Macroeconomics Canadian 15th Edition

Blanchard Solutions Manual

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Chapter 7
The Goods Market in an Open Economy

1. True/False/Uncertain

a. Uncertain – they simply reflect high domestic demand. Increases in domestic demand
could be from investment, government spending or consumption.

b. Uncertain or true – looser fiscal policy, all else equal, is usually associated with an
increase in the trade deficit.

c. False.

d. False.

e. True.

f. True.

g. False

2. Real Exchange Rates and The Balance of Trade

a. ε =EP*/P. Apply proposition 8 to (EP*)/P and then proposition 7 to (EP*).

b. If ∆P/P > ∆P*/P* and ∆E/E = 0, then ∆ε/ε <0, then the real exchange rate is decreasing
(appreciating from the point of view of the domestic country) over time. Given the
Marshall-Lerner condition, this implies net exports are falling. The price of domestic
goods is rising faster than the price of foreign goods, while the exchange rate is constant.
As domestic goods are becoming more expensive than foreign goods, consumers in both
countries shift their purchases away from goods in the high-inflation country to the low-
inflation one.

3. Coordination and Fiscal Policy

a. Y = C + I + G + X – Q = 20 + 0.8*(Y - 10) + G + 0.3Y*- 0.3Y

Y = [1/(1 - .8 + .3)](12 + G + 0.3Y*) = 2*(12 + G + 0.3Y*) = 44 + 0.6Y*

The multiplier is 2 (=1/(1-.8+.3)) when foreign output is fixed. The closed economy
multiplier is 5 (=1/.5). It differs from the open economy multiplier because, in the open
economy, only some of an increase demand falls on domestic goods.

b. Since the countries are identical, Y=Y*=110. Taking into account the endogeneity of
foreign income, the multiplier equals [1/(1-0.8 -0.3*0.6 +0.3)]=3.125. The multiplier is
higher than the open economy multiplier in part (a) because it takes into account the fact
that an increase in domestic income leads to an increase in foreign income (as a result of

Copyright © 2015 Pearson Canada Inc.

7-1
 Macroeconomics, Fifth Canadian Edition
Instructor’s Solutions Manual

an increase in domestic imports of foreign goods). The increase in foreign income leads
to an increase in domestic exports.

c. If Y=125, then foreign output Y*= 44+0.6*125=119. Using these two facts and
the equation Y = 2(12+G+0.3Y*) yields: 125 = 24+2G+0.6*(119). Solving for G
gives G=14.8. In the domestic country, NX = 0.3*(119)-0.3*(125) = -1.8; T-G =
10-14.8=-4.8. In the foreign country, NX*=1.8; T*-G*=0.

d. If Y=Y*=125, then we have: 125=24+2G+0.6*(125), which implies G=G*=13.

In both countries, net exports are zero, but the budget deficit has increased by 3.

e. In part, fiscal coordination is difficult to achieve because of the benefits of doing

nothing, as indicated from part (c).

4. A U.S. Recession and the Canadian Economy

a. The share of US spending on Canadian goods relative to Canadian GDP is

(0.8)(0.40)=32% of Canadian GDP.

b. A 5% decline in US GDP would be about a 0.5% decline in US imports which

corresponds to 0.16% of Canadian GDP.

c. If exports to all countries fell by 5%, this would reduce Canadian exports by 1.8%
of Canadian GDP, with a multiplier of 2, Canadian GDP would fall by 3.6%,

d. This is a pretty fair characterization of the Canadian economy. The US demand

for our exports is 32% of our GDP. That is big.

5 Dynamics of a Depreciation

a. Initially, net exports and output fall.

b. After six months, net exports and output increase.

6. Export Ratios

Answers will vary.

Copyright © 2015 Pearson Canada Inc.

