Deck 32: A Macroeconomic Theory of the Open Economy

Question 1

Net capital outflow represents the quantity of dollars supplied in the foreign-currency exchange market.

Answer 1

True

Question 2

A drop in the French real interest rate reduces French net capital outflow.

Answer 2

False

Question 3

The purchase of a capital asset adds to the demand for loanable funds only if that asset is a domestic one.

Answer 3

False

Question 4

In the open-economy macroeconomic model,at the equilibrium real interest rate,the amount that people (including government)want to save exactly balances desired domestic investment.

Question 5

In the open-economy macroeconomic model,other things the same,when a U.S.resident imports a foreign good,our model treats this as a decrease in the demand for dollars in the foreign-currency exchange market.

Question 6

The primary focus of the open-economy macroeconomic model is the determination of GDP and the price level.

Question 7

In the open-economy macroeconomic model,a higher domestic interest rate reduces the quantity of loanable funds demanded

Question 8

In an open economy,the supply of loanable funds comes from national saving.

Question 9

In the open-economy macroeconomic model,the supply curve of currency is vertical because the quantity of currency supplied does not depend on the real exchange rate.

Question 10

Over the past two decades the U.S.has persistently had trade deficits.

Question 11

In the open-economy macroeconomic model,net exports equal the quantity of dollars demanded in the foreign-currency exchange market.

Question 12

Over the past two decades,the United States has persistently exported more goods and services than it has imported.

Question 13

Other things the same,a higher real exchange rate raises net exports.

Question 14

In the open-economy macroeconomic model,the supply of dollars in the market for foreign-currency exchange is upward sloping.

Question 15

In an open economy,the demand for loanable funds comes from both domestic investment and net capital outflow.

Question 16

The key determinant of net capital outflow is the real interest rate.

Question 17

If the real interest rate were above the equilibrium rate,there would be a shortage of loanable funds.

Question 18

A higher U.S.interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S.assets.

Question 19

If the real exchange rate of the U.S.dollar were above its equilibrium level,the real exchange rate of the U.S.dollar would appreciate.

Question 20

Other things the same,when the real exchange rate of the dollar appreciates,U.S.goods become more attractive to U.S.residents,but less attractive to foreign residents.

Question 21

When the government budget deficit increases,national saving increases.

Question 22

An import quota imposed by Egypt would reduce Egyptian imports,but have no impact on Egyptian exports.

Question 23

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

Question 24

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 25

When a country imposes a trade restriction,the real exchange rate of that country's currency appreciates.

Question 26

As the interest rate rises,it is possible that net capital outflow could move from a positive to a negative value.

Question 27

Other things the same,when a Greek company imports bicycles from the U.S. ,the open-economy macroeconomic model treats this transaction as an increase in the quantity of dollars demanded in the U.S.foreign-currency exchange market.

Question 28

In the long run import quotas do not affect the size of net exports.

Question 29

According to the open-economy macroeconomic model,a decrease in the U.S.government budget deficit increases U.S.net capital outflow,causes the real exchange rate of the dollar to depreciate,and increases U.S.net exports.

Question 30

In the long run,import quotas increase net exports.

Question 31

Capital flight reduces a country's real exchange rate.

Question 32

If Argentina suffers from capital flight,Argentinean domestic investment and Argentinean net exports will both decline.

Question 33

According to the open-economy macroeconomic model,if the U.S.government budget deficit increases,then both U.S.domestic investment and U.S.net capital outflow would decrease.

Question 34

Because depreciation of the real exchange rate of the dollar increases U.S.net exports,the demand curve for dollars in the foreign-currency exchange market is downward sloping.

Question 35

Although trade policies do not affect a country's overall trade balance,they do affect specific firms and industries.

Question 36

In the 1980s,both the U.S.government budget and U.S.trade deficits increased.

Question 37

In the open-economy macroeconomic model,net capital outflow links the markets for loanable funds and foreign-currency exchange.

Question 38

According to the open-economy macroeconomic model,if the United States moved from a government budget deficit to a government budget surplus,U.S.real interest rates would increase and the real exchange rate of the U.S.dollar would appreciate.

Question 39

In the open-economy macroeconomic model,the real exchange rate does not affect net capital outflow.

Question 40

If policymakers impose import restrictions on clothing,the U.S.trade deficit will shrink.

Question 41

What effect do protectionist policies have on the trade deficit?

Question 42

Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S.citizens from investing in foreign companies and increase the value of the dollar.Evaluate this promise.

