Question 1

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.

Accepted Answer

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

Question 2

Use the following to answer questions :
Exhibit: Policies Influence Real Exchange Rate A)

Accepted Answer

B) 
 
C) 
 
D)

-(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)

Question 3

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?

Accepted Answer

The answer of Suppose that the large industrial countries of...

Question 4

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate:

Accepted Answer

A)  and net exports will both fall. 
B)  will fall and net exports will rise. 
C)  will rise and net exports will fall. 
D)  and net exports will both rise.

Question 5

Assume that the following equations characterize a large open economy:
(1) Y = 5,000
(2) Y = C + I + G + NX
(3) C = 1/2(Y - T)
(4) I = 2,000 - 100r
(5) NX = 500 - 500$\varepsilon$
(6) CF = -100r
(7) CF = NX
(8) G = 1,500
(9) T = 1,000.
Where NX is net exports, CF is net capital outflow, and $ \in $ is the real exchange rate.
Solve these equations for the equilibrium values of C, I, NX, CF, r, and $\varepsilon$. (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and $\varepsilon$. Check your work by seeing that all of these equations balance given your answers.)

Accepted Answer

The answer of Assume that the following equations characterize a...

Question 6

A country's exports may be written as equal to:

Accepted Answer

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 7

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)  borrowing from domestic banks. 
C)  the domestic government. 
D)  the World Bank.

Question 8

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 9

A "small" economy is one in which the:

Accepted Answer

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 10

If the number of dollars per yen rises, this is called a(n):

Accepted Answer

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 11

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

Accepted Answer

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

Question 12

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 13

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

Accepted Answer

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

Question 14

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

Accepted Answer

A)  decrease by 8 percent. 
B)  decrease by 4 percent. 
C)  increase by 4 percent. 
D)  increase by 5 percent.

Question 15

An increase in the trade deficit of a small open economy could be the result of:

Accepted Answer

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 16

Net exports equal GDP minus domestic spending on:

Accepted Answer

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 17

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

Accepted Answer

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 18

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 19

A depreciation of the real exchange rate in a small open economy could be the result of:

Accepted Answer

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.

Exam 6: The Open Economy

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.

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