Week 16 Growth in Open Economy Q&A Session
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Questions and Answers

What is the relationship between financial openness and GDP per capita according to the text?

  • GDP per capita increases when the interest rate is higher than the rate of return on capital.
  • GDP per capita decreases when the capital stock per capita is higher.
  • GDP per capita decreases when the interest rate is lower than the rate of return on capital. (correct)
  • GDP per capita increases when the capital stock per capita is lower.

    • How does financial openness affect the convergence process in an economy?

  • It has no effect on the convergence process.
  • It halts the convergence process by decreasing capital outflows.
  • It slows down the convergence process by decreasing capital inflows.
  • It accelerates the convergence process by increasing capital inflows. (correct)

    • Why do countries with higher productivity growth receive more capital inflows according to the text?

  • They borrow more from abroad to invest in lower productivity sectors.
  • Their increased productivity leads to a higher return on investment, attracting more capital inflows. (correct)
  • Higher productivity reduces the need for capital inflows due to self-sufficiency.
  • Higher productivity increases savings rates, attracting more capital inflows.

    • What happens to a country's capital stock per capita when it borrows from abroad?

    <p>It increases due to higher investment levels.</p> Signup and view all the answers

    In an open economy, how does an increase in savings rate affect GDP per capita?

    <p>It increases GDP per capita by boosting investment levels.</p> Signup and view all the answers

    Why do countries with higher productivity growth lend to abroad rather than borrow according to the text?

    <p>Higher productivity enables countries to invest surplus funds abroad for higher returns.</p> Signup and view all the answers

    In a closed economy, what happens to the capital stock per capita (kc) when savings (s) is low?

    <p>kc is low because the cost of capital (Rc) is high</p> Signup and view all the answers

    What is the relationship between the capital stock per capita (k) and the return on capital (MPK) in a closed economy?

    <p>MPK decreases as k increases due to diminishing returns to capital</p> Signup and view all the answers

    In an open economy with access to world capital markets, what determines the capital stock per capita (kc) for a country?

    <p>The world interest rate (r*)</p> Signup and view all the answers

    How does access to world capital markets affect a country's GDP per capita?

    <p>It increases GDP per capita by allowing more capital investment</p> Signup and view all the answers

    What is the relationship between the capital supply curve (KS) and the capital demand curve (KD) in a closed economy?

    <p>KS is a vertical line, and KD is a downward-sloping curve</p> Signup and view all the answers

    What is the condition for capital market equilibrium in a closed economy?

    <p>All of the above</p> Signup and view all the answers

    According to the given information, what determines the output per capita in an open economy?

    <p>The level of capital stock per capita (k) and the productivity parameter (A)</p> Signup and view all the answers

    In an open economy with access to world capital markets, what is the shape of the capital supply (KS) curve in the (k, r) space?

    <p>Horizontal line</p> Signup and view all the answers

    If the initial capital stock per capita (k0) is less than the steady-state level (k*) in an open economy, what is the impact of financial openness on capital convergence?

    <p>The economy converges to the steady-state instantaneously by borrowing from abroad</p> Signup and view all the answers

    According to the information provided, what is the relationship between the capital stock per capita (k) and the world interest rate (r*) in an open economy?

    <p>k is independent of r* as it is determined by the world capital markets</p> Signup and view all the answers

    If the initial capital stock per capita (k0) is greater than the steady-state level (k*) in an open economy, what is the expected capital flow direction?

    <p>Capital will flow out of the economy as domestic investors seek higher returns abroad</p> Signup and view all the answers

    What is the impact of financial openness on the production function and the diminishing returns to capital in an open economy?

    <p>Financial openness does not change the production function, and diminishing returns to capital still exist</p> Signup and view all the answers

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