7-2
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4010 Mercer John 12 July
F 26
14 July
4388 Malsby F Cav
A 31
19 Aug
4959 McDall R
A 7
38 Aug
5562 Manihan J
D 13
Aug
5618 Mageson J Cav 7A
14
42 Aug
5703 Mensome S, S’t
E 15
33 Aug
5713 Monroe S
F 15
80 Aug
5767 Montgomery R
F 15
Aug
5863 Michael S 7 I
16
30 Aug
6461 Mitchell J H
I 22
44 Aug
6521 Monroe H J, S’t
G 22
42 Aug
6566 Mathews M
K 23
Aug
7043 Milsker J 5D
27
42 Aug
7233 Matheny N, S’t
A 29
13 Aug
7272 McQueston J O
B 30
29 Sept
7510 Myers A
E 1
7820 Moore G, Cor 101 Sept
 F 4
Sept
7973 Mine John N 2H
6
101 Sept
8007 Miller W W
B 6
66 Sept
8176 McCoy W, S’t
B 8
Sept
8389 Murphy J 9E
10
93 Sept
8851 McElvain J
E 15
143 Sept
8925 Myers J
D 16
Sept
9575 Morrison J 4B
23
Sept
9600 Miller J Cav 7G
23
35 Sept
9856 Murgu A
D 27
Oct
10231 Monay G W 7E
2
93 Oct
10245 McFarney J
B 3
29 Oct
10394 Maples H
H 6
35 Oct
10891 Murphy F
B 13
74 Oct
10995 McDonald I
B 16
26 Oct
11166 Mills Milton
D 18
Oct
11271 Mitchell I 7K
21
11585 McCarty A 7A Oct
28
28 Oct
11665 McBeth I C
K 30
35 Oct
11680 Murphy F
C 31
Nov
11746 McCarty A 7A
2
Nov
11857 McCarty I 6A
6
30 Nov
11946 Miller F B
C 10
12 Jan
12548 Madlener L 65
K 27
30 Jan
12563 McFall I
A 31
Feb
12024 Manifold W Cav 6 I
9
Feb
12639 Montgomery W “ 5G
17
11 Feb
12709 Maloy I “
G 28
117 June
2007 Nossman G 64
G 15
Newcomb 22 July
3205
George A 12
July
3519 Nucha S Cav 3 I
18
Aug
4627 Napper W H, S’t 6 I
3
38 Aug
6528 Norton N A
B 23
10187 Note John H 39 Oct
 F 1
38 Dec
12226 Nichols J
G 5
Sept
9494 Newberry M Cav 7L
21
Apr
342 Oniel Thomas 6G
2
42 June
1874 Oliver John, Cor
- 12
July
2778 Oliver H H Cav 5M
2
120 Aug
5226 Oliver J
K 10
73 Aug
5361 Osborn J
E 11
19 Sept
7863 Oliver J
D 5
Sept
7911 O’Conner Thos Cav 5B
5
65 Oct
10940 Olinger E
A 14
35 Jan
12544 Ortell M 65
G 27
Feb
12590 Ousley W J 7A 65
5
66 Apr
287 Peache Cyrus 64
D 1
Apr
559 Pashby John Cav 6C
15
123 July
3484 Pavy W
A 17
42 July
3738 Palmer A
F 21
4008 Parker E, S’t 29 July
A 27
129 July
4171 Park John
B 28
53 Aug
4551 Pettis H
C 2
Aug
4553 Pruitt H C Cav 7K
2
22 Aug
5627 Prentice J M
K 14
Penat 38 Aug
6159
Alexander B 19
Aug
6278 Patterson E Cav 4G
20
65 Aug
6874 Parten D R
F 26
89 Sept
7710 Plough J W, S’t
D 3
29 Sept
8661 Pratt William
F 13
Sept
9196 Plumer A 2D
18
Sept
9705 Pope I T, S’t Cav 5G
24
93 Sept
9709 Patterson N S
G 24
39 Oct
10128 Packett T C, S’t
