Deck 30: A Macroeconomic Theory of the Open Economy

Question 1

If a country's net capital outflow is positive, it is an addition to its demand for loanable funds.

Answer 1

True

Question 2

The open-economy macroeconomic model takes

A) GDP, but not the price level as given.
B) The price level, but not GDP as given.
C) Both the price level and GDP as given.
D) The price level and GDP as variables to be determined by the model.

Answer 2

C

Question 3

If the EU raises its tariff on imported sugar, domestic sugar growers will benefit, but the euro will appreciate and domestic producers of export goods will be harmed.

Answer 3

True

Question 4

Which of the following could increase the supply of pounds in the foreign exchange market?

A) A reduction in the rate of inflation in the UK.
B) A reduction in real interest rates in the UK.
C) An increase in the UK government budget deficit.
D) A depreciation of other currencies.

Question 5

A country experiencing capital flight will experience a reduction in its net capital outflow and its net exports.

Question 6

An increase in the government budget deficit

A) Has no impact on the real interest rate and fails to crowd out investment because foreigners buy assets in the deficit country.
B) Decreases the real interest rate and crowds out investment.
C) None of these answers
D) Increases the real interest rate and crowds out investment.

Question 7

All other things being equal, an increase in a country's real interest rate reduces net capital outflow.

Question 8

Net capital outflow is the purchase of domestic assets by foreigners minus the purchase of foreign assets by domestic residents.

Question 9

Which of the following statement regarding the loanable funds market is true?

A) A decrease in the government budget deficit increases the real interest rate.
B) An increase in the government budget deficit shifts the supply of loanable funds to the right.
C) An increase in private saving shifts the supply of loanable funds to the left.
D) An increase in the government budget deficit shifts the supply of loanable funds to the left.

Question 10

An increase in UK net capital outflow increases the supply of pounds in the market for foreign currency exchange and decreases the real exchange rate of the pound.

Question 11

Other things the same, a lower real interest rate decreases the quantity of

A) Loanable funds demanded.
B) Loanable funds supplied.
C) Domestic investment.
D) Net capital outflow.

Question 12

Assuming all other things unchanged, a higher UK real interest rate

A) Decreases UK net capital outflow because UK residents and foreigners prefer to invest in the UK
B) None of these answers
C) Decreases UK net capital outflow because UK residents and foreigners prefer to invest abroad.
D) Increases UK net capital outflow because UK residents and foreigners prefer to invest in the UK.

Question 13

The open-economy macroeconomic model examines the determination of

A) The output growth rate and the real interest rate.
B) Unemployment and the exchange rate.
C) The output growth rate and the inflation rate.
D) The trade balance and the exchange rate.

Question 14

A country's net capital outflow is always equal to its net exports.

Question 15

The supply of foreign exchange is

A) Determined by the real exchange rate.
B) Independent of the real exchange rate.
C) Determined by central bankers.
D) Determined by the government of the country concerned.

Question 16

A rise in Denmark's net exports will increase the demand for the Danish krone in the market for foreign currency exchange and the krone will appreciate in value.

Question 17

Which of the following statements regarding the loanable funds market is not true?

A) A decrease in a country's net capital outflow shifts the demand for loanable funds to the left.
B) An increase in domestic investment shifts the demand for loanable funds to the right.
C) An increase in a country's net capital outflow shifts the supply of loanable funds to the left.
D) An increase in a country's net capital outflow raises its real interest rate.

Question 18

Households make their savings available to borrowers through

A) Resource markets.
B) The loanable funds market.
C) The labour market.
D) Taxes.

Question 19

An increase in the government's budget deficit shifts the supply of loanable funds to the right.

Question 20

If the EU raises its tariff on imported sugar, it will reduce imports and improve the trade balance of EU members.

Question 21

If the EU imposes a quota on the importing of clothing produced in China, so reducing UK imports of clothing, which of the following is true regarding the market for foreign currency exchange?

A) The demand for pounds decreases and the pound depreciates.
B) The supply of pounds increases and the pound depreciates.
C) The supply of pounds decreases and the pound appreciates.
D) The demand for pounds increases and the pound appreciates.

Question 22

An increase in the UK government budget deficit

A) Increases UK net exports and decreases UK net capital outflow.
B) Decreases UK net exports and UK net capital outflow the same amount.
C) Increases UK net exports and UK net capital outflow the same amount.
D) Decreases UK net exports and increases UK net capital outflow.

