Possible answers for sentence are \" Increase or Decrease\" Please explain how y
ID: 1197453 • Letter: P
Question
Possible answers for sentence are " Increase or Decrease"
Please explain how you get the answers. Thank you.
4. Net capital outflow and net exports An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true: Net Capital Outflow = Net Exports In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold Suppose you own a toy store in the United States, where there is high demand for the PlayNation Perfect, a video game console. Because of this, you spend $10,000 to increase your inventory of the gaming system, which is manufactured by Zony, a Japanese company, in Japan. Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "O" in the Magnitude of Change column. Hint: The magnitude of change should always be positive, regardless of the direction of changeExplanation / Answer
It has been provided that gaming syatem is manufactured by a Japanese company in Japan.
When local store in US increases the inventory of the gaming system manufactured by Japanese company in Japan then this implies that import of goods.
So, United States is importing additional goods worth $10,000.
Net Exports = Exports - Imports
With no change in exports (as no information about exports is provided), this increase in imports by $10,000 will decrease the net exports by $10,000.
Following is the complete table -
Magnitude of Change
(Dollars)
Given identity states that -
Net Capital Outflow = Net Exports
So, this decrease in net exports is matched by a decrease in net capital outflow as well and with same magnitude then only identity can hold.
So,
Because of the identity equation that relates to net exports, the decrease in US net exports is matched by decrease in US net capital outflow.
US net capital outflow = Acquisition of foriegn assets by US residents - Acquisition of US assets by foriegners
US net capital outflow can decrease if either acquisition of foriegn assets by US residents decreases or acquisition of US assets by foriegners increases.
Out of the three given options, two options - Zony purchases $10,000 worth of stock in a US company and Zony purchases $10,000 worth of US bonds - points towards the transactions that will decrease the US net capital outflow as any of these transaction will increase acquisition of US assets by foriegners.
Hence, the correct answer is option (1) and (3).
Direction of ChangeMagnitude of Change
(Dollars)
Exports No change $0 Imports Increase $10,000 Net Exports Decrease $10,000