Deck 6: The Open Economy

Question 1

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.

Answer 1

borrowing from abroad.

Question 2

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.

Answer 2

all goods and services.

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

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

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

Question 5

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 6

A trade deficit can be financed in all of the following ways 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

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 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 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 10

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 11

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 12

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 13

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 positive.
D) imports are less than exports.

Question 14

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

Question 15

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 16

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

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

Question 17

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 18

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 19

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 20

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 21

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 22

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 23

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 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

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 26

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 27

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 28

Use the following to answer questions :
Exhibit: Saving and Investment in a Small Open Economy
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r₁, then the economy has:

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

Question 29

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 30

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 31

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 32

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 33

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 34

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

Question 35

Starting from a 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 36

Use the following to answer questions :
Exhibit: Saving and Investment in a Small Open Economy
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r₃, then the economy has:

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

Question 37

In a small open economy with perfect capital mobility, 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 38

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 39

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 40

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 41

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 42

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 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

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 45

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 46

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 47

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

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

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

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 50

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 51

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 52

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______.

A) increases; appreciates
B) increases; depreciates
C) decreases; appreciates
D) decreases; depreciates

Question 53

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 54

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 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

Question 56

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 57

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 58

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 59

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 60

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

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

Question 61

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 62

In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment:

A) increases and is financed through an increase in national saving.
B) increases and is financed through an increase in exports.
C) increases and is financed through an inflow of foreign capital.
D) does not increase; the interest rate rises instead.

Question 63

One consequence of high inflation is a(n):

A) appreciating nominal exchange rate.
B) decrease in the price of goods measured in terms of money.
C) depreciating nominal exchange rate.
D) decrease in the price of foreign currencies measured in terms of the domestic currency.

Question 64

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 65

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______.

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

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

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 68

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 69

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 70

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.

Question 71

Use the following to answer questions :
Exhibit: Policies Influence Real Exchange Rate
(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in household saving?

A) (A)
B) (B)
C) (C)
D) (D)

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

Question 73

Use the following to answer questions :
Exhibit: Policies Influence Real Exchange Rate
(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in investment demand?

A) (A)
B) (B)
C) (C)
D) (D)

Question 74

Use the following to answer questions :
Exhibit: Policies Influence Real Exchange Rate
(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of protectionist trade policies?

A) (A)
B) (B)
C) (C)
D) (D)

Question 75

Use the following to answer questions:
Exhibit: Policies Influence Real Exchange Rate
(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies at home?

A) (A)
B) (B)
C) (C)
D) (D)

Question 76

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 77

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 78

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 79

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 80

Use the following to answer questions :
Exhibit: Policies Influence Real Exchange Rate
(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies abroad?

A) (A)
B) (B)
C) (C)
D) (D)