Question 23

If a country has a high savings rate relative to other countries, then the

A) Supply of loanable funds is larger, interest rates are lower, and net capital outflow is higher for that country than for others.
B) Supply of loanable funds is smaller, interest rates are higher, and net capital outflow is lower for that country than for others.
C) Demand for loanable funds is larger, interest rates are higher, and net capital outflow is lower for that country than for others.
D) Government must subsidize production in order to encourage international trade.

Question 24

The phrase "twin deficits" refers to

A) A country's trade deficit and its government budget deficit.
B) The fact that if a country has a trade deficit, its trading partners must also have trade deficits.
C) The equality of a country's saving deficit and its investment deficit.
D) A country's trade deficit and its net capital outflow deficit.

Question 25

If the EU imposes a quota on the importing of clothing produced in China, so reducing UK imports of clothing, which of the following is true regarding UK net exports?

A) Net exports will rise.
B) None of these answers.
C) Net exports will fall.
D) Net exports will remain unchanged.

Question 26

If a country's government wants to eliminate a trade deficit, its most effective policy would be to

A) Reduce tariffs.
B) Encourage imports.
C) Impose quotas on imports.
D) Reduce its budget deficit.

Question 27

Increased foreign investment in the UK causes the

A) Balance on current accounts to become positive.
B) Sum of the capital and current accounts to be positive.
C) Balance of trade to become negative.
D) Foreign exchange value of the pound to increase.

Question 28

If a country's government increases its budget deficit, then the

A) Supply of loanable funds will increase.
B) Supply of loanable funds will decrease.
C) Real interest rate will fall.
D) Real exchange rate will fall.

Question 29

Consider this diagram of the market for foreign currency exchange. If the US government decides to increase import tariffs on imported steel, we could expect the

A) Demand for dollars to shift from D₁ to D₂.
B) Demand for dollars to shift from D₂ to D₁.
C) Supply of dollars to increase.
D) Supply of dollars to decrease.

Question 30

Which of the following statements regarding the market for foreign currency exchange is true? An increase in UK net exports:

A) Decreases the supply of pounds and the pound depreciates.
B) Increases the demand for pounds and the pound appreciates.
C) Increases the supply of pounds and the pound depreciates.
D) Decreases the demand for pounds and the pound appreciates.

Question 31

The link between the loanable funds market and the foreign exchange market is

A) The governments of the countries involved.
B) The International Monetary Fund.
C) Net capital outflow.
D) Purchasing power parity.

Question 32

An increase in Europe's taste for UK-produced Hondas would cause the pound to

A) Depreciate and would increase UK net exports.
B) Appreciate and would increase UK net exports.
C) Depreciate and would decrease UK net exports.
D) Appreciate and would decrease UK net exports.
E) Appreciate, but the total value of UK net export stays the same.

Question 33

An increase in Japanese citizens' purchases of holidays in the UK would

A) Cause the pound to appreciate, but the total value of UK net exports stays the same.
B) Cause the pound to depreciate, but the total value of UK net exports stays the same.
C) Cause the total value of UK net exports to increase, but the foreign exchange value of the pound to appreciate stays the same.
D) Cause the total value of UK net exports to decrease, but the foreign exchange value of the pound to appreciate stays the same.

Question 34

Equilibrium in an open economy is characterized by

A) Net exports = net capital outflow.
B) Net exports + net capital outflow = savings.
C) Domestic investment + net capital outflow = savings.
D) Both a and c are correct.

Question 35

In response to an import quota

A) Exports increase more than imports.
B) Imports increase more than exports.
C) Imports and exports are unaffected, but the government collects revenues.
D) Imports and exports are both reduced but net exports are unchanged.

Question 36

If a country experiences a tremendous increase in the demand for loanable funds as many new infrastructure building projects are initiated, then the interest rate will

A) Rise, there will be a decrease in net capital outflow, and the real exchange rate will fall.
B) Rise, there will be a decrease in net capital outflow, and the real exchange rate will rise.
C) Fall, there will be an increase in net capital outflow, and the real exchange rate will rise.
D) Fall, there will be an increase in net capital outflow, and the real exchange rate will fall.

Question 37

A large and sudden movement of capital out of a country is called

A) capital inflow.
B) capital flight.
C) trade deficit.
D) trade surplus.

Question 38

Crowding-out caused by government budget deficits will lead to

A) An increase in the real exchange rate.
B) A decrease in the real exchange rate.
C) No change in the real exchange rate.
D) A devaluation in a nation's currency.

Question 39

Which of the following statements regarding the market for foreign currency exchange is true?

