Deck 5: The Open Economy

Question 1

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade and net capital outflow.

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

Answer 1

surplus; positive

Question 2

Net capital outflow is equal to the amount that:

A)foreign investors lend here.
B)domestic investors lend abroad.
C)foreign investors lend here minus the amount domestic investors lend abroad.
D)domestic investors lend abroad minus the amount that foreign investors lend here.

Answer 2

domestic investors lend abroad minus the amount that foreign investors lend here.

Question 3

If domestic saving exceeds domestic investment, then net exports are and net capital outflows are .

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

Answer 3

positive; positive

Question 4

If domestic saving is less than domestic investment, then net exports are and net capital outflows are .

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

Question 5

Net exports equal GDP minus domestic spending on:

A)all goods and services.
B)all goods and services plus foreign spending on domestic goods and services.
C)domestic goods and services.
D)domestic goods and services minus foreign spending on domestic goods and services.

Question 6

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

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

Question 7

A trade deficit can be financed in all of the following methods except by:

A)borrowing from foreigners.
B)selling domestic assets to foreigners.
C)selling foreign assets owned by domestic residents to foreigners.
D)borrowing from domestic lenders.

Question 8

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade and net capital outflow.

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

Question 9

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports and net capital outflows .

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 10

If domestic spending exceeds output, we the difference-net exports are .

A)import; negative
B)export; positive
C)import; positive
D)export; negative

Question 11

In a small, open economy if net exports are negative, then:

A)domestic spending is greater than output.
B)saving is greater than investment.
C)net capital outflows are negative.
D)imports are less than exports.

Question 12

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is and net capital outflow equals .

A)a trade deficit; $100 billion
B)balanced trade; $0
C)a trade surplus; $100 billion
D)balanced trade; $100 billion

Question 13

Net capital outflow is equal to:

A)national saving minus the trade balance.
B)domestic investment plus the trade balance.
C)domestic investment minus national saving.
D)national saving minus domestic investment.

Question 14

An "open" economy is one in which:

A)the level of output is fixed.
B)government spending exceeds revenues.
C)the national interest rate equals the world interest rate.
D)there is trade in goods and services with the rest of the world.

Question 15

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

A)make loans to the government.
B)make loans to foreigners.
C)repay the national debt.
D)repay loans to the Federal Reserve.

Question 16

A country's exports may be written as equal to:

A)GDP minus consumption minus investment minus government spending.
B)GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.
C)imports.
D)GDP minus imports.

Question 17

The value of net exports is also the value of:

A)net investment.
B)net saving.
C)national saving.
D)the excess of national saving over domestic investment.

Question 18

When exports exceed imports, all of the following are true except:

A)net capital outflows are positive.
B)net exports are positive.
C)domestic investment exceeds domestic saving.
D)domestic output exceeds spending.

Question 19

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:

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

Question 20

If net capital outflow is positive, then:

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

Question 21

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports and net capital outflows .

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 22

Building an economic model based on the assumption of a small open economy is useful because:

A)it accurately describes the U.S. economy.
B)it is more complicated and realistic than a model based on the assumption of a large open economy.
C)this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.
D)it is not possible to build models of large open economies.

Question 23

A "small" economy is one in which the:

A)level of output is fixed.
B)price level is fixed.
C)domestic interest rate equals the world interest rate.
D)domestic saving is less than domestic investment.

Question 24

Holding other factors constant, legislation to cut taxes in an open economy will:

A)increase national saving and lead to a trade surplus.
B)increase national saving and lead to a trade deficit.
C)reduce national saving and lead to a trade surplus.
D)reduce national saving and lead to a trade deficit.

Question 25

A small open economy with perfect capital mobility is characterized by all of the following except that:

A)its domestic interest rate always exceeds the world interest rate.
B)it engages in international trade.
C)its net capital outflows always equal the trade balance.
D)its government does not impede international borrowing or lending.

Question 26

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:

A)investment in the small open economy.
B)saving in the small open economy.
C)exports by the small open economy.
D)imports by the small open economy.

Question 27

An increase in the trade deficit of a small open economy could be the result of:

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

Question 28

In an open economy:

A)a trade deficit is always good.
B)a trade deficit is always bad.
C)a trade deficit may be good or bad.
D)a trade surplus is always bad.

Question 29

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports and net capital outflows .

