Question 1

When a government raises its budget deficit, then that country's

Accepted Answer

A)  national saving rises, so its supply of loanable funds shifts right.
B)  national saving falls, so its supply of loanable funds shifts left.
C)  national saving rises, so its demand for loanable funds shifts right.
D)  national saving falls, so its demand for loanable funds shifts left.E) A) and B)
F) B) and C)

Question 2

If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion euros, what is the quantity of euros demanded in the market for foreign-currency exchange?

Accepted Answer

A)  1,100 billion euros
B)  600 billion euros
C)  500 billion euros
D)  200 billion eurosE) B) and D)
F) A) and C)

Question 3

If a country's government moves from a budget deficit to a budget surplus, which curve in the market for loanable funds shifts and which direction does it shift? What happens to the interest rate?

Accepted Answer

The supply of loanab...

Question 4

What happens to domestic investment as the real interest rate rises? Explain your answer.

Accepted Answer

As the real interest rate rise...

Question 5

U.S. corporation Wright Air Conditions borrows funds to build a factory in the U.S. and a factory in Mexico. Borrowing for factories in which location(s)  is included in the U.S. demand for loanable funds?

Accepted Answer

A)  only the U.S.
B)  only Mexico
C)  Mexico and the U.S.
D)  neither Mexico nor the U.S.E) A) and B)
F) None of the above

Question 6

In the open-economy macroeconomic model, the

Accepted Answer

A)  exchange rate adjusts to equate private saving with the sum of investment, net exports, and net capital outflow.
B)  exchange rate adjusts to equate national saving with the sum of investment and net capital outflow.
C)  interest rate adjusts to equate private saving with the sum of investment, net exports, and net capital outflow.
D)  interest rate adjusts to equate national saving with the sum of investment and net capital outflow.E) C) and D)
F) A) and D)

Question 7

If the government budget deficit rises, what happens to the interest rate? What does this change in the interest rate do to net capital outflow? Provide a detailed explanation of why this change in the interest rate changes net capital outflow.

Accepted Answer

The interest rate rises. The increase in...

Question 8

If the government of India implemented a policy that decreased national saving, its real exchange rate would

Accepted Answer

A)  depreciate and Indian net exports would rise.
B)  depreciate and Indian net exports would fall.
C)  appreciate and Indian net exports would rise.
D)  appreciate and Indian net exports would fall.E) A) and C)
F) B) and D)

Question 9

Refer to Figure 32-3. The curve in panel b shows that as the interest rate rises,

Accepted Answer

A)  domestic investment declines.
B)  net capital outflow declines.
C)  net capital outflow and domestic investment decline.
D)  None of the above is correct.E) A) and B)
F) B) and C)

Question 10

Refer to Depositors Move Funds Out of Greek Banks. What happened to the domestic equilibrium interest rate and quantity of loanable funds supplied?

Accepted Answer

Both the equilibrium...

Question 11

Suppose a country experiences capital flight. Of the demand for loanable funds and the supply of currency in the market for foreign-currency exchange, which shifts right?

Accepted Answer

A)  only the demand for loanable funds
B)  only the supply of its currency in the market for foreign-currency exchange
C)  both curves shift right
D)  neither curve shifts rightE) A) and D)
F) B) and C)

Question 12

In the long run, import quotas increase net exports.

Accepted Answer

A) True 
 B)False

Question 13

When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds

Accepted Answer

A)  and U.S. net capital outflow rose.
B)  and U.S. net capital outflow fell.
C)  fell and U.S. net capital outflow rose.
D)  rose and U.S. net capital outflow fell.E) None of the above
F) B) and C)

Question 14

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate

Accepted Answer

A)  and the quantity of dollars traded rises.
B)  rises and the quantity of dollars traded falls.
C)  falls and the quantity of dollars traded rises.
D)  and the quantity of dollars traded falls.E) All of the above
F) C) and D)

Question 15

Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

Accepted Answer

The supply of loanable funds increases, ...

Question 16

Which of the following is considered part of the supply of U.S. dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

Accepted Answer

A)  both a U.S. bank wanting to lend money to a Canadian company and a U.S. firm wanting to buy computers made in South Korea
B)  a U.S. bank wanting to lend money to a Canadian company, but not a U.S. firm wanting to buy computers made in South Korea
C)  a U.S. firm wanting to buy computers made in South Korea, but not a U.S.bank wanting to lend money to a Canadian company
D)  neither a U.S. bank wanting to lend money to a Canadian company nor a U.S. firm wanting to buy computers made in South KoreaE) B) and C)
F) A) and B)

Question 17

Refer to Figure 32-3. Which curve is determined by net capital outflow only?

