Deck 32: A Macroeconomic Theory of the Open Economy

Question 1

If interest rates rose more in France than in the U.S.,then other things the same

A)U.S.citizens would buy more French bonds and French citizens would buy more U.S.bonds.
B)U.S.citizens would buy more French bonds and French citizens would buy fewer U.S.bonds.
C)U.S.citizens would buy fewer French bonds and French citizens would buy more U.S.bonds.
D)U.S.citizens would buy fewer French bonds and French citizens would buy fewer U.S.bonds.

Answer 1

B

Question 2

In an open economy,the market for loanable funds equates national saving with

A)domestic investment.
B)net capital outflow.
C)national consumption minus domestic investment.
D)None of the above is correct.

Answer 2

D

Question 3

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 3

C

Question 4

Over the past two decades,the United States has

A)generally had, or been very near to a trade balance.
B)had trade deficits in about as many years as it has trade surpluses.
C)persistently had a trade deficit.
D)persistently had a trade surplus.

Question 5

In the open-economy macroeconomic model,the demand for loanable funds comes from

A)domestic investment.
B)net exports.
C)net capital outflow.
D)the sum of net capital outflow and domestic investment.

Question 6

The purchase of a capital asset adds to the demand for loanable funds

A)only if the asset is located at home.
B)only if the asset is located abroad.
C)whether the asset is located at home or abroad.
D)None of the above is correct.

Question 7

In the open-economy macroeconomic model,the supply of loanable funds comes from

A)national saving.
B)private saving.
C)domestic investment.
D)the sum of domestic investment and net capital outflow.

Question 8

An increase in the U.S.real interest rate induces

A)Americans to buy more foreign assets, which increases U.S.net capital outflow.
B)Americans to buy more foreign assets, which reduces U.S.net capital outflow.
C)foreigners to buy more U.S.assets, which reduces U.S.net capital outflow.
D)foreigners to buy more U.S.assets, which increases U.S.net capital outflow.

Question 9

The open-economy macroeconomic model includes

A)only the market for loanable funds.
B)only the market for foreign-currency exchange.
C)both the market for loanable funds and the market for foreign-currency exchange.
D)neither the market for loanable funds or the market for foreign-currency exchange.

Question 10

Which of the following would be consistent with an increase in the U.S.real interest rate?

A)a Swiss bank purchases a U.S.bond instead of the German bond it had considered purchasing.
B)firms decide to do more investment spending.
C)a U.S.citizen decides to put less money in his savings account than he had planned to.
D)All of the above are consistent.

Question 11

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 12

In the open-economy macroeconomic model,the market for loanable funds identity can be written as

A)S = I
B)S = NCO
C)S = I + NCO
D)S + I = NCO

Question 13

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 14

An increase in real interest rates in the United States

A)discourages both U.S.and foreign residents from buying U.S.assets.
B)encourages both U.S.and foreign residents to buy U.S.assets.
C)encourages U.S.residents to buy U.S.assets, but discourages foreign residents from buying U.S.assets.
D)encourages foreign residents to buy U.S.assets, but discourages U.S.residents from buying U.S.assets.

Question 15

An increase in the real interest rate

A)discourages people from saving and so increases the quantity of loanable funds demanded.
B)discourages people from saving and so decreases the quantity of loanable funds demanded.
C)encourages people to save and so increases the quantity of loanable funds supplied.
D)encourages people to save and so decreases the quantity of loanable funds supplied.

Question 16

Other things the same,a higher real interest rate raises the quantity of

A)domestic investment.
B)net capital outflow.
C)loanable funds demanded.
D)loanable funds supplied.

Question 17

U.S.corporation Well's Petroleum borrows money to build an oil well in Texas and to build another in Venezuela.

A)The borrowing for the well in the U.S.and the well in Venezuela both count as part of the demand for loanable funds in the U.S.market.
B)Neither the borrowing for the well in the U.S.nor the well in Venezuela count as part of the demand for loanable funds in the U.S.market.
C)The borrowing for the well in the U.S.counts as part of the demand for loanable funds in the U.S.The borrowing for the well in Venezuela does not count as part of the demand for loanable funds in the U.S.market.
D)The borrowing for the well in Venezuela counts as part of the demand for loanable funds in the U.S.The borrowing for the well in the US.does not counts as part of the demand for loanable funds in the U.S.market.

Question 18

Many U.S.business leaders argue that the current state of U.S.net exports is the result of

A)U.S.export subsidies.
B)free trade policies of foreign governments.
C)unproductive U.S.workers.
D)unfair foreign competition.