F 1
20 Nov
11880 Pangburn, S’t
B 6
99 Feb
12572 Potts I 65
H 2
12588 Phepps A 30 Feb
 D 4
May
1249 Packer Saml B Cav 6G 64
20
66 May
872 Remy John
B 4
57 May
944 Reed R
F 7
65 May
1065 Remcett L
H 13
117 June
1558 Roll N C
F 2
116 June
1696 Reese L
I 7
June
2140 Robinson L 7 I
18
38 July
4039 Rogman
I 26
39 July
4165 Reiggs K N
K 28
35 July
4400 Richardson I
I 31
117 Aug
5180 Rawlings J W
F 9
Aug
5259 Rains G D 4G
10
29 Aug
5454 Ritter Benjamin
K 12
68 Aug
5542 Ralph G
F 13
Roundbush Aug
6247 6B
Daniel 20
65 Aug
6383 Redyard A
F 21
6754 Russell J 7K Aug
24
Sept
7677 Ringold I Cav 7 I
3
Sept
8488 Russmore E Cav 2C
11
80 Sept
8577 Redman N E
F 12
Richardson 86 Sept
9521
John D 21
19 Aug
9547 Riggs L
E 23
42 Oct
10829 Reeves Wm
F 13
Oct
11410 Rierdon M D Bat 5 -
24
44 Oct
11451 Rutger W, Cor
D 25
13 Nov
11935 Russell W H
C 9
Jan
12454 Robinson R 8G 65
14
127 Jan
12523 Richardson E
E 26
35 May
1440 Ryan Martin 64
B 28
66 Aug
6707 Rawlings E, S’t
C 24
65 Mar
86 Smiley ——
I 21
66 Mar
129 Stein Thomas
D 23
205 Stonts —— 65 Mar
 I 28
Apr
768 Sanderson H Cav 6G
27
65 Apr
817 Sears I
I 30
20 May
901 Shick Eli
C 5
24 May
1039 Smith M C, Cor Bat
- 12
86 May
1331 Smith H
A 24
44 May
1400 Sapp A J
H 26
82 May
1430 Swindle T O, S’t
A 28
116 May
1501 Smith L
A 31
42 June
1611 Schroder W
A 4
66 June
1690 Sparks L D
D 7
June
1732 Search C Cav 5D
8
10 June
2079 Shigley T W
H 17
June
2083 Stinit D Cav 6L 64
17
June
2218 Smudley W 5E
20
30 June
2318 Swain J W
A 22
June
2420 Snow J Cav 5G
24
2447 Stafford J W 68 May
I 25
65 July
2740 Smith J
H 1
July
2799 Stanchley Wm 5K
2
29 July
2923 Stofer L, S’t
B 5
80 July
3416 Spencer M
K 16
128 July
4014 Shields J
F 26
38 July
4054 Smith J W
G 27
79 July
4062 Smith H
H 27
July
4088 Schneider S A Cav 3 -
27
35 July
4229 Sollman C, S’t
D 29
July
4418 Stevens M Cav 6M
31
117 Aug
4630 Snider D
K 3
29 Aug
4799 Summersvolt V
A 5
Aug
5254 Scott B 9D
10
Aug
5418 Smith Samuel E 9C
12
Aug
5513 Shoemaker E W Cav 5 I
13
5514 Sims S 101 Aug
 B 13
Aug
5571 Sackett J Cav 6G
14
68 Aug
5611 Stockman L M
E 14
66 Aug
5884 Standish M
B 16
19 Aug
5977 Stockhoff G
I 17
Aug
6044 Stout H 7G
18
82 Aug
6736 Sipe J
A 24
Aug
6830 Strong L 9F
25
80 Aug
7120 Spellman J
F 28
129 Aug
7264 Shaver F
I 30
Sept
7683 Snyder L Cav 6A
3
Sept
7822 Sanders D 7 I
4
66 Sept
8058 Suthien J H
E 7
Sept
8107 Starkey I Cav 6 I
7
123 Sept
