Questions 1 and 2 relate to content and skills covered in Week 6 of the Weekly Study Program, Chapter 31 of Gans et al. (2012)
Question 3 relates to content and skills covered in Week 7 of the Weekly Study Program, Chapter 32 of Gans et al.
Question 1 [Word limit: Approximately 150-250 words]Marks: 10 marksExplain how net foreign investment measures the international flow of capital.Hint: Provide possible examples or case studies.Question 2 [Word limit: Approximately 150-300 words]Marks: 10 marksExamine how the purchasing-power parity theory determines exchange rates.
Question 3 [Word limit: Approximately 500 words]Marks: 20 marksUse a diagram of the open economy model (e.g. fig 32.4 from the text) to illustrate and explain the effect of the following event on the market for loanable funds, the level of net foreign investment and the market for foreign-currency exchange. In your answer make sure you discuss the impact on the following variables:• Interest rates, public savings, private savings, national savings, investment, net foreign investment, supply of currency, the exchange rate and the level of net exports.Event: There is a decline in consumer confidence in the economyNote: Ignore the detail and politics of this event. Focus only on analysing the market adjustment in each case. Fully explain all the transmission mechanism.