Question 19

In an open economy,the market for loanable funds equates national saving with

A)domestic investment.
B)net capital outflow.
C)the sum of national consumption and government spending.
D)the sum of domestic investment and net capital outflow.

Question 20

A fall in the real interest rate

A)increases the quantity of loanable funds demanded because firms will want to borrow more
B)decreases the quantity of loanable funds demanded because firms will want to borrow less.
C)increases the quantity of loanable funds supplied because firms will want to borrow more.
D)decreases the quantity of loanable funds supplied because firms will want to borrow less.

Question 21

In the open-economy macroeconomic model,other things the same,a decrease in the interest rate shifts

A)the demand for dollars in the market for foreign-currency exchange to the right.
B)the demand for dollars in the market for foreign-currency exchange to the left.
C)the supply of dollars in the market for foreign-currency exchange to the right.
D)the supply of dollars in the market for foreign-currency exchange to the left.

Question 22

At the equilibrium interest rate in the open economy macroeconomic model,the equilibrium quantity of loanable funds equals

A)net capital outflow.
B)domestic investment.
C)foreign currency supplied.
D)national saving.

Question 23

Which of the following would make the equilibrium interest rate decrease and the equilibrium quantity of loanable funds increase?

A)The supply of loanable funds shifts right.
B)The supply of loanable funds shifts left.
C)The demand for loanable funds shifts right.
D)The demand for loanable funds shifts left.

Question 24

The supply of loanable funds comes from

A)national saving.
B)national saving and domestic investment.
C)domestic investment and net capital outflow.
D)national saving, domestic investment, and net capital outflow.

Question 25

In an open economy,the demand for loanable funds comes from

A)only those who want to borrow funds to buy domestic capital goods.
B)only those who want to borrow funds to buy foreign assets.
C)those who want to borrow funds to buy either domestic capital goods or foreign assets.
D)neither those who want to borrow funds to buy domestic capital goods nor those who want to borrow funds to buy foreign assets.

Question 26

If there is a surplus of loanable funds,the quantity demanded is

A)greater than the quantity supplied and the interest rate will rise.
B)greater than the quantity supplied and the interest rate will fall.
C)less than the quantity supplied and the interest rate will rise.
D)less than the quantity supplied and the interest rate will fall.

Question 27

Other things the same,an increase in the interest rate would tend to reduce

A)domestic investment, but not net capital outflow.
B)net capital outflow, but not domestic investment.
C)both domestic investment and net capital outflow.
D)neither domestic investment nor not capital outflow.

Question 28

Which of the following would make the equilibrium interest rate increase and the equilibrium quantity of funds decrease?

A)The supply of loanable funds shifts right.
B)The supply of loanable funds shifts left.
C)The demand for loanable funds shifts right.
D)The demand for loanable funds shifts left.

Question 29

In an open economy,

A)net capital outflow = imports.
B)net capital outflow = net exports.
C)net capital outflow = exports.
D)None of the above is correct.

Question 30

At the equilibrium interest rate in the open economy macroeconomic model,the amount that people want to save equals the desired quantity of

A)net capital outflow.
B)domestic investment.
C)net capital outflow plus domestic investment.
D)foreign currency supplied.

Question 31

Figure 32-1

Refer to Figure 32-1.The loanable funds market is in equilibrium at

A)1 percent, $30 billion.
B)2 percent, $20 billion.
C)4 percent, $10 billion.
D)None of the above is correct.

Question 32

Which of the following would make both the equilibrium interest rate and the equilibrium quantity of loanable funds increase?

A)The demand for loanable funds shifts right.
B)The demand for loanable funds shifts left.
C)The supply of loanable funds shifts right.
D)The supply of loanable funds shifts left.

Question 33

If the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied

A)there is a surplus and the interest rate will rise.
B)there is a surplus and the interest rate will fall.
C)there is a shortage and the interest rate will rise.
D)there is a shortage and the interest rate will fall.

Question 34

In an open economy the supply of loanable funds comes from

A)national saving.Demand comes from only domestic investment.
B)national saving.Demand comes from domestic investment and net capital outflow.
C)Only net capital outflow.Demand for loanable funds comes from national saving.
D)domestic investment and net capital outflow.Demand for loanable funds comes from national saving.

Question 35

Suppose the U.S.supply of loanable funds shifts left.This will

A)increase U.S.net capital outflow and increase the quantity of loanable funds demanded.
B)increase U.S.net capital outflow and decrease the quantity of loanable funds demanded.
C)decrease U.S.net capital outflow and increase the quantity of loanable funds demanded.
D)decrease U.S.net capital outflow and decrease the quantity of loanable funds demanded.

