Question 1

In an open economy, the domestic real interest rate is determined by:

Accepted Answer

A) domestic saving 
B) domestic investment 
C) domestic saving and domestic investment 
D) domestic saving, domestic investment and net capital inflows 
A) domestic saving 
B) domestic investment 
C) domestic saving and domestic investment 
D) domestic saving, domestic investment and net capital inflows D

Question 2

An appreciation of the Australian real exchange rate:

Accepted Answer

A) reduces the quantity of dollars demanded in the market for foreign-currency exchange 
B) makes Australian goods become more expensive relative to foreign goods 
C) makes Australian goods more attractive to consumers at home and abroad 
D) reduces Australian exports and increases Australian imports 
A) reduces the quantity of dollars demanded in the market for foreign-currency exchange 
B) makes Australian goods become more expensive relative to foreign goods 
C) makes Australian goods more attractive to consumers at home and abroad 
D) reduces Australian exports and increases Australian imports C

Question 3

Whereas in the long-run macroeconomic model of a closed economy, monetary changes affect only nominal variables, in the long-run macroeconomic model of an open economy, monetary changes also affect real variables.

Accepted Answer

A) True 
 B)False  False

Question 4

In the market for foreign-currency exchange, the demand curve represents:

Accepted Answer

A) national saving 
B) private saving 
C) net foreign investment 
D) domestic investment 
E) none of the above 
A) national saving 
B) private saving 
C) net foreign investment 
D) domestic investment 
E) none of the above

Question 5

A removal of trade restrictions:

Accepted Answer

A) reduces the interference upon gains from trade and therefore increases overall economic wellbeing 
B) alters a country's balance of trade and therefore are fully justified 
C) can be used to punish other countries and therefore are fully justified 
D) protect domestic jobs and therefore are fully justified 
A) reduces the interference upon gains from trade and therefore increases overall economic wellbeing 
B) alters a country's balance of trade and therefore are fully justified 
C) can be used to punish other countries and therefore are fully justified 
D) protect domestic jobs and therefore are fully justified

Question 6

If money is neutral, the nominal exchange rate must _____ when the domestic price level rises.

Accepted Answer

A) fall 
B) rise 
C) not change 
D) none of the above 
A) fall 
B) rise 
C) not change 
D) none of the above

Question 7

Because trade policies do not affect a country's overall trade balance, they also do not affect specific firms, industries and foreign countries.

Accepted Answer

A) True 
 B)False

Question 8

The concept of income elasticity of demand is also an explanation of how nations behave when the cost of luxury imports increase in price.

Accepted Answer

A) True 
 B)False

Question 9

For given risk levels, a relatively higher return in one country will lead to capital inflow to that country.For given returns, a relatively higher degree of risk in one country will lead to capital outflows from that country.

Accepted Answer

A) True 
 B)False

Question 10

In an open economy, an increase in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

Accepted Answer

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

Question 11

In an open economy, a government budget deficit raises real interest rates, crowds out domestic investment, causes the currency to appreciate and pushes the trade balance towards deficit.

Accepted Answer

A) True 
 B)False

Question 12

Net foreign investment represents the quantity of dollars demanded in the foreign-currency exchange market.

Accepted Answer

A) True 
 B)False

Question 13

If the market for foreign-currency supply comes from _____, demand comes from the _____.

Accepted Answer

A) net foreign investment; current account balance 
B) trade deficit; capital outflows 
C) capital account deficit; current account deficit 
D) capital account surplus; current account surplus 
A) net foreign investment; current account balance 
B) trade deficit; capital outflows 
C) capital account deficit; current account deficit 
D) capital account surplus; current account surplus

Question 14

Low government saving has NOT contributed to the recent large ________ in Australia.

Accepted Answer

A) household savings 
B) increase in household debt 
C) strong investment 
D) trade deficits 
A) household savings 
B) increase in household debt 
C) strong investment 
D) trade deficits

Question 15

A country with a low saving rate tends to have a _____ domestic real interest rate that will _____ capital inflows.

Accepted Answer

A) high; attract 
B) high; discourage 
C) high; not affect 
D) low; attract 
A) high; attract 
B) high; discourage 
C) high; not affect 
D) low; attract

Question 16

In an open economy, a rise in government budget deficit will cause the dollar to appreciate and push the trade balance towards surplus.

