Question 1

A depreciation of the real exchange rate in a small open economy could be the result of:

Accepted Answer

A) a domestic tax cut. 
B) an increase in government spending. 
C) a decrease in the world interest rate. 
D) the expiration of an investment tax-credit provision. 
A) a domestic tax cut. 
B) an increase in government spending. 
C) a decrease in the world interest rate. 
D) the expiration of an investment tax-credit provision. D

Question 2

Fill in the blanks: According to the national income accounts identity, an economy's _____ must always equal the difference between its _____ and its _____.

Accepted Answer

Net exports; savings; investment

Question 3

In the 2008 global financial crisis, many investors considered the U.S. economy a safe place to move their assets. What is the predicted impact of this inflow of financial capital to the United States on the U.S. interest rate and the U.S. exchange rate, holding other factors constant? Illustrate your answer graphically and explain in words.

Accepted Answer

​   The reduction in net capital outflows reduces the demand for loanable funds, which reduces the domestic interest rate. The lower domestic interest rate partially offsets some of the initial decrease in net capital outflows from the United States, but there is an overall decrease in net capital outflows. The reduction in net capital inflows reduces the supply of dollars in the foreign exchange market and increases the real exchange rate.

Question 4

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit _____ net exports, and the real exchange rate _____.

Accepted Answer

A) increases; appreciates 
B) increases; depreciates 
C) decreases; appreciates 
D) decreases; depreciates 
A) increases; appreciates 
B) increases; depreciates 
C) decreases; appreciates 
D) decreases; depreciates

Question 5

Exhibit: Policies Influence Real Exchange Rate   Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate?

Accepted Answer

A) (
A)  
B) (
B)  
C) (
C)  
D) (
D)  
A) (
A)  
B) (
B)  
C) (
C)  
D) (
D)

Question 6

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _____ and _____ net capital outflow.

Accepted Answer

A) deficit; negative 
B) surplus; positive 
C) deficit; positive 
D) surplus; negative 
A) deficit; negative 
B) surplus; positive 
C) deficit; positive 
D) surplus; negative

Question 7

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

Accepted Answer

A) vertical line at 0. 
B) horizontal line at the world real interest rate. 
C) line that slopes up and to the right. 
D) line that slopes down and to the right. 
A) vertical line at 0. 
B) horizontal line at the world real interest rate. 
C) line that slopes up and to the right. 
D) line that slopes down and to the right.

Question 8

Exhibit: Saving and Investment in a Small Open Economy   In a small open economy, if the world interest rate is r3, then the economy has:

Accepted Answer

A) a trade surplus. 
B) balanced trade. 
C) a trade deficit. 
D) positive capital outflows. 
A) a trade surplus. 
B) balanced trade. 
C) a trade deficit. 
D) positive capital outflows.

Question 9

The value of net exports is also the value of:

Accepted Answer

A) net investment. 
B) net saving. 
C) national saving. 
D) the difference of national saving and domestic investment. 
A) net investment. 
B) net saving. 
C) national saving. 
D) the difference of national saving and domestic investment.

Question 10

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

Accepted Answer

A) borrowing from abroad. 
B) borrowing from domestic banks. 
C) the domestic government. 
D) the World Bank. 
A) borrowing from abroad. 
B) borrowing from domestic banks. 
C) the domestic government. 
D) the World Bank.

Question 11

Expansionary fiscal policy in a large open economy _____ the real interest rate and _____ the real exchange rate.

Accepted Answer

A) does not change; increases 
B) increases; increases 
C) increases; decreases 
D) decreases; increases 
A) does not change; increases 
B) increases; increases 
C) increases; decreases 
D) decreases; increases

Question 12

The world interest rate:

Accepted Answer

A) is equal to the domestic interest rate. 
B) makes domestic saving equal to domestic investment. 
C) is the interest rate charged on loans by the World Bank. 
D) is the interest rate prevailing in world financial markets. 
A) is equal to the domestic interest rate. 
B) makes domestic saving equal to domestic investment. 
C) is the interest rate charged on loans by the World Bank. 
D) is the interest rate prevailing in world financial markets.

Question 13

Figure: Small Open Economy   From this graph, what is the world interest rate at which there will be equilibrium in the capital market of a small open economy?

Accepted Answer

The answer of Figure: Small Open Economy   From...

Question 14

Graphically illustrate the relationship between the real exchange rate and net exports.

Accepted Answer

The answer of Graphically illustrate the relationship between the real...

Question 15

If net capital outflow is positive, then:

Accepted Answer

A) imports must be positive. 
B) exports must be negative. 
C) the trade balance must be positive. 
D) the trade balance must be negative. 
A) imports must be positive. 
B) exports must be negative. 
C) the trade balance must be positive. 
D) the trade balance must be negative.

