Question 1

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade and net capital outflow.

Accepted Answer

A) deficit; negative 
B) surplus; negative 
C) deficit; positive 
D) surplus; positive

Question 2

An "open" economy is one in which:

Accepted Answer

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 3

In an open economy:

Accepted Answer

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 4

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.

Accepted Answer

The answer of In the 2008 global financial crisis, many...

Question 5

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:

Accepted Answer

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

Question 6

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

Accepted Answer

A) increasing taxes 
B) increasing government spending 
C) increasing investment tax credits 
D) imposing protectionist trade policies

Question 7

A small open economy with perfect capital mobility is characterized by all of the following except that:

Accepted Answer

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 8

The adoption of an investment tax credit in a small open economy is likely to lead to:

Accepted Answer

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 9

Holding other factors constant, legislation to cut taxes in an open economy will:

Accepted Answer

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 10

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

Accepted Answer

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

Question 11

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:

Accepted Answer

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 12

If net capital outflow is positive, then:

Accepted Answer

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 13

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:

Accepted Answer

A) -$25 billion. 
B) -$10 billion. 
C) $10 billion. 
D) $25 billion.

Question 14

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?

Accepted Answer

The answer of Suppose that the International Monetary Fund (IMF)...

Question 15

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?

Accepted Answer

The answer of Assume that in a small open economy...

Question 16

If domestic saving is less than domestic investment, then net exports are and net capital outflows are
)

Accepted Answer

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

Question 17

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.

Accepted Answer

The answer of a. Suppose that governments around the world...

Question 18

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 .

Accepted Answer

A) a trade deficit; $100 billion 
B) balanced trade; $0 
C) a trade surplus; $100 billion 
D) balanced trade; $100 billion

Question 19

The world interest rate:

Accepted Answer

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 20

Net capital outflow is equal to:

Accepted Answer

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.

Exam 5: Elasticity and Its Application