Question 36

Which of the following would make both the equilibrium interest rate and the equilibrium quantity of loanable funds decrease?

A)The demand for loanable funds shifts right.
B)The demand for loanable funds shifts left.
C)The supply of loanable funds shifts right.
D)The supply of loanable funds shifts left.

Question 37

Figure 32-1

Refer to Figure 32-1.In the Figure shown,if the real interest rate is 3 percent,the quantity of loanable funds demanded is

A)$10 billion, and the quantity supplied is 20.
B)$10 billion, and the quantity supplied is 30.
C)$30 billion, and the quantity supplied is 10.
D)$30 billion, and the quantity supplied is 20.

Question 38

If there is a shortage of loanable funds,

A)the demand for loanable funds will shift right so the interest rate rises.
B)the supply of loanable funds will shift left so the interest rate falls.
C)there will be no shifts of the curves, but the interest rate rises.
D)there will be no shifts of the curves, but the interest rate falls.

Question 39

If the quantity of loanable funds supplied is greater than the quantity demanded,then

A)there is a shortage of loanable funds and the interest rate will fall.
B)there is a shortage of loanable funds and the interest rate will rise.
C)there is a surplus of loanable funds and the interest rate will fall.
D)there is a surplus of loanable funds and the interest rate will rise.

Question 40

Figure 32-1

Refer to Figure 32-1.In the Figure shown,if the real interest rate is 1 percent,there will be a

A)surplus of $10 billion.
B)surplus of $20 billion.
C)shortage of $10 billion.
D)shortage of $20 billion.

Question 41

If for some reason Americans wished to purchase more foreign assets,then other things the same

A)both the real exchange rate and the quantity of dollars exchanged in the market for foreign-currency exchange would fall.
B)both the real exchange rate and the quantity of dollars exchanged in the market for foreign-currency would rise.
C)the real exchange rate would rise and the quantity of dollars exchanged in the market for foreign-currency would fall.
D)the real exchange rate would fall and the quantity of dollars exchanged in the market for foreign-currency would rise.

Question 42

The amount of dollars demanded in the market for foreign-currency exchange at a given real exchange rate increases if

A)either U.S.imports or exports increase.
B)either U.S.imports or exports decrease.
C)either U.S.imports increase or U.S.exports decrease.
D)either U.S.imports decrease or U.S.exports increase.

Question 43

The real exchange rate measures the

A)price of domestic currency relative to foreign currency.
B)price of domestic goods relative to the price of foreign goods.
C)rate of domestic and foreign interest.
D)None of the above is correct.

Question 44

The price that balances supply and demand in the market for foreign-currency exchange in the open-economy macroeconomic model is the

A)nominal exchange rate.
B)nominal interest rate.
C)real exchange rate.
D)real interest rate.

Question 45

Net capital outflow is equal to

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

Question 46

Figure 32-1

Refer to Figure 32-1.In the Figure shown,if the real interest rate is 1 percent,there will be pressure for

A)the real interest rate to rise.
B)the demand for loanable funds curve to shift right.
C)the supply for loanable funds curve to shift left.
D)All of the above are correct.

Question 47

Which of the following would tend to shift the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model to the right?

A)The exchange rate rises.
B)The exchange rate falls.
C)The expected rate of return on U.S.assets rises.
D)The expected rate of return on U.S.assets falls.

Question 48

If net exports are positive,then

A)net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.
B)net capital outflow is positive, so American assets bought by foreigners are greater than foreign assets bought by Americans.
C)net capital outflow is negative, so foreign assets bought by Americans are greater than American assets bought by foreigners.
D)net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

Question 49

The value of net exports equals the value of

A)national saving.
B)public saving.
C)national saving - net exports.
D)national saving - domestic investment.

Question 50

In the open economy macroeconomic model net capital outflow is equal to the quantity of

A)dollars supplied in the foreign exchange market.
B)dollars demand in the foreign exchange market.
C)funds supplied in the loanable funds market.
D)None of the above is correct.

Question 51

If net exports are positive,then

A)exports are greater than imports.
B)net capital outflow is negative.
C)Both of the above are correct.
D)Neither of the above is correct.