Question 16

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

Accepted Answer

A) -$25 billion. 
B) -$10 billion. 
C) $10 billion. 
D) $25 billion. 
A) -$25 billion. 
B) -$10 billion. 
C) $10 billion. 
D) $25 billion.

Question 17

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

Accepted Answer

A) increasing taxes 
B) increasing government spending 
C) increasing investment tax credits 
D) imposing protectionist trade policies 
A) increasing taxes 
B) increasing government spending 
C) increasing investment tax credits 
D) imposing protectionist trade policies

Question 18

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

Accepted Answer

A) make loans to the domestic government. 
B) make loans to foreigners. 
C) repay the national debt. 
D) repay loans to the Bank of Canada. 
A) make loans to the domestic government. 
B) make loans to foreigners. 
C) repay the national debt. 
D) repay loans to the Bank of Canada.

Question 19

The real exchange rate is determined by the equality of:

Accepted Answer

A) saving and the demand for net exports. 
B) investment and the demand for net exports. 
C) net capital outflow and the demand for net exports. 
D) the negative value of net capital outflow and the demand for net exports. 
A) saving and the demand for net exports. 
B) investment and the demand for net exports. 
C) net capital outflow and the demand for net exports. 
D) the negative value of net capital outflow and the demand for net exports.

Question 20

If a country has a high rate of inflation relative to Canada (holding the real exchange rate fixed), the dollar will buy:

Accepted Answer

A) less of the foreign currency over time. 
B) more of the foreign currency over time. 
C) the same amount of the foreign currency over time. 
D) an amount of foreign currency determined by the real exchange rate. 
A) less of the foreign currency over time. 
B) more of the foreign currency over time. 
C) the same amount of the foreign currency over time. 
D) an amount of foreign currency determined by the real exchange rate.

A depreciation of the real exchange rate in a small open economy could be the result of:

Fill in the blanks: According to the national income accounts identity, an economy's ___ must always equal the difference between its _ and its ___.

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit _ net exports, and the real exchange rate _.

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate?

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _ and _ net capital outflow.

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

Exhibit: Saving and Investment in a Small Open Economy In a small open economy, if the world interest rate is r₃, then the economy has:

The value of net exports is also the value of:

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

Expansionary fiscal policy in a large open economy _ the real interest rate and _ the real exchange rate.

The world interest rate:

Figure: Small Open Economy From this graph, what is the world interest rate at which there will be equilibrium in the capital market of a small open economy?

Graphically illustrate the relationship between the real exchange rate and net exports.

If net capital outflow is positive, then:

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

The real exchange rate is determined by the equality of:

If a country has a high rate of inflation relative to Canada (holding the real exchange rate fixed), the dollar will buy:

The Science of Macroeconomics

The Data of Microeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

Unemployment and the Labour Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Islm Model

Aggregate Demand Ii: Applying the Islm Model

The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

The Microfoundations of Consumption and Investment

Filters

Exam 6: The Open Economy

A depreciation of the real exchange rate in a small open economy could be the result of:

Fill in the blanks: According to the national income accounts identity, an economy's _____ must always equal the difference between its _____ and its _____.

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit _____ net exports, and the real exchange rate _____.

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate?

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _____ and _____ net capital outflow.

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

Exhibit: Saving and Investment in a Small Open Economy In a small open economy, if the world interest rate is r3, then the economy has:

The value of net exports is also the value of:

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

Expansionary fiscal policy in a large open economy _____ the real interest rate and _____ the real exchange rate.

The world interest rate:

Figure: Small Open Economy From this graph, what is the world interest rate at which there will be equilibrium in the capital market of a small open economy?

Graphically illustrate the relationship between the real exchange rate and net exports.

If net capital outflow is positive, then:

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

The real exchange rate is determined by the equality of:

If a country has a high rate of inflation relative to Canada (holding the real exchange rate fixed), the dollar will buy:

The Science of Macroeconomics

The Data of Microeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

Unemployment and the Labour Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Islm Model

Aggregate Demand Ii: Applying the Islm Model

The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

The Microfoundations of Consumption and Investment

Filters

Fill in the blanks: According to the national income accounts identity, an economy's ___ must always equal the difference between its _ and its ___.

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit _ net exports, and the real exchange rate _.

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _ and _ net capital outflow.

Exhibit: Saving and Investment in a Small Open Economy In a small open economy, if the world interest rate is r₃, then the economy has:

Expansionary fiscal policy in a large open economy _ the real interest rate and _ the real exchange rate.