A)increase; increase
B)decrease; decrease
C)do not change; do not change
D)do not change; increase

Question 30

The world interest rate:

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 31

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

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

Question 32

The adoption of an investment tax credit in a small open economy is likely to lead to:

A)no change in either domestic investment or domestic saving in the small open economy.
B)an increase in both domestic investment and domestic saving in the small open economy.
C)an increase in domestic saving but no change in domestic investment in the small open economy.
D)an increase in domestic investment but no change in domestic saving in the small open economy.

Question 33

A shrinking U.S. budget deficit in the 1990s coincided with a U.S. trade deficit.

A)shrinking
B)continuing
C)nonexistent
D)stable

Question 34

Starting from trade balance, if the world interest rate falls, then, holding other factors constant, in a small, open economy the amount of domestic investment will and net exports will .

A)increase; increase
B)increase; decrease
C)increase, not change
D)decrease; increase

Question 35

An increase in the trade surplus of a small open economy could be the result of:

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

Question 36

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.

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

Question 37

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

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

Question 38

In a country with a small open economy, the real interest rate will always be:

A)above the world real interest rate.
B)below the world real interest rate.
C)equal to the world real interest rate.
D)equal to the world nominal interest rate.

Question 39

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade and net capital outflow.

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

Question 40

In a small open economy, policies that increase:

A)investment tend to cause a trade surplus.
B)investment tend to cause a trade deficit.
C)saving do not affect the trade balance.
D)saving tend to cause a trade deficit.

Question 41

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the net-exports schedule and the line representing saving minus investment.

A)downward-sloping; vertical
B)upward-sloping; vertical
C)downward-sloping; upward-sloping
D)upward-sloping; downward-sloping

Question 42

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was than the expansionary shift in the U.S. investment function, resulting in a trade .

A)stronger; deficit
B)stronger; surplus
C)weaker; deficit
D)weaker; surplus

Question 43

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies where:

A)capital is relatively scarce.
B)capital is relatively abundant.
C)technological production capabilities are inferior.
D)labor is relatively scarce.

Question 44

In the small open economy in equilibrium:

A)saving is fixed and investment is determined by the investment function and the world interest rate.
B)investment is fixed and saving is determined by the saving function and the world interest rate.
C)saving is fixed and investment is determined by the trade balance.
D)investment is fixed and saving is determined by the trade balance.

Question 45

The lower the real exchange rate is, the expensive domestic goods are relative to foreign goods, and the the demand is for net exports.

A)more; greater
B)more; smaller
C)less; greater
D)less; smaller

Question 46

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate:

A)rises and net exports fall.
B)rises and net exports rise.
C)falls and net exports fall.
D)falls and net exports rise.

Question 47

An appreciation of the real exchange rate in a small open economy could be the result of:

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

Question 48

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

A)number of yen you can get for lending one dollar in Japan for one year.
B)number of yen you can get for one dollar.
C)price of U.S. goods divided by the price of Japanese goods.
D)price of Japanese goods divided by the price of U.S. goods.

Question 49

In a small, open economy, if the world interest rate falls, then domestic investment will and the real exchange rate will , holding all else constant.

A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase

Question 50

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is Swiss goods per U.S. good.

A)0.5
B)2.5
C)5
D)10

Question 51

Two reasons why capital may not flow to poor countries are that the poorer countries may:

A)have economies unlike those described by a Cobb-Douglas production function and not be subject to diminishing returns to capital.
B)have already accumulated high levels of capital relative to labor and may already have access to advanced technologies.
C)legally prevent the inflow of foreign capital and provide strong legal protection of private property.
D)have inferior production capabilities and not enforce property rights.

Question 52

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

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

Question 53

If the number of dollars per yen rises, this is called a(n):

A)appreciation of the dollar.
B)appreciation of the yen.
C)increase in the terms of trade.
D)decrease in the terms of trade.

Question 54

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports and U.S. imports .

A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

Question 55

The real exchange rate is determined by the equality of:

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 56

In a small, open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will and the real exchange rate will , holding all else constant.

A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase

Question 57

When the real exchange rate rises:

A)exports will decrease but imports will be unaffected.
B)imports will decrease but exports will be unaffected.
C)exports will increase and imports will decrease.
D)exports will decrease and imports will increase.

Question 58

If the real exchange rate decreases, then net exports will .

A)be positive.
B)be negative.
C)increase.
D)decrease.

