Deck 6: Unemployment

Question 1

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
D)exports. lowers the real exchange rate.

Answer 1

B

Question 2

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.

Answer 2

A

Question 3

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.

Answer 3

B

Question 4

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)a decrease in the world interest rate.
D)the expiration of an investment tax-credit provision.

Question 5

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 6

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 7

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 8

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 9

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

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

Question 10

In a small open economy, when the government reduces national saving, 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 11

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

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

Question 12

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 13

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)an increase in the world interest rate.
D)the implementation of an investment tax-credit provision.

Question 14

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 15

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 domestic spending.

Question 16

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 good(s) per U.S. good.

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

Question 17

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

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

Question 18

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)is the price of a domestic car divided by the price of a foreign car.

Question 19

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 20

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.

Question 21

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
Exhibit: Policies Influence Real Exchange Rate

Question 22

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.
a. he
If government spending rises by 100, does investm ent change? What is the level of investment after t
change?
b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much?
c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the change in G?

Question 23

Suppose that governments around the world begin to engage in expansionary fiscal policy (run large budget deficits) in order to stimulate economic activity in their countries. Use the long-run model of a small open economy to illustrate graphically the impact of this expansionary fiscal policy by foreigners on the U.S. exchange rate and the trade balance. Assume that the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of the foreign expansionary fiscal policy on the U.S. exchange rate and the U.S. trade balance.

Question 24

If corporate downsizing and lack of job security cause consumers to spend less and save more, what will be the impact on the exchange rate and trade balance? Use the long-run model of a small open economy to illustrate graphically the impact of this decline in consumer confidence on the exchange rate and the trade balance. Assume the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of a decline in consumer confidence on the exchange rate and the U.S. trade balance.

Question 25

Suppose that the large industrial countries of the world are concerned about the depreciating currencies of a number of small open economies.
a. What type of fiscal policies must the large industrial countries undertake in order to promote currency appreciation in the small open economies?
b. Illustrate graphically the impact of the industrial countries' policies on the exchange rate of the small open economies.
c. What will happen to the trade balance of the typical small open economy, assuming that it starts from a position of balanced trade?

Question 26

Solve these equations for the equilibrium values of C, I, NX, CF, r, and $\varepsilon$ . (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and $\varepsilon$ . Check your work by seeing that all of these equations balance given your answers.)

Question 27

What determines the real exchange rate and what determines the nominal exchange rate in a small open economy with perfect capital mobility, fully employed factors of production, and flexible prices?

Question 28

In times of great economic uncertainty and potential job loss, many consumers may increase their saving as a precautionary measure. What is the predicted impact of an increase in national saving on the domestic interest rate and exchange rate in a large open economy, holding other factors constant. Illustrate your answer graphically and explain in words.

Question 29

The real interest rates and real exchanges rates are constant and equal in North Country and South Country. The Fisher equation and purchasing-power parity hold in both countries. If the nominal interest rate is 8 percent in North Country and 10 percent in South Country, do you expect North Country's nominal exchange rate to appreciate, depreciate, or remain the same? Explain.

Question 30

Suppose a new technology is developed that increases investment demand in both a closed economy and in a small open economy that are in other ways identical. Holding other factors constant, will the quantity of investment spending increase more in the closed economy or in the small open economy? Explain. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

Question 31

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

Question 32

Compare the impact of an increase in the government's budget deficit on investment spending in a small open economy with an otherwise comparable closed economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

Question 33

Major improvements in computer information technology and communications in the late 1990s fueled an increase in investment demand in the United States, which is a large open economy. What is the predicted impact of this increased investment demand in the United States on the U.S. interest rate, the U.S. exchange rate, and U.S. net exports, holding other factors constant? Illustrate your answer graphically and explain in words.

Question 34

In September 1995, Patrick Buchanan, a Republican candidate for president, proposed a 10 percent tariff on Japanese imports to the United States, a 20 percent tariff on Chinese imports to the United States, and an unspecified "social" tariff on imports from third-world countries. Use the long-run model of a small open economy to illustrate graphically the impact of these trade policies on the U.S. exchange rate and the trade balance. Assume that the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of Mr. Buchanan's proposed policies. Specifically state what happens to the exchange rate, the trade balance, the volume of imports, and the volume of exports.

Question 35

Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy.
a. What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation?
b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy.
c. What will happen to the trade balance of the small open economy, assuming that it started from a position of balanced trade?

Question 36

The government of a small open economy wishes to promote trade policies that will result in currency appreciation.
a. Would protectionist policies (higher tariffs and more quotas) or freer trade policies (tariff reductions and quota eliminations) be more effective in generating currency appreciation?
b.
c. Illustrate graphically the impact of the trade policy on the exchange rate of the small open economy.
d. What will happen to the trade balance of the small open economy as a result of the trade policies, assuming that the country started from a position of free trade?
e. What will happen to the quantity of exports and imports as a result of the trade policies?

Question 37

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, which is a large open economy, on the U.S. interest rate and the U.S. exchange rate, holding other factors constant. Illustrate your answer graphically and explain in words.

Question 38

Assume that in a small open economy where full employment always prevails, national saving is 300.
a. If domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed?
b. If the economy is open and the world interest rate is 10 percent, what will investment be?
c. What will the current account surplus or deficit be? What will net capital outflow be?

Question 39

In April 1995, Michel Camdessus, managing director of the International Monetary Fund (IMF), criticized
U.S. economic policy for allowing the dollar exchange rate to fall too low. He recommended that the United States reduce its budget deficit in order to raise the exchange rate. Use the long-run model of a small open economy to illustrate graphically the impact of reducing the government's budget deficit on the exchange rate and the trade balance. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain whether Mr. Camdessus's policy recommendation will work. Specifically state what happens to the exchange rate and the trade balance as a result of the government budget deficit reduction.

Question 40

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 41

If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and the United States dollar? Explain.

Question 42

Compare the impact of an increase in investment demand in a small open economy and a large open economy. Assume prices are flexible, factors of production are fully employed in both countries and there is perfect capital mobility in the small open economy.