8262 Sizeman I
B 9
Stagewald J M, 22 Sept
8313
S’t K 10
21 Sept
8623 Swillenger F
I 13
8666 Sylvanus J J 35 Sept
G 13
30 Sept
8727 Shoel J P
B 14
Sept
8910 Storm L M, S’t 6A
16
84 Sept
9093 Simmons J
I 18
13 Sept
9252 Sharp D M
E 19
43 Sept
9546 Sharpless W
G 23
17 Sept
9623 Smith S B
F 24
65 Sept
9807 Skeels W
A 26
131 Oct
10790 Smith George
D 12
39 Oct
10949 Smith I
I 14
44 Oct
11006 Sloat G W, S’t
B 16
Oct
11187 Seigfred G H Cav 4 I
19
Oct
11427 Sweitzer J 2G
24
99 Nov
11842 Shaw W R
B 5
74 Nov
11969 Shoe G W
E 12
29 Nov
11984 Steamer F
F 13
12113 Scarff F Cav 6D Nov
 21
93 Jan
12381 Starke M S 65
D 2
Jan
12492 Salts H C Cav 4F
20
12 Feb
12582 Smith D H “
H 3
66 Feb
12615 Sides G
A 8
Feb
12666 Smure C Cav 2G
17
38 Mar
12724 Stewart E B
E 3
72 Mar
12809 Staley G W
A 24
82 June
2625 Sattershwait A 64
I 28
117 Apr
518 Tenher James
I 13
65 July
3778 Tunblora B
B 22
July
3791 Thompson T Cav 6C
22
42 Aug
4733 Tooley G W
H 4
Aug
5065 Truman L H, S’t Cav 6G
8
63 Aug
5403 Taylor N 64
I 12
42 Aug
6509 Tooley W R, Cor
H 22
Aug
6719 Todd T 6B
24
7096 Thomas H D 42 Aug
I 28
Sept
7442 Taylor Geo H Cav 4M
1
30 Sept
8495 Trumble D A
A 11
25 Sept
8525 Taylor E
I 12
Oct
10438 Thomas M Cav 2 -
6
Nov
12337 Tucer B, Cit - -
26
Feb
12609 Terhune C Cav 9A 65
7
Tasnahet Chas, 33 Oct
10219 64
S’t E 2
Sept
10356 Underwood P Cav 7C
5
52 Oct
10760 Upton F M
A 12
June
1717 Voit T Cav 6K
8
30 Aug
5363 Venome James
K 11
93 Aug
6250 Vanose J
B 20
42 Sept
7691 Verhouse D
A 3
117 Mar
135 Windinger J
G 24
May
886 Walters J H, Cor Cav 6G
5
934 Williams A 6G May
 7
May
1194 Wright Saml Cav 6 I
18
June
1776 White P “ 6C
9
88 June
1812 Wise Eli
D 10
65 June
1918 Warren E
H 14
38 June
2107 Williams F
F 17
June
2242 West E Cav 7H
20
29 June
2363 Woodward W W
A 23
75 June
2417 Wilson J N
G 24
44 June
2467 Warden I
B 25
37 June
2554 Warren E
I 27
79 June
2670 Ward J
F 29
13 July
2900 Wyn W E
D 5
116 July
2929 Wislake I
I 5
July
2934 Wicks L Cav 6H
6
29 Aug
4528 Whitehead J
I 2
36 Aug
4639 Winship James
K 4
4826 Witt T 125 Aug
D 5
81 Aug
5399 Wade C
K 12
Aug
5547 Waynin J H Cav 4 I
13
Aug
6132 Washburn R H “ 6A
19
120 Aug
6405 Winders A
I 21
Aug
6524 Wagner M Cav 5 I
25
84 Aug
7184 Winters F W
C 29
42 Aug
7191 Wagoner E
A 29
Aug
7349 Witzgall John 2D
31
13 Sept
8943 Weiber Charles
F 16
Sept
9228 White W 7E
19
81 Sept
9316 Watkins J
A 20
129 Sept
