# NCERT Solutions for Class 12 Economics Introductory Macroeconomics Chapter 6

## Open Economy Macroeconomics Class 12

### Exercise : Solutions of Questions on Page Number : 96

Q1 :

Differentiate between balance of trade and current account balance.

 Points of difference Balance of trade Current account balance Definition It is the difference between the values of exports and imports of goods of a country. It is the difference between the values of exports and imports of goods, services and unilateral transfers of a country. Components 1. Export of goods 2. Import of goods Export and import of goods, export and import of services, unilateral transfers. Nature of transactions It records transactions related to visible items (i.e. goods) only. It records the transactions related to visible items (goods) as well as invisible items (services) and unilateral transfers.

Q2 :

What are official reserve transactions? Explain their importance in the balance of payments.

The transactions carried by monetary authority of a country, which cause changes in official reserves, are termed as official reserve transactions (ORT). These transactions are carried through purchase or sale of currency in the exchange market for foreign currencies or other assets. The reserves are drawn by selling foreign currencies in exchange market during deficits and foreign currencies are purchased during surplus. When the official reserves increases or decreases, it is called overall balance of payments surplus or deficit respectively.

Importance of ORT in balance of payments:

1. Purchase of a country's own currency is a credit item in the balance of payments; whereas, sale of the currency is a debit item.

2. It helps to adjust the deficit and surplus in balance of payments.

Q3 :

Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.

Q4 :

Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in terms of Indian goods). (Hint: First find out the nominal exchange rate as a price of yen in rupees).

Q5 :

Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.

Q6 :

How is the exchange rate determined under a flexible exchange rate regime?

Q7 :

Differentiate between devaluation and depreciation.

Q8 :

Would the central bank need to intervene in a managed floating system? Explain why.

Q9 :

Are the concepts of demand for domestic goods and domestic demand for goods the same?

Q10 :

What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?

Q11 :

Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?

Q12 :

Calculate the open economy multiplier with proportional taxes, T = tY, instead of lump-sum taxes as assumed in the text.

Q13 :

Suppose C = 40 + 0.8Y D. T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y

(a) Find equilibrium income

(b) Find the net export balance at equilibrium income

(c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 to 50?

Q14 :

In the above example, if exports change to X = 100, find the change in equilibrium income and the net export balance.

Q15 :

Explain why G - T = (Sg - I) - (X - M).

Q16 :

If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed, what is likely to happen to the trade balance between the two countries?

Q17 :

Should a current account deficit be a cause for alarm? Explain.

Q18 :

Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.