign tourists spent 25 million on domestic ski slopes
(c) Foreign investors were paid 15 million in dividends from their holdings of domestic equities
(d) Domestic residents gave 25 million to foreign charities
(e) Domestic businesses borrowed 65 million from foreign banks
(f) Foreign investors purchased 15 million of domestic government bonds
(g) Domestic investors sold 50 million of their holdings of foreign government bonds.

Exercise 2: Real exchange rate and trade balance

Consider the equilibrium of an open economy characterized by the following equations:

C = 400 + 0,5YD T = 0,2Y I = 600 + 0,1Y – 5000 r G = 100


X = 0,3Y* - 500ɛ IM = ɛ(0,1Y + 700 ɛ) r = 0,1 Y*= 4400

Determine the real exchange rate ɛ for which the trade balance is equal to zero.

Exercise 3: Multipliers, openness and fiscal policy

Consider the short run equilibrium (fixed prices) in an open economy characterized by the following
equations:

C = c0 + c1(Y – T) I = d0 + d1Y IM = m1Y X = x1Y*

The parameters m1 and x1 are the propensities to import and export. Assume that the real exchange
rate is fixed at a value of 1. Foreign income, Y*, taxes T and government spending G are all exogen-
ous parameters. We explore the effectiveness of changes in G under alternative assumptions about
the propensity to import.

a) Write down the equilibrium condition in the market for domestic goods and solve for Y.
b) Suppose that government purchases increase by one unit. What is the effect on output Y?
Assume that 0 < m1 < c1 + d1 < 1 holds.
c) How do net exports change when government purchases increase by one unit?

Now consider two economies, one with m1 = 0.5 and the other with m1 = 0.1. Each economy is char-
acterised by (c1 + d1) = 0.6.
d) Suppose that one of the economies is much larger than the other. Which economy do you
expect to have the larger value of m1? Explain.
e) Calculate the answers to questions b) and c) for each economy by substituting the appropri-
ate parameter values.
f) In which economy does fiscal policy have a larger effect on output? In which economy does
fiscal policy have a larger effect on net exports?

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