ECON 1000 C: A Macroeconomic Theory of the Small Open Economy. Bring: Textbook, Worksheet, Computer & Writing Materials!

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1 : A Macroeconomic Theory of the Small Open Economy PASS is an active learning environment and safe space where answers are not judged or graded Don t feel afraid to collaborate and share your knowledge with your classmates! Bring: Textbook, Worksheet, Computer & Writing Materials! Opener: Headbands (10 Minutes) Try to explain in a non-technical manner what the other students concepts are; AND, pose an exam type question that relates to the given concept. If you get the concept correct you get to take your concept and help others guess their concepts until everyone has guessed their concept. Two Market Mayhem LF & FOREX (20 Minutes) Derive the relationship between NCO, Savings, and Investment. How are savings and investment different? How are savings and investment related? (Remember! Y = C + I + G + NX). A) NCO > 0, S-I > 0 B) NCO < 0, S-I < 0 C) NCO = 0, S-I = 0 Given the derived relationship, using the three given situations (above), show what happens in the market for loanable funds for each situation (see graphs below).

2 Represent what you found in the Y = C + I + G + NX format clearly stating the relationship between Net Exports, Net Capital Outflow, GDP, and Savings/Investment. r NX NCO GDP (Y= C + I + G + NX) r^w>r^c r^w<r^c r^w=r^c NCO > 0 NCO < 0 NCO = 0 Savings/Investment Given your results found in the table above draw the market for loanable funds and the market for foreign exchange. Explain the net effect on the real exchange rate and balance of trade (Remember! NX = X M AND look at relative price). Draw graphs below:

3 More graph drawing space: Policy Practice (Testing Questions) (20 Minutes) (Note: You will be given situations in the PASS workshop. You must attend the workshop or go to my office hours to get the situations). -World Interest Rates -Government Budget -Trade Policy (Import Quota & Tariff) -Political Risks (Capital Flight) Both algebraically and graphically show the effect on the market for loanable funds and the market for foreign exchange. As well, state the impact on the balance of trade and real exchange rate. Here are some helpful identities: NX = X M and NM = M X Y = C + I + G + NX and (Y T C) + (T G) NX = I S = I + NX or NCO = NX = S I E = ep/p* and e = P*/P I = Y C G NX or I = S - NX Write answers on following page:

4 Write answers below both graphically and algebraically (Recall! y=mx+b OR Qs=ab+c!): No need for this

5 Question Time! (15 Minutes) Search for a news story online and apply your knowledge about the market for loanable funds and foreign exchange that can potentially explain the situation. If you have not found an article I posted some below that you can check out and discuss in the PASS workshop. Potential Articles (Note: I encourage you to find your own to share with the PASS workshop): Trudeau calls Trump to register serious concern about proposed steel tariffs Canadians think Liberal deficit spending wrong, government-funded report suggests Canadian dollar to strengthen on further interest rate hikes: Reuters poll Use space below for graphical analysis: Closer: Summarize the Procedure (10 Minutes) Succinctly explain the impact of each of the following situations clearly and in detail without the aid of a graph. A good thing to do for this activity is for you to try to picture the graph in your mind in explaining the impact for the following situations (Note: situations will be given in workshop).