6418 Wellington H
I 21
Sept
9501 Wilson J B 6E
21
Sept
9998 Wagner F 7D
29
29 Oct
10648 Ward J
G 11
11141 Whitehead N B Cav 5L Oct
 18
Oct
11424 White R B 6D
24
Oct
11602 Walters J 5 I
28
35 Nov
12708 Winebrook P
B 18
32 Dec
12316 Werper J
E 20
Dec
12341 White J 7A
26
13 Jan
12402 Wells J M 65
D 16
93 Jan
12497 What J
B 21
10 Mar
12737 Wade W Cav
M 6
July
3837 Weltz Ira, S’t 4B 64
23
Aug
6000 West S N, Cor 7B
17
38 Sept
9920 Williams J A, S’t
C 28
Aug
5055 Younce Chas A Cav 7 I
8
28 Aug
5838 Yorker Daniel
B 16
65 June
1540 Zuet J
H 1
Total
593.
 IOWA.
Aug
5560 Allen N 3K 64
13
Sept
8974 Ankobus L. Cor 6 I
17
11 Sept
9472 Ashford A W
C 21
31 Nov
11784 Alderman W W
F 4
Nov
11896 Austin Wm Cav 3A
7
May
1293 Bartche C P 5K
23
39 June
1570 Bingman W H
H 3
Aug
5276 Blanchard A 7A
10
Aug
6164 Bunsford M 7F
19
26 Sept
7779 Baird J J
H 4
15 Sept
8265 Buckmaster F
K 9
4 Sept
9301 Buell J
D 20
14 Sept
9456 Boylan C
G 21
Sept
9691 Boles M B - I
24
10749 Bellings J 5B Oct
 12
3 Oct
11334 Blakeley Geo
G 23
Collins Henry, 4 Mar
167
S’t G 26
April
328 Chenworth Wm 4K
2
27 Aug
4582 Cromwell G W
F 2
Aug
5101 Cooper S 5B
9
5 Aug
5244 Cox E E, Cor
G 9
5 Aug
5620 Cox W A
G 14
31 Aug
5999 Coder E
E 17
Aug
6378 Cox H 5 I
21
26 Aug
6604 Clamson Henry
I 23
Aug
6848 Collins M 3L
25
Culbertson S, 5 Sept
8062
Cor H 7
Sept
8352 Crow B 4E
10
Sept
9784 Coles J W, S’t 8K
26
3 Sept
9820 Cobb E Cav
C 26
Sept
10037 Cramer J M “ 5B
29
10901 Chapman J 3 Oct
G 14
Dec
12230 Chamberlain J B C 8A
6
June
2903 Davis S 3E
30
15 July
4206 Davis J
D 29
17 Sept
9229 Davis H
A 19
5 Aug
4675 Dermott L
G 4
26 Aug
6849 Discol S
I 25
31 Sept
9852 Dingman W
D 27
5 Oct
11098 Denoya W H
M 18
6 Nov
11753 Dutlin S Cav
C 2
12 Dec
12245 Durochis Wm
H 8
Derickson W W, 8 Feb
12657 C 65
Cor M 15
Mar
262 Ennis Wm 4B 64
31
Oct
11414 England G 9F
24
July
3705 Field Jacob 5K
21
2 Aug
4503 Farnsworth S
H 1
1316 Forney James M 10 May
 K 23
10 Sept
7715 Frue J
- 3
16 Sept
7378 Frederick J A
C 5
6 Sept
8380 Frussell G W
D 10
16 Sept
10048 Fordson Michael
H 29
Oct
11078 Fener J W Cav 3B
17
15 Feb
12701 Ferguson A W 65
A 28
6 April
750 Gain L 64
C 26
May
1484 Gender Jacob 5 I
30
4 Aug
5004 Gentle G
G 8
26 Aug
5836 Gunshaw C
- 16
11 Oct
10511 Gray J
C 7
8 Oct
10306 Gothard J
G 11
8 Aug
5461 Harris J Cav
H 13
11 Sept
8106 Hastings J, S’t
B 7
3 Sept
9379 Hird D, Cor
G 20
16 Sept
9417 Hudson M
B 21