Question 52

Suppose that the real exchange rate is such that the market for foreign-currency exchange has a surplus

A)this will lead to an appreciation of the dollar, an increase in U.S.net exports, and so an increase in the quantity of dollars demanded in the foreign exchange market.
B)this will lead to an appreciation of the dollar, a decrease in U.S.net exports, and so a decrease in the quantity of dollars demanded in the foreign exchange market.
C)this will lead to a depreciation of the dollar, an increase in U.S.net exports, and so an increase in the quantity of dollars demanded in the foreign exchange market.
D)this will lead to a depreciation of the dollar, a decrease in U.S.net exports, and so a decrease in the quantity of dollars demanded in the foreign exchange market.

Question 53

Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

A)A firm in Mexico wants to buy corn from a U.S.firm.
B)A Japanese bank desires to purchase U.S.Treasury securities.
C)An U.S.citizen wants to buy a bond issued by a Mexican corporation.
D)All of the above are correct.

Question 54

If net exports are negative,then

A)net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.
B)net capital outflow is positive, so American assets bought by foreigners are greater than foreign assets bought by Americans.
C)net capital outflow is negative, so foreign assets bought by Americans are greater than American assets bought by foreigners.
D)net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

Question 55

At a given real exchange rate,which of the following,by itself,would increase the supply of dollars in the market for foreign-currency exchange?

A)foreign citizens buy more U.S.bonds
B)U.S.citizens buy more foreign bonds
C)foreign citizens buy more U.S.goods
D)U.S.citizens buy more foreign goods

Question 56

You see on the Internet that the U.S.exchange rate has fallen.This might have been caused by

A)a decrease in the demand for or a decrease in the supply of dollars in the market for foreign-currency exchange.
B)a decrease in the demand for or an increase in the supply of dollars in the market for foreign-currency exchange.
C)an increase in the demand for or a decrease in the supply of dollars in the market for foreign-currency exchange.
D)an increase in the demand for or a increase in the supply of dollars in the market for foreign-currency exchange.

Question 57

Which of the following would tend to shift the supply of dollars in the market for foreign-currency exchange of the open-economy macroeconomic model to the left?

A)The exchange rate rises.
B)The exchange rate falls.
C)The expected rate of return on U.S.assets rises.
D)The expected rate of return on U.S.assets falls.

Question 58

In the market for foreign-currency exchange in the open-economy macroeconomic model,a higher U.S.real exchange rate makes

A)U.S.goods more expensive relative to foreign goods and reduces the quantity of dollars supplied.
B)U.S.goods more expensive relative to foreign goods and reduces the quantity of dollars demanded.
C)foreign goods more expensive relative to U.S.goods and reduces the quantity of dollars supplied.
D)foreign goods more expensive relative to U.S.goods and reduces the quantity of dollars demanded.

Question 59

Which of the following is included in the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

A)A retail outlet in Russia wants to buy semi-conductors from a U.S.manufacturer.
B)A U.S.bank loans dollars to Blair, a U.S.resident, who wants to purchase a new house in the United States.
C)A U.S.based mutual fund wants to purchase bonds issued by an Italian corporation.
D)All of the above are correct.

Question 60

In the market for foreign-currency exchange in the open economy macroeconomic model,the amount of net capital outflow represents the quantity of dollars

A)supplied for the purpose of selling assets domestically.
B)supplied for the purpose of buying assets abroad.
C)demanded for the purpose of buying U.S.net exports of goods and services.
D)demanded for the purpose of importing foreign goods and services.

Question 61

The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is

A)downward sloping.
B)upward sloping.
C)horizontal.
D)vertical.

Question 62

When the U.S.real interest rate falls,owning U.S.assets is

A)less attractive and so U.S.net capital outflow rises.
B)less attractive and so U.S.net capital outflow falls.
C)more attractive and so U.S.net capital outflow rises.
D)more attractive and so U.S.net capital outflow falls.

Question 63

If the real exchange rate for the dollar is below the equilibrium level,the quantity of dollars supplied in the market for foreign-currency exchange is

A)less than the quantity demanded and the dollar will appreciate.
B)less than the quantity demanded and the dollar will depreciate.
C)greater than the quantity demanded and the dollar will appreciate.
D)greater than the quantity demanded and the dollar will depreciate.

Question 64

Net capital outflow

A)is a source of the supply of loanable funds, and the source of the supply of dollars in the foreign exchange market.
B)is a source of the supply of loanable funds, and a source of the demand for dollars in the foreign exchange market.
C)is a part of the demand for loanable funds, and the source of the supply of dollars in the foreign exchange market.
D)is a part of the demand for loanable funds, and a source of the demand for dollars in the foreign exchange market.

Question 65

The variable that links the market for loanable funds and the market for foreign-currency exchange is

A)net capital outflow.
B)national saving.
C)exports.
D)domestic investment.

