Investment decreases by 300 billion, government expenditure is ...

[ec501234]

Investment decreases by 300 billion, government expenditure is unchanged, and exports increase by 500 billion. As a result, autonomous expenditure ________, the total expenditure ________, and equilibrium real GDP ________.
 
  A) increases by 800 billion; increases; increases by more than 800 billion
  B) increases by 200 billion; increases; increases by more than 200 billion
  C) decreases by 300 billion; decreases; decreases by more than 300 billion
  D) is unchanged; is unchanged; is unchanged
  E) increases by 500 billion; is unchanged; increases by more than 500 billion

Question 2

Explain the effect on the demand for dollars in the foreign exchange market of an increase in the U.S. interest rate differential.
 
  What will be an ideal response?

[swimkari]

Answer to Question 1

B

Answer to Question 2

As the U.S. interest rate differential increases, international investors can obtain a greater return by holding U.S. assets. Therefore these investors want to buy more U.S. assets, such as bonds. But in order to buy more U.S. assets, they need more dollars. Hence the increase in the U.S. interest rate differential leads to an increase in the demand for dollars in the foreign exchange market and so the demand curve for U.S. dollars shifts rightward.