Deck 12: A Macroeconomic Theory of the Open Economy

Question 1

Which of the following could increase the supply of rands in the foreign exchange market?

A)A reduction in the rate of inflation in SA.
B)A reduction in real interest rates in SA.
C)An increase in the SA government budget deficit.
D)A depreciation of other currencies.

Answer 1

A reduction in real interest rates in SA.

Question 2

Households make their savings available to borrowers through

A)resource markets.
B)the loanable funds market.
C)the labour market.
D)taxes.

Answer 2

the loanable funds market.

Question 3

Assuming all other things unchanged, a higher SA real interest rate

A)decreases SA net capital outflow because SA residents and foreigners prefer to invest in SA.
B)None of these answers.
C)decreases SA net capital outflow because SA residents and foreigners prefer to invest abroad.
D)increases SA net capital outflow because SA residents and foreigners prefer to invest in SA.

Answer 3

decreases SA net capital outflow because SA residents and foreigners prefer to invest in SA.

Question 4

If a country's net capital outflow is positive, it is an addition to its demand for loanable funds.

Question 5

A country experiencing capital flight will experience a reduction in its net capital outflow and its net exports.

Question 6

An increase in the government's budget deficit shifts the supply of loanable funds to the right.

Question 7

If SA raises its tariff on imported sugar, domestic sugar growers will benefit, but the rand will appreciate and domestic producers of export goods will be harmed.

Question 8

A rise in SA's net exports will increase the demand for the SA rands in the market for foreign currency exchange and the rand will appreciate in value.

Question 9

A country's net capital outflow is always equal to its net exports.

Question 10

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 11

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 12

Which of the following statements regarding the loanable funds market is not true?

A)A decrease in a country's net capital outflow shifts the demand for loanable funds to the left.
B)An increase in domestic investment shifts the demand for loanable funds to the right.
C)An increase in a country's net capital outflow shifts the supply of loanable funds to the left.
D)An increase in a country's net capital outflow raises its real interest rate.

Question 13

Which of the following statement regarding the loanable funds market is true?

A)A decrease in the government budget deficit increases the real interest rate.
B)An increase in the government budget deficit shifts the supply of loanable funds to the right.
C)An increase in private saving shifts the supply of loanable funds to the left.
D)An increase in the government budget deficit shifts the supply of loanable funds to the left.

Question 14

An increase in the government budget deficit

A)has no impact on the real interest rate and fails to crowd out investment because foreigners buy assets in the deficit country.
B)decreases the real interest rate and crowds out investment.
C)None of these answers.
D)increases the real interest rate and crowds out investment.

Question 15

The supply of foreign exchange is

A)determined by the real exchange rate.
B)independent of the real exchange rate.
C)determined by central bankers.
D)determined by the government of the country concerned.

Question 16

If SA raises its tariff on imported sugar, it will reduce imports and improve its trade balance.

Question 17

An increase in SA net capital outflow increases the supply of rands in the market for foreign currency exchange and decreases the real exchange rate of the rands.

Question 18

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 19

Net capital outflow is the purchase of domestic assets by foreigners minus the purchase of foreign assets by domestic residents.

Question 20

All other things being equal, an increase in a country's real interest rate reduces net capital outflow.

Question 21

A large and sudden movement of capital out of a country is called

A)capital inflow.
B)capital flight.
C)trade deficit.
D)trade surplus.

Question 22

If SA imposes a quota on the importing of clothing produced in China, so reducing SA imports of clothing, which of the following is true regarding SA net exports?

A)Net exports will rise.
B)None of these answers.
C)Net exports will fall.
D)Net exports will remain unchanged.

Question 23

Government trade policies, such as tariffs and quota restrictions on imports,

A)can eliminate a trade imbalance.
B)often increase a trade deficit.
C)have no real effect on the trade balance.
D)can lower a deficit on current account but not on the capital account.

Question 24

If SA imposes a quota on the importing of clothing produced in China, so reducing SA imports of clothing, which of the following is true regarding the market for foreign currency exchange?

A)The demand for rands decreases and the rand depreciates.
B)The supply of rands increases and the rand depreciates.
C)The supply of rands decreases and the rand appreciates.
D)The demand for rands increases and the rand appreciates.

Question 25

In response to an import quota

A)exports increase by more than imports.
B)imports increase by more than exports.
C)imports and exports are unaffected, but the government collects revenues.
D)imports and exports are both reduced, but net exports are unchanged.

Question 26

If a country's government wants to eliminate a trade deficit, its most effective policy would be to

A)reduce tariffs.
B)encourage imports.
C)impose quotas on imports.
D)reduce its budget deficit.

Question 27

Crowding out caused by government budget deficits will lead to

A)an increase in the real exchange rate.
B)a decrease in the real exchange rate.
C)no change in the real exchange rate.
D)a devaluation in a nation's currency.

Question 28

The phrase "twin deficits" refers to

A)a country's trade deficit and its government budget deficit.
B)the fact that if a country has a trade deficit, its trading partners must also have trade deficits.
C)the equality of a country's saving deficit and its investment deficit.
D)a country's trade deficit and its net capital outflow deficit.

Question 29

Increased foreign investment in SA causes the

A)balance on current account to become positive.
B)sum of the capital and current accounts to be positive.
C)balance of trade to become negative.
D)foreign exchange value of the rand to increase.

Question 30

Which of the following statements regarding the market for foreign currency exchange is true? An increase in SA net exports

A)decreases the supply of rands and the rand depreciates.
B)increases the demand for rands and the rand appreciates.
C)increases the supply of rands and the rand depreciates.
D)decreases the demand for rands and the rand appreciates.

Question 31

Which of the following statements regarding the market for foreign currency exchange is true?

A)An increase in SA net capital outflow increases the supply of rands and the rand depreciates.
B)An increase in SA net capital outflow increases the demand for rands and the rand appreciates.
C)An increase in SA net capital outflow increases the demand for rands and the rand depreciates.
D)An increase in SA net capital outflow increases the supply of rands and the rand appreciates.

Question 32

If a country's government increases its budget deficit, then the

A)supply of loanable funds will increase.
B)supply of loanable funds will decrease.
C)real interest rate will fall.
D)real exchange rate will fall.

Question 33

Consider this diagram of the market for foreign currency exchange.If the US government decides to increase import tariffs on imported steel, we could expect the

A)demand for dollars to shift from D₁ to D₂.
B)demand for dollars to shift from D₂ to D₁.
C)supply of dollars to increase.
D)supply of dollars to decrease.

Question 34

If a country has a high savings rate relative to other countries, then the

A)supply of loanable funds is larger, interest rates are lower, and net capital outflow is higher for that country than for others.
B)supply of loanable funds is smaller, interest rates are higher, and net capital outflow is lower for that country than for others.
C)demand for loanable funds is larger, interest rates are higher, and net capital outflow is lower for that country than for others.
D)government must subsidize production in order to encourage international trade.

Question 35

The link between the loanable funds market and the foreign exchange market is

A)the governments of the countries involved.
B)the International Monetary Fund.
C)net capital outflow.
D)purchasing power parity.

Question 36

An increase in Japanese citizens' purchases of holidays in SA would

A)cause the rand to appreciate, but the total value of SA net exports stays the same.
B)cause the rand to depreciate, but the total value of SA net exports stays the same.
C)cause the total value of SA net exports to increase, but the foreign exchange value of the rand to appreciate stays the same.
D)cause the total value of SA net exports to decrease, but the foreign exchange value of the rand to appreciate stays the same.

Question 37

If a country experiences a tremendous increase in the demand for loanable funds as many new infrastructure building projects are initiated, then the interest rate will

A)rise, there will be a decrease in net capital outflow, and the real exchange rate will fall.
B)rise, there will be a decrease in net capital outflow, and the real exchange rate will rise.
C)fall, there will be an increase in net capital outflow, and the real exchange rate will rise.
D)fall, there will be an increase in net capital outflow, and the real exchange rate will fall.

Question 38

An increase in the SA government budget deficit

A)increases SA net exports and decreases SA net capital outflow.
B)decreases SA net exports and SA net capital outflow the same amount.
C)increases SA net exports and SA net capital outflow the same amount.
D)decreases SA net exports and increases SA net capital outflow.

Question 39

Capital flight is often caused by

A)political stability.
B)shifts away from the industrial sector and towards the service sector.
C)political instability.
D)policies of the International Monetary Fund.

Question 40

An increase in South Africa's taste for UK produced Hondas would cause the pound to

A)depreciate and would increase UK net exports.
B)appreciate and would increase UK net exports.
C)depreciate and would decrease UK net exports.
D)appreciate and would decrease UK net exports.

Question 41

Suppose that SA 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 42

Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand for foreign currency exchange curve.Use SA as an example.

Question 43

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

Question 44

An export subsidy should have the opposite effect of

A)a government budget deficit.
B)capital flight.
C)an increase in private saving.
D)a tariff.

Question 45

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

Question 46

Which of the following statements about trade policy is true?

A)A country's trade policy has no impact on the size of its trade balance.
B)None of these answers.
C)A restrictive import quota decreases a country's net exports.
D)A restrictive import quota increases a country's net exports.

Question 47

Which of the following groups would NOT benefit from an SA import quota on Japanese cars?

A)SA consumers who buy electronics from Japan.
B)SA farmers who export grain.
C)Employees of SA car manufacturers.
D)Shareholders of German carmaker BMW.

Question 48

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 49

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

Question 50

Capital flight

A)decreases a country's net exports and increases its long run growth path.
B)increases a country's net exports and increases its long run growth path.
C)increases a country's net exports and decreases its long run growth path.
D)decreases a country's net exports and decreases its long run growth path.

Question 51

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 52

An increase in SA private saving

A)increases SA net exports and SA net capital outflow the same amount.
B)increases SA net exports and decreases SA net capital outflow.
C)decreases SA net exports and SA net capital outflow the same amount.
D)decreases SA net exports and increases SA net capital outflow.

Question 53

Suppose, due to political instability, Russia suddenly choose to invest in SA assets as opposed to Russian assets.Which of the following statements is true regarding SA net foreign investment?

A)SA net foreign investment is unchanged because only SA residents can alter SA net foreign investment.
B)SA net foreign investment rises.
C)SA net foreign investment falls.
D)None of these answers.

Question 54

Explain how an increase in the demand for capital goods in South Africa can lead to a change in the value of the rand against other currencies.

Question 55

If a country had capital flight, then the real exchange rate would

A)fall.To offset this fall the government could increase the budget deficit.
B)fall.To offset this fall the government could decrease the budget deficit.
C)rise.To offset this rise the government could increase the budget deficit.
D)rise.To offset this rise the government could decrease the budget deficit.

Question 56

Suppose, due to political instability, Russians suddenly choose to purchase SA assets as opposed to Russian assets.Which of the following statements is true regarding the value of the rand and SA net exports? The pound:

A)appreciates, and SA net exports rise.
B)appreciates, and SA net exports fall.
C)depreciates, and SA net exports rise.
D)depreciates, and SA net exports fall.

Question 57

An example of a trade policy is

A)a tariff on sugar.
B)all are examples of trade policy.
C)capital flight because it increases a country's net exports.
D)an increase in the government budget deficit because it reduces a country's net exports.

Question 58

Which of the following groups would be most harmed by a SA government budget deficit?

A)Foreigners who wish to buy assets in SA.
B)An SA company wishing to sell aircraft to Saudi Arabia.
C)SA residents wishing to buy foreign produced cars.
D)Lenders of loanable funds.

Question 59

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

Question 60

What impact do trade policies, such as tariffs and quotas, have on the standard of living?