Deck 6: The Open Economy

Question 1

If a Canadian corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then Canadian net exports _____, and net capital outflows _____.

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

Answer 1

increase; increase

Question 2

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.

Answer 2

domestic investment exceeds domestic saving.

Question 3

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.

Answer 3

its domestic interest rate always exceeds the world interest rate.

Question 4

If a Canadian corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a Canadian government bond, then Canadian net exports _____, and net capital outflows _____.

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

Question 5

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 6

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

Question 7

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.

Question 8

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.

Question 9

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 10

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 11

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 12

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 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:

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

Question 14

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 Bank of Canada.

Question 15

The value of net exports is also the value of:

A)net investment.
B)net saving.
C)national saving.
D)the difference of national saving and domestic investment.

Question 16

If a Canadian corporation sells a product to the United States and uses the proceeds to purchase a product manufactured in United States, then Canadian 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 17

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 18

A "closed" 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 19

If net capital outflow is positive, then:

A)imports must be positive.
B)exports must be negative.
C)the trade balance must be positive.
D)the trade balance must be negative.

Question 20

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 21

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 22

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 23

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 24

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 25

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 26

The real exchange rate:

A)measures how many Japanese yen you can get for one Canadian dollar.
B)is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the domestic price level divided by the foreign price level.
C)is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) 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 27

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)labour is relatively scarce.

Question 28

If 5 Swiss francs trade for $1, the Canadian price level equals $1 for a good, and the Swiss price level equals 2 francs for the same good, then the real exchange rate between Swiss goods and Canadian goods is _____ Swiss good(s) per Canadian good.

A)0.4
B)2.5
C)5
D)10

Question 29

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 30

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 31

If the real exchange rate depreciates from 1 Japanese good per Canadian good to 0.5 Japanese good per Canadian good, then Canadian exports _____, and Canadian imports _____.

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

Question 32

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 33

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 34

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 35

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.
B)an increase in both domestic investment and domestic saving.
C)an increase in domestic saving but no change in domestic investment.
D)an increase in domestic investment but no change in domestic saving.

Question 36

The nominal exchange rate between the Canadian dollar and the Japanese yen (measured in $ / 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 Canadian goods divided by the price of Japanese goods.
D)price of Japanese goods divided by the price of Canadian goods.

Question 37

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 38

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 39

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 40

In a 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 41

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 42

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of an increase in investment demand on the real exchange rate?

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

Question 43

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 44

If a country has a high rate of inflation relative to Canada (holding the real exchange rate fixed), 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 45

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 46

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 47

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of an increase in household saving on the real exchange rate?

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

Question 48

If the purchasing-power parity theory is true, then:

A)the net exports schedule is very steep.
B)all changes in the real exchange rate result from changes in price levels.
C)all changes in the nominal exchange rate result from changes in price levels.
D)changes in saving or investment influence only the real exchange rate.

Question 49

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate (measured in units of the home currency divided by units of foreign currency):

A)rises, and home country net exports fall.
B)rises, and home country net exports rise.
C)falls, and home country net exports fall.
D)falls, and home country net exports rise.

Question 50

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 51

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate?

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

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

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of contractionary fiscal policies abroad on the real exchange rate?

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

Question 54

If the real exchange rate between Canada and Japan remains unchanged, and the inflation rate in Canada 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 55

Which of the following would decrease the real exchange rate in a small open economy?

A)a personal income tax cut
B)a reduction in government spending
C)a tariff on imports
D)an increase in investment

Question 56

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 57

The Canadian dollar exchange rate (units of foreign currency per Canadian dollar) for currencies of countries with high inflation rates relative to Canada has tended to _____, and the Canadian dollar exchange rate (units of foreign currency per Canadian dollar) for currencies of countries with low inflation rates relative to Canada has tended to _____.

A)appreciate; appreciate
B)appreciate; depreciate
C)depreciate; depreciate
D)depreciate; appreciate

Question 58

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 59

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 60

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact on of protectionist trade policies on the real exchange rate?

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

Question 61

In a small open economy, if the introduction of automatic teller machines reduces the demand for money, then net exports:

A)fall, and the real exchange rate falls.
B)fall, but the real exchange rate remains unchanged.
C)remain unchanged, but the real exchange rate falls.
D)increase, and the real exchange rate remains unchanged.

Question 62

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:

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 63

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate:

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

Question 64

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.
​
a.If government spending rises by 100, does investment change? What is the level of investment after the change?
b.Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much?
c.Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much?
d.Will the real exchange rate rise, fall, or remain constant as a result of the change in G?

Question 65

In a large open economy, the real interest rate is determined by:

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

Question 66

In a large open economy, the interest rate adjusts so that domestic saving equals:

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

Question 67

In a large open economy, if an import quota is adopted, then:

A)net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises.
B)net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate falls.
C)net exports rise and the real exchange rate rises.
D)net exports rise and the real exchange rate falls.

Question 68

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate.

A)increase
B)decrease
C)not change
D)either increase or decrease

Question 69

According to purchasing-power parity, if the dollar price of oil is higher in Toronto than in London, arbitrageurs will _____ oil in Toronto and _____ oil in London to drive _____ the price of oil in Toronto.

A)buy; sell; up
B)buy; sell; down
C)sell; buy; up
D)sell; buy; down

Question 70

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

A)vertical line at 0.
B)horizontal line at the world real interest rate.
C)line that slopes up and to the right.
D)line that slopes down and to the right.

Question 71

In a large open economy, an investment tax credit raises the real interest rate, _____ the trade balance, and _____ net capital outflow.

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

Question 72

Purchasing-power parity theory:

A)is a completely accurate description of the real world.
B)would be entirely accurate if only goods were traded.
C)would be entirely accurate if all consumers had the same preferences.
D)provides a reason to expect that movements in the real exchange rate will typically be small or temporary.

Question 73

Expansionary fiscal policy in a large open economy _____ the real interest rate and _____ the real exchange rate.

A)does not change; increases
B)increases; increases
C)increases; decreases
D)decreases; increases

Question 74

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:

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

Question 75

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

A)vertical line at 0.
B)horizontal line at the world real interest rate.
C)line that slopes up and to the right.
D)line that slopes down and to the right.

Question 76

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:

A)rises, and net exports fall.
B)and net exports both rise.
C)falls, and net exports rise.
D)and net exports both fall.

Question 77

In a large open economy, the exchange rate adjusts so that net exports equal:

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

Question 78

Net capital outflow in a large country:

A)rises as the real domestic interest rate rises.
B)declines as the domestic interest rate rises.
C)depends on the foreign interest rate.
D)depends only on domestic saving.

Question 79

In a small open economy, if consumers shift their preference toward Japanese cars, then net exports:

A)fall, and the real exchange rate falls.
B)fall, but the real exchange rate remains unchanged.
C)remain unchanged, but the real exchange rate falls.
D)increase, and the real exchange rate remains unchanged.

Question 80

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

A)rises, while the real exchange rate rises and net exports fall.
B)rises, while the real exchange rate falls and net exports rise.
C)falls, while the real exchange rate rises and net exports rise.
D)falls, while the real exchange rate rises and net exports fall.