Accepted Answer

A)   the demand curve in panel a.
B)   the demand curve in panel c.
C)   the supply curve in panel a.
D)   the supply curve in panel c.E) A) and B)
F) None of the above

Question 18

If the exchange rate rises, which of the following falls in the open-economy macroeconomic model?

Accepted Answer

A)  desired net exports and desired net capital outflow
B)  desired net exports but not desired net capital outflow
C)  desired net capital outflow but not desired net exports
D)  neither desired net exports nor desired net capital outflowE) A) and D)
F) A) and C)

Question 19

When Mexico suffered from capital flight in 1994, Mexico's real interest rate

Accepted Answer

A)  fell and the peso appreciated.
B)  fell and the peso depreciated.
C)  rose and the peso appreciated.
D)  rose and the peso depreciated.E) A) and B)
F) C) and D)

Question 20

If U.S. net exports are negative, then net capital outflow is

Accepted Answer

A)  positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.
B)  positive, so American assets bought by foreigners are greater than foreign assets bought by Americans.
C)  negative, so foreign assets bought by Americans are greater than American assets bought by foreigners.
D)  negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.E) A) and B)
F) A) and C)

Exam 32: A Macroeconomic Theory of the Open Economy

When a government raises its budget deficit, then that country's

Correct AnswerverifiedShow Answer

If the exchange rate rises, which of the following falls in the open-economy macroeconomic model?

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When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds

Correct AnswerverifiedShow Answer

Which of the following is considered part of the supply of U.S. dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

Correct AnswerverifiedShow Answer

Suppose a country experiences capital flight. Of the demand for loanable funds and the supply of currency in the market for foreign-currency exchange, which shifts right?

Correct AnswerverifiedShow Answer

If the government budget deficit rises, what happens to the interest rate? What does this change in the interest rate do to net capital outflow? Provide a detailed explanation of why this change in the interest rate changes net capital outflow.

Correct AnswerverifiedThe interest rate rises. The increase in...View AnswerShow Answer

Refer to Figure 32-3. The curve in panel b shows that as the interest rate rises,

Correct AnswerverifiedShow Answer

If the government of India implemented a policy that decreased national saving, its real exchange rate would

Correct AnswerverifiedShow Answer

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate

Correct AnswerverifiedShow Answer

Refer to Depositors Move Funds Out of Greek Banks. What happened to the domestic equilibrium interest rate and quantity of loanable funds supplied?

Correct AnswerverifiedBoth the equilibrium...View AnswerShow Answer

Refer to Figure 32-3. Which curve is determined by net capital outflow only?

Correct AnswerverifiedShow Answer

If U.S. net exports are negative, then net capital outflow is

Correct AnswerverifiedShow Answer

U.S. corporation Wright Air Conditions borrows funds to build a factory in the U.S. and a factory in Mexico. Borrowing for factories in which location(s) is included in the U.S. demand for loanable funds?

Correct AnswerverifiedShow Answer

In the open-economy macroeconomic model, the

Correct AnswerverifiedShow Answer

What happens to domestic investment as the real interest rate rises? Explain your answer.

Correct AnswerverifiedAs the real interest rate rise...View AnswerShow Answer

When Mexico suffered from capital flight in 1994, Mexico's real interest rate

Correct AnswerverifiedShow Answer

Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

Correct AnswerverifiedThe supply of loanable funds increases, ...View AnswerShow Answer

In the long run, import quotas increase net exports.

Correct AnswerverifiedShow Answer

If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion euros, what is the quantity of euros demanded in the market for foreign-currency exchange?

Correct AnswerverifiedShow Answer

If a country's government moves from a budget deficit to a budget surplus, which curve in the market for loanable funds shifts and which direction does it shift? What happens to the interest rate?

Correct AnswerverifiedThe supply of loanab...View AnswerShow Answer

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The interest rate rises. The increase in...
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Both the equilibrium...
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As the real interest rate rise...
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The supply of loanable funds increases, ...
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The supply of loanab...
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