Question 59

If the real exchange rate is high, foreign goods:

A)and domestic goods are both relatively expensive.
B)and domestic goods are both relatively cheap.
C)are relatively expensive and domestic goods are relatively cheap.
D)are relatively cheap and domestic goods are relatively expensive.

Question 60

The real exchange rate:

A)measures how many Japanese yen one really gets for a U.S. dollar.
B)is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.
C)is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level.
D)the price of a domestic car divided by the price of a foreign car.

Question 61

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the:

A)foreign inflation rate minus the domestic inflation rate.
B)domestic inflation rate minus the foreign inflation rate.
C)foreign exchange rate minus the domestic exchange rate.
D)domestic interest rate minus the foreign interest rate.

Question 62

In a small open economy, if the government adopts a policy that lowers imports, then that policy:

A)raises the real exchange rate and increases net exports.
B)raises the real exchange rate and does not change net exports.
C)raises the real exchange rate and decreases net exports.
D)lowers the real exchange rate.

Question 63

Which of the following would decrease the real exchange rate in a small open economy in the long run?

A)a personal income tax cut
B)a reduction in government spending
C)a tariff on imports
D)an increase in investment

Question 64

In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out, and the expansion also causes a trade:

A)surplus and a fall in the real exchange rate.
B)deficit and a rise in the real exchange rate.
C)surplus and a rise in the real exchange rate.
D)deficit and a fall in the real exchange rate.

Question 65

One consequence of high inflation is a(n):

A)appreciating nominal exchange rate.
B)appreciating real exchange rate.
C)depreciating nominal exchange rate.
D)depreciating real exchange rate.

Question 66

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:

A)dollar will appreciate by 3 percent against the yen.
B)yen will appreciate by 3 percent against the dollar.
C)yen will appreciate by 6 percent against the dollar.
D)yen will appreciate by 9 percent against the dollar.

Question 67

Protectionist policies in a small open economy do not alter the trade balance because the:

A)quantity of imports and exports is fixed.
B)interest rate adjusts to offset any reductions in imports.
C)exchange rate appreciates to offset the increase in net exports.
D)level of net capital outflow is fixed by the world interest rate.

Question 68

The currencies of countries with high inflation rates relative to the United States have tended to , and the currencies of countries with low inflation rates relative to the United States have tended to .

A)appreciate; appreciate
B)appreciate; depreciate
C)depreciate; depreciate
D)depreciate; appreciate

Question 69

If a country has a high rate of inflation relative to the United States, the dollar will buy:

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.

Question 70

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall:

A)0 percent.
B)8 percent.
C)10 percent.
D)12 percent.

Question 71

Net capital outflow in a large country:

A)rises as the real domestic interest rate rises.
B)declines as the domestic interest rate rises.
C)depends on the foreign interest rate.
D)depends only on domestic saving.

Question 72

Protectionist policies implemented in a small open economy with a trade deficit have the effect of the trade deficit and the quantity of imports and exports.

A)decreasing; decreasing not
B)changing; decreasing
C)decreasing; not changing
D)not changing; not changing

Question 73

According to purchasing power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will oil in New York and oil in London to drive the price of oil in New York.

A)buy; sell; up
B)buy; sell; down
C)sell; buy; up
D)sell; buy; down

Question 74

The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called:

A)the theory of the real exchange rate.
B)equal currency conversion.
C)international monetary exchange.
D)purchasing power parity.

Question 75

For a closed economy, 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:

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 76

If purchasing power parity holds, then changes in domestic saving will the real exchange rate.

A)increase
B)decrease
C)not change
D)either increase or decrease

Question 77

If the purchasing-power parity theory is true, then:

A)the net exports schedule is very steep.
B)all changes in the real exchange rate result from changes in price levels.
C)all changes in the nominal exchange rate result from changes in price levels.
D)changes in saving or investment influence only the real exchange rate.

Question 78

The law of one price is enforced by:

A)governments.
B)producers.
C)consumers.
D)arbitrageurs.

Question 79

In a small open economy, if the government adopts a policy that lowers imports, then the quantity of exports:

A)remains unchanged.
B)decreases but not as much as the quantity of imports decreases.
C)decreases by exactly the same amount as the quantity of imports decreases.
D)decreases by more than the quantity of imports decreases.

Question 80

An effective policy to reduce a trade deficit in a small open economy would be to:

A)increase tariffs on imports.
B)impose stricter quotas on imported goods.
C)increase government spending.
D)increase taxes.