A) An increase in UK net capital outflow increases the supply of pounds and the pound depreciates.
B) An increase in UK net capital outflow increases the demand for pounds and the pound appreciates.
C) An increase in UK net capital outflow increases the demand for pounds and the pound depreciates.
D) An increase in UK net capital outflow increases the supply of pounds and the pound appreciates.

Question 40

Government trade policies, such as tariffs and quota restrictions on imports,

A) Can eliminate a trade imbalance.
B) Often increase a trade deficit.
C) Have no real effect on the trade balance.
D) Can lower a deficit on current accounts but not on the capital account.

Question 41

Which of the following groups would be most harmed by a UK government budget deficit?

A) Foreigners who wish to buy assets in the UK.
B) A British company wishing to sell aircraft to Saudi Arabia.
C) UK residents wishing to buy foreign produced cars.
D) Lenders of loanable funds.

Question 42

Capital flight

A) Decreases a country's net exports and increases its long-run growth path.
B) Increases a country's net exports and increases its long-run growth path.
C) Increases a country's net exports and decreases its long-run growth path.
D) Decreases a country's net exports and decreases its long-run growth path.

Question 43

Which of the following statements about trade policy is true?

A) A country's trade policy has no impact on the size of its trade balance.
B) None of these answers.
C) A restrictive import quota decreases a country's net exports.
D) A restrictive import quota increases a country's net exports.

Question 44

Suppose that the Turkish government budget deficit increases. What curves in the open-economy macroeconomic model shift? Explain why each curve shifts the direction it does.

Question 45

If a country had capital flight, then the real exchange rate would

A) Fall. To offset this fall the government could increase the budget deficit.
B) Fall. To offset this fall the government could decrease the budget deficit.
C) Rise. To offset this rise the government could increase the budget deficit.
D) Rise. To offset this rise the government could decrease the budget deficit.

Question 46

What impact do trade policies, such as tariffs and quotas, have on the standard of living?

Question 47

An increase in UK private saving

A) Increases UK net exports and UK net capital outflow the same amount.
B) Increases UK net exports and decreases UK net capital outflow.
C) Decreases UK net exports and UK net capital outflow the same amount.
D) Decreases UK net exports and increases UK net capital outflow.

Question 48

An export subsidy should have the opposite effect of

A) A government budget deficit.
B) Capital flight.
C) An increase in private saving.
D) A tariff.

Question 49

An example of a trade policy is

A) A tariff on sugar.
B) All are examples of trade policy.
C) Capital flight because it increases a country's net exports.
D) An increase in the government budget deficit because it reduces a country's net exports.

Question 50

Which of the following groups would NOT benefit from an EU import quota on Japanese cars?

A) EU consumers who buy electronics from Japan.
B) EU farmers who export grain.
C) Employees of EU car manufacturers.
D) Shareholders of German carmaker BMW.

Question 51

How are the identities S = NCO + I and NCO = NX related to the foreign currency exchange market and the loanable funds market?

Question 52

Capital flight is often caused by

A) Political stability.
B) Shifts away from the industrial sector and towards the service sector.
C) Political instability.
D) Policies of the International Monetary Fund.

Question 53

Suppose that UK investors decide that investment opportunities in African countries have improved. What happens to UK net capital outflow? What happens to the UK real interest rate?

Question 54

Why do higher real interest rates lead to lower net capital outflow?

Question 55

State what, if anything, each of the following does to the supply or demand of loanable funds.
a. Net capital outflow increases at each interest rate
b. Domestic investment increases at each interest rate
c. The government deficit increases
d. Private saving increases

Question 56

Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand for foreign-currency exchange curve. Use the UK as an example.

Question 57

Suppose, due to political instability, Russians suddenly choose to purchase UK assets as opposed to Russian assets. Which of the following statements is true regarding the value of the pound and UK net exports? The pound:

A) Appreciates, and UK net exports rise.
B) Appreciates, and UK net exports fall.
C) Depreciates, and UK net exports rise.
D) Depreciates, and UK net exports fall.

Question 58

Suppose that UK 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?

Question 59

Suppose, due to political instability, Russia suddenly choose to invest in UK assets as opposed to Russian assets. Which of the following statements is true regarding UK net foreign investment?

A) UK net foreign investment is unchanged because only UK residents can alter UK net foreign investment.
B) UK net foreign investment rises.
C) UK net foreign investment falls.
D) None of these answers.

Question 60

Explain how an increase in the demand for capital goods in the Eurozone countries can lead to a change in the value of the euro against other currencies.

Question 61

If a county becomes more likely to default on its bonds, what happens to that country's interest rate and exchange rate? Explain.