Question 43

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.

Question 44

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 45

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

Question 46

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 47

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

Question 48

Explain how an increase in the demand for capital goods in the U.S.can lead to a change in the U.S.exchange rate.

Question 49

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

Question 50

What do trade policies do to the standard of living?

Question 51

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 52

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 53

Suppose that U.S.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 54

Suppose the U.S.government institutes a "Buy American" campaign,in order to encourage spending on domestic goods.What effect will this have on the U.S.trade balance?

Question 55

In an open economy,national saving equals

A) domestic investment plus net capital outflow.
B) domestic investment minus net capital outflow.
C) domestic investment.
D) net capital outflow.

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.

Question 57

In the open-economy macroeconomic model,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.

Question 58

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 59

In the open-economy macroeconomic model,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 60

Fill in the table below with the direction of the variables that change in response to the events in the first column.

Question 61

A country has national saving of $70 billion,government expenditures of $20 billion,domestic investment of $30 billion,and net capital outflow of $40 billion.What is its supply of loanable funds?

A) $30 billion
B) $40 billion
C) $50 billion
D) $70 billion

Question 62

In the open-economy macroeconomic model,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 63

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 64

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

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

Question 65

If a country has a positive net capital outflow,then

A) on net it is purchasing assets from abroad.This adds to its demand for domestically generated loanable funds.
B) on net it is purchasing assets from abroad.This subtracts from its demand for domestically generated loanable funds.
C) on net other countries are purchasing assets from it.This adds to its demand for domestically generated loanable funds.
D) on net other countries are purchasing assets from it.This subtracts from its demand for domestically generated loanable funds.

Question 66

A country has national saving of $80 billion,government expenditures of $40 billion,domestic investment of $60 billion,and net capital outflow of $20 billion.What is its demand for loanable funds?

A) $40 billion
B) $60 billion
C) $80 billion
D) $120 billion

Question 67

U.S.corporation Titan Bikes borrows funds to build a factory in the U.S.and a factory in Denmark.Borrowing for factories in which location(s)is included in the U.S.demand for loanable funds?

A) The U.S.only.
B) Denmark only.
C) The U.S.and Denmark.
D) Neither the U.S.nor Denmark.

Question 68

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 69

In the open-economy macroeconomic model,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 70

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

A) national saving.The demand for loanable funds comes from domestic investment + net capital outflow.
B) national saving.The demand for loanable funds comes only from domestic investment.
C) private saving.The demand for loanable funds comes from domestic investment + net capital outflow.
D) private saving.The demand for loanable funds comes only from domestic investment.

Question 71

U.S.corporation Well's Petroleum borrows money to build an oil well in Texas and to build another in Venezuela.Borrowing for which well is included in the demand for loanable funds in the U.S.?

A) The U.S.and Venezuela.
B) The U.S.only.
C) Venezuela only.
D) Neither the U.S.or Venezuela.

Question 72

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 73

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 74

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 75

Other things the same,an increase in the U.S.interest rate causes the quantity of loanable funds supplied to

A) rise because net capital outflow and domestic investment rise.
B) rise because national saving rises.
C) fall because net capital outflow and domestic investment rise.
D) fall because national saving falls.

Question 76

Other things the same,as the real interest rate rises

A) domestic investment and net capital outflow both rise.
B) domestic investment and net capital outflow both fall.
C) domestic investment rises and net capital outflow falls.
D) domestic investment falls and net capital outflow rises.

Question 77

A country has national saving of $60 billion,government expenditures of $30 billion,domestic investment of $40 billion,and net capital outflow of $20 billion.What is its supply of loanable funds?

A) $30 billion
B) $60 billion
C) $70 billion
D) $100 billion

Question 78

Other things the same,people in the U.S.would want to save more if the real interest rate in the U.S.

A) fell.The increased saving would increase the quantity of loanable funds demanded.
B) fell.The increased saving would increase the quantity of loanable funds supplied.
C) rose.The increased saving would increase the quantity of loanable funds demanded.
D) rose.The increased saving would increase the quantity of loanable funds supplied.

Question 79

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 80

The explanation for the slope of

A) the supply of loanable funds curve is based on the logic that a higher real interest rate leads to higher saving.
B) the demand for loanable funds curve is based on the logic that a higher interest rate leads to higher saving.
C) the supply of loanable funds curve is based on the logic that a higher real interest rate leads to lower saving.
D) the demand for loanable funds curve is based on the logic that a higher interest rate leads to lower saving.