Investment Level

  • A. Explain the “principles” that Economists use to understand human behavior.
  • A. Explain why net exports equal net capital outflows.
  • Calculate the change in the real exchange rate and determine what happens to the relative value of the goods between a Japanese car selling for 1,500,000 yen and a domestic car selling for $30,000 dollars when the nominal exchange rate changes from 100 yen per dollar to 150 yen per dollar.
  • A. Illustrate and explain the relationship between net exports and the real exchange rate.
  • Illustrate and explain what occurs in the open economy model given an increase in government spending.

B. Explain the “process” that Economists use to analyze reality.

  • Suppose Ali bought opera tickets on Friday for $100 for a Saturday night showing.On Saturday afternoon, a friend invites Ali to go bowling that night, but what Ali really wants to do on Saturday night is spend the evening painting at home alone.What does it cost Ali to stay home on Saturday night?Explain.
  • A.Assume countries can produce two goods, X and Y.Country A can produce 5 X if it uses all of its resources for X production or 5 Y if it uses all resources for Y production.Country B can either produce 12 X or 2 Y with its resources.Illustrate and evaluate the potential of these countries to trade.What about when Country B invents a new machine that can increase its maximum amount of Y production to 6?

B. Given Part A, should these countries adopt free trade policies with each other?Explain.

  1. Given the following information:
Year Price

Jelly Beans


Jelly Beans





2000 5 10 20 4
2001 6 12 30 5
  • Calculate Nominal GDP in 2000.
  • Calculate Real GDP in 2001 (Use 2000 as base year).
  • Calculate the percent change in real GDP between 2000 and 2001.
  1. A. Explain how the government runs a budget deficit and what effect an increase in government spending has on a closed economy.Illustrate and explain.

B.True/False/Uncertain: Government deficit/debt is detrimental to our economy. Explain.

  1. True/False/Uncertain: In a closed economy, the real interest rate will rise and the level of investment will decrease if there is an increase in the productivity of capital and consumers become worried about the future.Illustrate and explain.

B. True/False/Uncertain: In an open economy, if domestic national saving is low, then the country will have high GDP growth, due to high levels of domestic investment.

B. Illustrate and explain the relationship between net capital outflows and the real interest rate.

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