Accepted Answer

A) True 
 B)False

Question 17

One way to stop capital flight is for that country's central bank to raise interest rates above and beyond foreign investors' expectation.

Accepted Answer

A) True 
 B)False

Question 18

In using the open-economy macroeconomic model to analyse an event, the first step is to:

Accepted Answer

A) determine which of the supply and demand curves the event affects 
B) determine which way the curves shift 
C) use the supply-and-demand diagrams to examine how the shifts alter the economy's equilibrium 
D) it doesn't matter in which order the steps are taken 
A) determine which of the supply and demand curves the event affects 
B) determine which way the curves shift 
C) use the supply-and-demand diagrams to examine how the shifts alter the economy's equilibrium 
D) it doesn't matter in which order the steps are taken

Question 19

Graph 13-2  
-In Graph 13-2, an increase in the government budget deficit causes the equilibrium interest rate to:

Accepted Answer

A) be unchanged 
B) increase from r₁ to r2 in panel (a) 
C) increase from E₁ to E2 in panel (c) 
D) decrease from r2 to r₁ in panel (a) 
E) both B and C 
A) be unchanged 
B) increase from r₁ to r2 in panel (a) 
C) increase from E₁ to E2 in panel (c) 
D) decrease from r2 to r₁ in panel (a) 
E) both B and C

Question 20

At the equilibrium real exchange rate, the demand for dollars to buy:

Accepted Answer

A) foreign assets exactly balances the supply of dollars to be exchanged into foreign currency to buy domestic assets 
B) net exports exactly balances the supply of dollars to be exchanged into foreign currency to buy net imports 
C) foreign assets exactly balances the supply of dollars to be exchanged into foreign currency to buy net exports 
D) net exports exactly balances the supply of dollars to be exchanged into foreign currency to buy foreign assets 
A) foreign assets exactly balances the supply of dollars to be exchanged into foreign currency to buy domestic assets 
B) net exports exactly balances the supply of dollars to be exchanged into foreign currency to buy net imports 
C) foreign assets exactly balances the supply of dollars to be exchanged into foreign currency to buy net exports 
D) net exports exactly balances the supply of dollars to be exchanged into foreign currency to buy foreign assets

Exam 32: A Macroeconomic Theory of the Open Economy

In an open economy, the domestic real interest rate is determined by:

An appreciation of the Australian real exchange rate:

Whereas in the long-run macroeconomic model of a closed economy, monetary changes affect only nominal variables, in the long-run macroeconomic model of an open economy, monetary changes also affect real variables.

In the market for foreign-currency exchange, the demand curve represents:

A removal of trade restrictions:

If money is neutral, the nominal exchange rate must _____ when the domestic price level rises.

Because trade policies do not affect a country's overall trade balance, they also do not affect specific firms, industries and foreign countries.

The concept of income elasticity of demand is also an explanation of how nations behave when the cost of luxury imports increase in price.

For given risk levels, a relatively higher return in one country will lead to capital inflow to that country.For given returns, a relatively higher degree of risk in one country will lead to capital outflows from that country.

In an open economy, an increase in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

In an open economy, a government budget deficit raises real interest rates, crowds out domestic investment, causes the currency to appreciate and pushes the trade balance towards deficit.

Net foreign investment represents the quantity of dollars demanded in the foreign-currency exchange market.

If the market for foreign-currency supply comes from _____, demand comes from the _____.

Low government saving has NOT contributed to the recent large ________ in Australia.

A country with a low saving rate tends to have a _____ domestic real interest rate that will _____ capital inflows.

In an open economy, a rise in government budget deficit will cause the dollar to appreciate and push the trade balance towards surplus.

One way to stop capital flight is for that country's central bank to raise interest rates above and beyond foreign investors' expectation.

In using the open-economy macroeconomic model to analyse an event, the first step is to:

Graph 13-2 -In Graph 13-2, an increase in the government budget deficit causes the equilibrium interest rate to:

At the equilibrium real exchange rate, the demand for dollars to buy:

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Business Strategy and Oligopoly

Competition Policy

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Global Financial Crisis of 2008 and Beyond

Five Debates Over Macroeconomic Policy

Filters

In an open economy, an increase in capital inflows the equilibrium domestic real interest rate and the quantity of domestic investment.

If the market for foreign-currency supply comes from _, demand comes from the _.

A country with a low saving rate tends to have a _ domestic real interest rate that will _ capital inflows.