Homework 5 2015

Homework 5 (based on chapter 32) – worth 20 points During the so-called euro crisis investors holding government bonds of various countries suddenly realized that some countries are more risky than others. As the result they transferred large amount of capital from risky countries (like Greece) to “safe heavens”, for example Switzerland. Using the 3-diagrams model of chapter 32 graph and explain the effects of this capital inflow on the economy of Switzerland. Try to explain, how will the following variables change (in Switzerland): a) real interest rate, b) net capital outflow, c) domestic investment, d) national savings, e) nominal exchange rate (the value of Swiss franc) f) real exchange rate, g) trade balance (net exports) What do you think, is Switzerland happy about this? (you may try to search on the Internet, and find out what are Swiss authorities doing about this)

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