Deck 5: Elasticity and Its Application

Question 1

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 1

D

Question 2

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 2

D

Question 3

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.

Answer 3

B

Question 4

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 5

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 6

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 7

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 8

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 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

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 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

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 13

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 14

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 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 spending.

Question 16

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

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

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 19

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 20

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 21

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 22

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 23

Exhibit: Saving and Investment in a Small Open Economy


Reference: Ref 5-1
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r ,
Then the economy has:

A)a trade surplus.
B)balanced trade.
C)a trade deficit.
D)positive capital outflows.

Question 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

Exhibit: Saving and Investment in a Small Open Economy


Reference: Ref 5-1
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r ,
Then the economy has:

A)a trade surplus.
B)balanced trade.
C)a trade deficit.
D)negative capital outflows.

Question 39

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 40

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 41

a. 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 42

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. Illustrate graphically the impact of the trade policy on the exchange rate of the small open economy.
c. 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?
d. What will happen to the quantity of exports and imports as a result of the trade policies?

Question 43

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 44

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 45

a. 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 46

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 47

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 48

a. 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 49

Major improvements in computer information technology and communications in the late 1990s fueled an increase in investment demand in the United States. What is the predicted impact of this increased investment demand in the United States, which is a large open economy, 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 50

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 51

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 52

a. 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 53

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 54

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. If government spending rises by 100, does investment change? What is the level of investment after the 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 55

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

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