Question 1

According to the open-economy macroeconomic model, if Canada moved from a government budget deficit to a government budget surplus, Canadian real interest rates would increase and the real exchange rate of the Canadian dollar would appreciate.

Accepted Answer

Moving from a government budget deficit to a surplus typically reduces interest rates because the government demands fewer loanable funds, which can lead to a depreciation of the real exchange rate due to lower inflows of foreign capital seeking higher returns.

Question 2

If the real exchange rate of the Canadian dollar were above its equilibrium level, the real exchange rate of the Canadian dollar would appreciate.

Accepted Answer

If the real exchange rate of the Canadian dollar is above its equilibrium level, it suggests that the Canadian dollar is overvalued, leading to a likely depreciation rather than an appreciation to return to equilibrium.

Question 3

When a country imposes a trade restriction, the real exchange rate of that country's currency appreciates.

Accepted Answer

When a country imposes a trade restriction, it becomes more difficult for foreign firms and individuals to purchase goods and services from that country, thereby decreasing the demand for the country's currency. This causes the currency to appreciate to maintain balance in the foreign exchange market.

Question 4

Although trade policies do not affect a country's overall trade balance, they do affect specific firms and industries.

Accepted Answer

Trade policies can affect specific firms and industries by altering the costs of imports and exports, which can impact their competitiveness and profitability. For example, tariffs on a particular product could hurt firms that rely on imported components for their production, while export subsidies could benefit firms that sell their products overseas. However, these effects may not necessarily translate into a significant impact on a country's overall trade balance.

Question 5

When the government increases the government budget deficit, national saving decreases.

Accepted Answer

When the government increases the budget deficit, it means that it is spending more than it is collecting in revenue. This leads to a decrease in national saving because the government is not able to save any money and may even need to borrow money from other countries. This can also lead to higher interest rates, which can discourage private saving and investment.

Question 6

Other things the same, when a Canadian company imports wool from Australia, the open-economy macroeconomic model treats this transaction as a decrease in the quantity of dollars demanded in the Canadian foreign-currency exchange market.

Accepted Answer

The import of wool from Australia would involve the Canadian company exchanging Canadian dollars for Australian dollars to pay for the wool. This would result in a decrease in the quantity of dollars demanded in the Canadian foreign-currency exchange market.

Question 7

According to the open-economy macroeconomic model, if the Canadian government decreased the government budget deficit, both Canadian domestic investment and Canadian net capital outflow would fall.

Accepted Answer

According to the open-economy macroeconomic model, a decrease in government budget deficit would lead to a decrease in domestic investment due to decreased government spending, and a decrease in net capital outflow due to a decrease in demand for foreign investment.

Question 8

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 decreases at each interest rate.
c. The government surplus increases.
d. Private saving increases.

Accepted Answer

The answer of State what, if anything, each of the...

Question 9

In the open-economy macroeconomic model, other things the same, when a Canadian resident imports a foreign good, our model treats this as a decrease in the demand for dollars in the foreign-currency exchange market.

Accepted Answer

When a Canadian resident imports a foreign good, they must pay for it in the currency of the foreign country. This means they must sell Canadian dollars and buy the foreign currency, resulting in a decrease in the demand for Canadian dollars and an increase in the supply of Canadian dollars in the foreign-currency exchange market.

Question 10

The key determinant of net capital outflow is the real exchange rate.

Accepted Answer

The key determinant of net capital outflow is the difference between domestic and foreign real interest rates, not the real exchange rate. Net capital outflow is primarily driven by investors seeking the highest returns on their investments, which are influenced by interest rates rather than exchange rates.

Question 11

If Greece suffers from capital flight, Grecian domestic investment will fall and Grecian net exports will increase.

Accepted Answer

Capital flight means that investors are moving their money out of Greece and investing elsewhere. This reduces the amount of money available for domestic investment, thus decreasing it. On the other hand, as the value of the Greek currency falls due to capital flight, net exports become cheaper for foreign buyers, leading to an increase in net exports.

Question 12

An import quota imposed by Egypt would reduce Egyptian imports, but have no impact on Egyptian exports.

Accepted Answer

An import quota imposed by Egypt would reduce Egyptian imports, but it could also affect Egyptian exports indirectly through changes in exchange rates, retaliatory trade measures by other countries, or shifts in domestic production that affect export competitiveness.

Question 13

Because depreciation of the real exchange rate of the dollar increases Canadian net exports, the demand curve for dollars in the foreign-currency exchange market is downward sloping.

Accepted Answer

When the real exchange rate of the dollar depreciates, Canadian goods become relatively cheaper for foreign consumers. This leads to an increase in Canadian exports and an increase in demand for Canadian dollars in the foreign-currency exchange market. As demand for Canadian dollars increases, the price of the dollar in terms of foreign currency will rise, causing the demand curve for dollars to be downward sloping.

Question 14

Explain why saving need not equal domestic investment in an open economy.

Accepted Answer

The answer of Explain why saving need not equal domestic...

Question 15

If policymakers impose import restrictions on automobiles, the Canadian trade deficit would shrink.

Accepted Answer

Imposing import restrictions on automobiles would likely lead to retaliation from trading partners, resulting in reduced exports for Canada and potentially worsen the trade deficit.

Question 16

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

Accepted Answer

The answer of Suppose that Canadian investors decide that investment...

Question 17

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

Accepted Answer

The answer of Why do higher real interest rates lead...

Question 18

In the open-economy macroeconomic model, net capital outflow links the markets for loanable funds and foreign-currency exchange.

Accepted Answer

Net capital outflow represents the difference between a country's saving and investment and is an important variable that links the markets for loanable funds and foreign-currency exchange.

Question 19

Suppose that Canadian 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?

Accepted Answer

The answer of Suppose that Canadian citizens start saving more....

Question 20

According to the open-economy macroeconomic model, an increase in the Canadian government budget surplus increases Canadian net capital outflow, causes the real exchange rate of the dollar to depreciate, and increases Canadian net exports.

Accepted Answer

The answer of According to the open-economy macroeconomic model, an...

Quiz 13: A Macroeconomic Theory of the Small Open Economy