Question 66

In the open-economy macroeconomic model,equilibrium is determined by the equality between the supply of dollars which comes from

A)U.S.national saving and the demand for dollars for U.S.net exports.
B)U.S.net capital outflow and the demand for dollars for U.S.net exports.
C)domestic investment and the demand for U.S.net exports.
D)foreign demand for U.S.goods and U.S.demand for foreign goods.

Question 67

Which of the following is correct in an open economy?

A)S = I
B)S = NX + NCO
C)S = NCO
D)S = I + NCO

Question 68

Refer to Figure 32-2.Domestic investment plus net capital outflow is represented by the

A)demand curve in panela
B)demand curve in panelc
C)supply curve in panel a.
D)None of the above is correct.

Question 69

Refer to Figure 32-2.National saving is represented by the

A)demand curve in panela
B)demand curve in panelc
C)supply curve in panel a.
D)supply curve in panel c.

Question 70

When the real exchange rate for the dollar appreciates,U.S.goods become

A)less expensive relative to foreign goods, which makes exports rise and imports fall.
B)less expensive relative to foreign goods, which makes exports fall and imports rise.
C)more expensive relative to foreign goods, which makes exports rise and imports fall.
D)more expensive relative to foreign goods, which makes exports fall and imports rise.

Question 71

If a U.S.resident wants to buy a foreign bond,his actions are included

A)in the U.S.supply of loanable funds and the supply of dollars in the market for foreign-currency exchange.
B)in the U.S.supply of loanable funds and the demand for dollars in the market for foreign-currency exchange.
C)in the U.S.demand for loanable funds and the supply of dollars in the market for foreign-currency exchange.
D)in the U.S.demand for loanable funds and the supply of dollars in the market for foreign-currency exchange.

Question 72

When the real exchange rate for the dollar depreciates,U.S.goods become

A)less expensive relative to foreign goods, which makes exports rise and imports fall.
B)less expensive relative to foreign goods, which makes exports fall and imports rise.
C)more expensive relative to foreign goods, which makes exports rise and imports fall.
D)more expensive relative to foreign goods, which makes exports fall and imports rise.

Question 73

In the open-economy macroeconomic model,the quantity of dollars demanded in the market for foreign-currency exchange

A)depends on the real exchange rate.The quantity of dollars supplied in the foreign-exchange market depends on the real interest rate.
B)depends on the real interest rate.The quantity of dollars supplied in the foreign-exchange market depends on the real exchange rate.
C)and the quantity of dollars supplied in the market for foreign-currency exchange depend on the real exchange rate.
D)and the quantity of dollars supplied in the market for foreign-currency exchange depend on the real interest rate.

Question 74

In the open-economy macroeconomic model,if the supply of loanable funds increases,the interest rate

A)and the real exchange rate increase.
B)and the real exchange rate decrease.
C)increases and the real exchange rate decreases.
D)decreases and the real exchange rate increases.

Question 75

If the real exchange rate for the dollar is above the equilibrium level,the quantity of dollars supplied in the market for foreign-currency exchange is

A)greater than the quantity demanded and the dollar will appreciate.
B)greater than the quantity demanded and the dollar will depreciate.
C)less than the quantity demanded and the dollar will appreciate.
D)less than the quantity demanded and the dollar will depreciate.

Question 76

In the open-economy macroeconomic model,if a country's interest rate increases,its net capital outflow

A)and the real exchange rate increase.
B)and the real exchange rate decrease.
C)increases and the real exchange rate decreases.
D)decreases and the real exchange rate increases.

Question 77

Other things the same,if the Canadian real interest rate were to increase,Canadian net capital outflow

A)and net capital outflow of other countries would rise.
B)and net capital outflow of other countries would fall.
C)would rise, while net capital outflow of other countries would fall.
D)would fall, while net capital outflow of other countries would rise.

Question 78

In the open-economy macroeconomic model,which of the following would make India's net capital outflow decrease?

A)a decrease in U.S.interest rates.
B)a decrease in Indian interest rates.
C)an appreciation of the Indian rupee.
D)None of the above is correct.

Question 79

In the open-economy macroeconomic model,the key determinant of net capital outflow is the

A)nominal exchange rate.
B)nominal interest rate.
C)real exchange rate.
D)real interest rate.

Question 80

In the open-economy macroeconomic model,if the supply of loanable funds increases,net capital outflow

A)and the real exchange rate increase.
B)and the real exchange rate decrease.
C)increases and the real exchange rate decreases.
D)decreases and the real exchange rate increases.