Exam 32: A Macroeconomic Theory of the Open Economy

In an open economy, a decrease in the perceived riskiness of domestic assets by foreigners, arising, for example, from an increase in political stability, leads to a(n) _______ in the equilibrium domestic real interest rates and to ____ in the quantity of domestic investment.

How would an increase in the supply of loanable funds in the domestic economy affect that country's trade balance?

Citing a recent example, describe how a loss of overseas confidence due to political/financial instability may cause that country's exchange rate to depreciate.

An appreciation of the Australian real exchange rate _____ the quantity of dollars demanded in the market for foreign-currency exchange.

The real exchange rate is:

Explain what happens to the real exchange rate when a tariff is introduced by the government.

Trade policies:

The demand for loanable funds comes from domestic investment and net foreign investment.

The supply of loanable funds comes from:

Economists have argued that removing trade restrictions benefits Australian industries that produce goods for export.Explain why this may be the case.

Trade policies _____ trade balance since these police do not alter _____.

According to the theory of purchasing-power parity, the demand curve is horizontal at the level of the real exchange rate that ensures parity of purchasing power at home and abroad.

Which of the following statements is correct when the Australian government runs a budget deficit?

What is the difference between the supply of loanable funds in a closed economy and that in an open economy?

The price of imports will increase on the domestic market if two conditions are fulfilled: a strong local currency and a shortage of supply.

In the market for loanable funds, r₀ is:

At the equilibrium real interest rate, the amount that people (including government) want to save exactly balances the desired quantity of net foreign investment.

Capital flight from a country:

When capital flows out of Country A to Country B, Country A's net foreign investment will:

Trade policies that directly affect exports or imports: