Deck 18: The Goods Market in an Open Economy

Question 1

Suppose there is a reduction in foreign output (Y*).This reduction in Y* will cause which of the following in the domestic country?

A)a reduction in output
B)a reduction in consumption
C)a reduction in net exports
D)all of the above
E) none of the above

Answer 1

all of the above

Question 2

Assume the Marshall-Lerner condition holds.Which of the following will cause an increase in net exports?

A)an increase in government spending
B)an increase in investment
C)a reduction in foreign output
D)a reduction in the real exchange rate
E) all of the above

Answer 2

a reduction in the real exchange rate

Question 3

Using the ZZ / Y and NX graphs,illustrate graphically and explain what effect an increase in government spending will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Answer 3

An increase in government spending will cause ZZ to shift up as demand rises.Y will increase causing an increase in C and S.As Y rises,imports will rise.Given that exports do not change,net exports will decrease.

Question 4

Explain the determinants of exports and imports.

Question 5

Which of the following represents the domestic demand for goods?

A)C + I + G
B)C + I + G + X
C)C + I + G - IM / ε
D)C + I + G + X - εM / ε
E) C + I + G + X + εIM

Question 6

Using the ZZ / Y and NX graphs,illustrate graphically and explain what effect a reduction in taxes will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Question 7

In an open economy,an increase in government spending will cause

A)a reduction in domestic output.
B)a reduction in imports.
C)a reduction in net exports.
D)all of the above
E) none of the above

Question 8

Which of the following is true when a county is experiencing a trade deficit (NX < 0)?

A)Demand for domestic goods is equal to the domestic demand for goods.
B)Demand for domestic goods is greater than the domestic demand for goods.
C)Demand for domestic goods is less than the domestic demand for goods.
D)A budget deficit exists.

Question 9

The quantity of imports will increase when there is

A)a reduction in the real exchange rate.
B)an increase in domestic output.
C)an increase in foreign output.
D)all of the above
E) none of the above

Question 10

Which of the following occurs when the goods market is in equilibrium?

A)Domestic output (Y)equals the demand for domestic goods.
B)Y equals the domestic demand for goods.
C)Y equals the domestic demand for domestic goods.
D)Net exports equals 0.
E) Demand for domestic goods equals the domestic demand for goods.

Question 11

In an open economy,which of the following will cause an increase in the size of the multiplier?

A)a reduction in the marginal propensity to import
B)a reduction foreign output
C)an increase in the marginal propensity to save
D)all of the above
E) none of the above

Question 12

The expression,IM,represents the value of imports in terms of

A)foreign currency.
B)domestic currency.
C)foreign goods.
D)domestic goods.
E) exports.

Question 13

Exports will decrease when there is

A)an increase in the real exchange rate.
B)an increase in domestic output.
C)an increase in foreign output.
D)all of the above
E) none of the above

Question 14

Explain why the demand for domestic goods curve (ZZ)has a different shape than the domestic demand curve (DD).

Question 15

Explain why in practice policy coordination is hard to achieve.

Question 16

Using the ZZ / Y and NX graphs,illustrate graphically and explain what effect a reduction in foreign output (Y*)will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Question 17

Which of the following is true when a country's trade position is balanced (i.e.,NX = 0)?

A)Demand for domestic goods is equal to the domestic demand for goods.
B)Demand for domestic goods is greater than the domestic demand for goods.
C)Demand for domestic goods is less than the domestic demand for goods.
D)Neither a budget surplus nor deficit exists (i.e., G - T = 0).

Question 18

Which of the following represents the demand for domestic goods?

A)C + I + G
B)C + I + G + X
C)C + I + G - εIM
D)C + I + G + X + εIM
E) C + I + G + X - IM / ε

Question 19

Which of the following is true when a country is experiencing a trade surplus (NX > 0)?

A)Demand for domestic goods is equal to the domestic demand for goods.
B)Demand for domestic goods is greater than the domestic demand for goods.
C)Demand for domestic goods is less than the domestic demand for goods.
D)A budget surplus exists.

Question 20

Explain the difference between: (1)the demand for domestic goods; and (2)the domestic demand for goods.

Question 21

A reduction in the marginal propensity to import will cause

A)the ZZ line to become flatter and a given change in government spending (G)to have a larger effect on domestic output.
B)the ZZ line to become flatter and a given change in government spending (G)to have a smaller effect on domestic output.
C)the ZZ line to become steeper and a given change in government spending (G)to have a larger effect on domestic output.
D)the ZZ line to become steeper and a given change in government spending (G)to have a smaller effect on domestic output.

Question 22

In an open economy,net exports will be equal to which of the following?

A) X - IM / ε
B)T - G
C)DD
D)Z
E) S - I

Question 23

Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y*).This increase in Y* will not cause which of the following to occur?

A)the domestic country's output to increase
B)the domestic country's consumption to increase
C)the domestic country's output to increase and its trade balance to worsen as imports increase
D)all of the above
E) none of the above

Question 24

Assume a country is open.Given this information,which of the following must occur?

A)demand for domestic goods will be equal to the domestic demand for goods
B)demand for domestic goods will be greater than the domestic demand for goods
C)demand for domestic goods will be less than the domestic demand for goods
D)S + T = I + G
E) none of the above

Question 25

Assume a country is closed.Given this information,which of the following must occur?

A)demand for domestic goods will be less than the domestic demand for goods
B)demand for domestic goods will be greater than the domestic demand for goods
C)S + T = I + G
D)a budget surplus exists
E) S = I

Question 26

An increase in the marginal propensity to import will cause

A)the multiplier to increase and a given change in government spending (G)to have a larger effect on domestic output.
B)the multiplier to increase and a given change in government spending (G)to have a smaller effect on domestic output.
C)the multiplier to decrease and a given change in government spending (G)to have a larger effect on domestic output.
D)the multiplier to decrease and a given change in government spending (G)to have a smaller effect on domestic output.

Question 27

A reduction in the marginal propensity to import will cause

A)the multiplier to increase and a given change in government spending (G)to have a larger effect on domestic output.
B)the multiplier to increase and a given change in government spending (G)to have a smaller effect on domestic output.
C)the multiplier to decrease and a given change in government spending (G)to have a larger effect on domestic output.
D)the multiplier to decrease and a given change in government spending (G)to have a smaller effect on domestic output.

Question 28

Which of the following will occur as a result of a tax increase?

A)private saving increases
B)investment increases
C)the trade balance improves
D)the trade balance worsens
E) the budget deficit increases

Question 29

Which of the following will always cause an increase in net exports?

A)a reduction in domestic output
B)an increase in the real exchange rate
C)an increase in government spending
D)an increase in investment
E) all of the above

Question 30

Which of the following would make the spending multiplier smaller?

A)a reduction in marginal propensity to save
B)a small initial trade deficit
C)a reduction in the marginal propensity to import
D)a real appreciation
E) none of the above

Question 31

A change in which of the following variables will have no direct effect on the level of domestic demand?

A)domestic income
B)the real exchange rate
C)government spending
D)the interest rate (r)
E) none of the above

Question 32

An increase in the marginal propensity to import will cause

A) the ZZ line to become flatter and a given change in government spending (G)to have a larger effect on domestic output.
B)the ZZ line to become flatter and a given change in government spending (G)to have a smaller effect on domestic output.
C)the ZZ line to become steeper and a given change in government spending (G)to have a larger effect on domestic output.
D)the ZZ line to become steeper and a given change in government spending (G)to have a smaller effect on domestic output.

Question 33

Policy coordination is difficult because each country

A)prefers to be the one to increase demand.
B)prefers to be the one to appreciate its currency.
C)prefers that other countries increase their demand.
D)prefers to be the one to increase taxes.
E) prefers that other countries increase taxes.

Question 34

An increase in government spending will have a greater impact on net exports when

A)the marginal propensity to save is smaller.
B)the economy is closed.
C)the sensitivity of investment to income is smaller.
D)all of the above
E) none of the above

Question 35

Which of the following conditions must be satisfied for the demand for domestic goods to be equal to the domestic demand for goods?

A)X = εIM
B)X = 0
C)G - T = 0
D)S = I
E) X = IM / ε

Question 36

An increase in which of the following variables will cause a reduction in the demand for domestic goods?

A)foreign income
B)the real exchange rate
C)consumer confidence
D)domestic income
E) all of the above

Question 37

An open economy with a low saving rate (private and public)must have

A)low investment only.
B)high investment only.
C)a trade surplus only.
D)low investment or a trade deficit.
E) low investment or a trade surplus.

Question 38

A change in which of the following variables will have no direct effect on domestic demand?

A)domestic income
B)foreign income
C)government spending
D)the interest rate (r)
E) none of the above

Question 39

An increase in domestic demand will have which of the following effects in an open economy?

A)a smaller effect on output than in a closed economy and a positive effect on the trade balance
B)a smaller effect on output than in a closed economy and a negative effect on the trade balance
C)a larger effect on output than in a closed economy and a positive effect on the trade balance
D)a larger effect on output than in a closed economy and a negative effect on the trade balance

Question 40

Which of the following will occur in a small country with a high marginal propensity to import?

A)Changes in government spending will cause large changes in output.
B)Changes in government spending will cause large changes in the trade balance.
C)A depreciation will cause only small changes in the trade balance.
D)There is no combination of policies that can eliminate the trade deficit.
E) all of the above

Question 41

For this question,assume that the Marshall-Lerner condition does not hold.An increase in the real exchange rate will tend to cause which of the following to occur?

A)a reduction in NX and a reduction in Y
B)a reduction in NX and an increase in Y
C)an increase in NX and a reduction in Y
D)an increase in NX and an increase in Y

Question 42

For an open economy,which of the following expressions represents net exports (NX)?

A)S + G - T - I
B)S + G - T + I
C)S + T - G + I
D)G - T + I - S
E) none of the above

Question 43

For an open economy,which of the following expressions represents saving (S)?

A)I + T - G + NX
B)I + T - G - NX
C)I + G - T + NX
D)G - T + NX - I
E) none of the above

Question 44

Suppose policy makers want to increase Y and increase NX.Which of the following policies would most likely achieve this?

A)an increase in government spending
B)a real depreciation
C)a reduction in taxes and an increase in the real exchange rate
D)an increase in the real exchange rate

Question 45

Assume the Marshall-Lerner condition holds.Which of the following will cause a reduction in net exports?

A)a reduction in government spending
B)a reduction in investment
C)an increase in foreign output
D)an increase in the real exchange rate
E) all of the above

Question 46

We will generally observe that the less open an economy

A)the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
B)the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
C)the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
D)the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.

Question 47

Assuming the Marshall-Lerner condition holds and using the ZZ / Y and NX graphs,illustrate graphically and explain what effect a real depreciation will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Question 48

Explain what the Marshall-Lerner condition represents.

Question 49

Assuming the Marshall-Lerner condition holds and using the ZZ / Y and NX graphs,illustrate graphically and explain what effect a real appreciation will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Question 50

For this question,assume that the Marshall-Lerner condition does not hold.A reduction in the real exchange rate will tend to cause which of the following to occur?

A)a reduction in NX and a reduction in foreign output (Y*)
B)a reduction in NX and an increase in domestic output (Y)
C)an increase in NX and a reduction in Y
D)an increase in NX and an increase in Y
E) none of the above

Question 51

For this question,assume the Marshal-Lerner condition holds.Which of the following would occur as a result of an increase in the real exchange rate?

A)an improvement of the trade balance
B)a reduction in the quantity of imports
C)an increase in domestic output
D)all of the above
E) none of the above

Question 52

We will generally observe that the more open an economy

A)the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
B)the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
C)the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
D)the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.

Question 53

Using the ZZ / Y and NX graphs,illustrate graphically and explain what effect an increase in taxes will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Question 54

For this question,assume that equilibrium output is determined in the ZZ-Y diagram.Further assume that policy makers' goals are (1)to achieve balanced trade (i.e.,NX = 0); and (2)to achieve a target level of output,say Yᵀ.Now,suppose that the initial level of equilibrium output is equal to Yᵀ (i.e.,Y = Yᵀ)and that a trade deficit exists at this initial level of output.Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously?

A)a reduction in government spending
B)convince the country's trading partners to pursue policies that will cause an increase in foreign income (Y*)
C)a reduction in the real exchange rate
D)a reduction in taxes
E) a simultaneous increase in government spending and reduction in the real exchange rate
F) none of the above

Question 55

Explain why the multiplier in an open economy is different from the multiplier in a closed economy.

Question 56

In a large country,the effect of a given change in government spending

A)on output is large and the effect on the trade balance is small.
B)on output is large and the effect on the trade balance is large.
C)on output is small and the effect on the trade balance is small.
D)on output is small and the effect on the trade balance is large.

Question 57

Suppose there is a real appreciation.This real appreciation is more likely to cause a reduction in net exports when

A)domestic output is relatively low.
B)foreign output is relatively high.
C)the Marshall-Lerner condition does not hold.
D)imports are not at all sensitive to price changes.
E) exports and imports are relatively sensitive to price changes.

Question 58

In a small country,the effect of a given change in government spending

A)on output is large and the effect on the trade balance is small.
B)on output is large and the effect on the trade balance is large.
C)on output is small and the effect on the trade balance is small.
D)on output is small and the effect on the trade balance is large.

Question 59

Using the ZZ / Y and NX graphs,illustrate graphically and explain what effect an increase in foreign output (Y*)will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.

Question 60

The evidence suggests that in rich countries,a depreciation

A)immediately improves the trade balance.
B)eventually improves the trade balance.
C)first improves, but then worsens the trade balance.
D)has no effect on the trade balance.
E) none of the above

Question 61

Exports will increase when there is

A)a reduction in the real exchange rate.
B)a reduction in domestic output.
C)a reduction in foreign output.
D)all of the above
E) none of the above

Question 62

A reduction in the budget deficit can be reflected in

A)a reduction in private saving.
B)an increase in investment.
C)an increase in net exports.
D)all of the above
E) none of the above

Question 63

The existence of the J-curve suggests that a real depreciation will cause

A)an initial increase in net exports.
B)an initial increase in economic activity.
C)a final reduction in net exports.
D)an initial reduction in the demand for domestic goods.

Question 64

The J-curve illustrates the effects of

A)changes in Y* on NX.
B)changes in Y on NX.
C)changes in the real exchange rate on NX.
D)changes in Y on imports.

Question 65

An increase in the budget deficit can be reflected in

A)an increase in private saving.
B)a reduction in investment.
C)a reduction in net exports.
D)all of the above
E) none of the above

Question 66

For this question,assume that the J-curve effect exists.Which of the following will occur after a real appreciation?

A)The trade deficit will improve temporarily before it worsens.
B)The trade deficit will worsen temporarily before it improves.
C)The real exchange rate will fall temporarily before it rises.
D)The real exchange rate will rise temporarily before it falls.
E) none of the above

Question 67

The quantity of imports will decrease when there is

A)an increase in the real exchange rate.
B)a reduction in domestic output.
C)a reduction in foreign output.
D)all of the above
E) none of the above

Question 68

A reduction in private saving (S)can be reflected in

A)an increase in the budget deficit.
B)an increase in investment.
C)a reduction in net exports.
D)all of the above

Question 69

Suppose policy makers want to increase Y and keep NX constant.Which of the following policies would most likely achieve this?

A)an increase in government spending
B)a real depreciation
C)an increase in government spending and a reduction in the real exchange rate
D)a reduction in the real exchange rate
E) encourage the country's trading partners to implement policies that will cause an increase in foreign income (Y*)

Question 70

Which of the following will occur as a result of a tax cut?

A)private saving decreases
B)investment decreases
C)the trade balance improves
D)the trade balance worsens
E) the budget deficit decreases

Question 71

Suppose the rest of the world experiences a recession that causes a reduction in foreign income (Y*).From the domestic economy's perspective,this reduction in foreign income will cause which of the following as the domestic economy adjusts to the drop in Y*?

A)a reduction in income and a reduction in imports
B)a reduction in imports and an increase in net exports
C)the NX line to shift up
D)an ambiguous effect on net exports

Question 72

Suppose the rest of the world experiences an expansion that causes an increase in foreign income (Y*).From the domestic economy's perspective,this increase in foreign income will cause which of the following as the domestic economy adjusts to the rise in Y*?

A)an increase in domestic income
B)an increase in imports
C)an increase in net exports
D)all of the above
E) both A and C

Question 73

An increase in private saving (S)can be reflected in

A)a reduction in the budget deficit.
B)a reduction in investment.
C)an increase in net exports.
D)all of the above

Question 74

Which of the following will always cause a reduction in net exports?

A)an increase in domestic output
B)a reduction in the real exchange rate
C)a reduction in government spending
D)a reduction in investment
E) all of the above

Question 75

In an open economy,which of the following will cause a reduction in the size of the multiplier?

A)an increase in the marginal propensity to import
B)an increase on foreign output
C)a reduction in the marginal propensity to save
D)all of the above
E) none of the above

Question 76

Suppose policy makers want to increase NX and keep Y constant.Which of the following policies would most likely achieve this?

A)a reduction in government spending
B)a real depreciation
C)a reduction in government spending and a reduction in the real exchange rate
D)a reduction in the real exchange rate and a tax cut

Question 77

Explain what the J-curve is and why it occurs.

Question 78

A real depreciation will initially cause a reduction in output when which of the following holds?

A)the Marshall-Lerner condition
B)the J-Curve effect
C)net exports are initially zero
D)net exports are initially negative
E) net exports are initially positive

Question 79

The Marshall-Lerner condition is less likely to hold when

A)imports and exports are very price-sensitive.
B)the trade deficit is large.
C)the marginal propensity to consume is very large.
D)the marginal propensity to consume if very small.
E) none of the above

Question 80

In an open economy,a reduction in government spending will cause

A)an increase in domestic output.
B)an increase in imports.
C)an increase in net exports.
D)all of the above
E) none of the above