Question 1

Net capital outflow represents the quantity of dollars supplied in the foreign-currency exchange market.

Accepted Answer

Net capital outflow refers to the difference between the domestic country's purchases of foreign assets and foreign purchases of the domestic country's assets. When a country's residents invest more abroad than foreigners invest in the country, this results in a net outflow of capital, which corresponds to the supply of dollars in the foreign exchange market, as these dollars are exchanged for foreign currency to facilitate these investments.

Question 2

A drop in the French real interest rate reduces French net capital outflow.

Accepted Answer

A drop in the French real interest rate typically increases French net capital outflow, as lower domestic returns encourage investment abroad.

Question 3

The purchase of a capital asset adds to the demand for loanable funds only if that asset is a domestic one.

Accepted Answer

The purchase of a capital asset adds to the demand for loanable funds regardless of whether it is a domestic or foreign asset.

Question 4

In the open-economy macroeconomic model,at the equilibrium real interest rate,the amount that people (including government)want to save exactly balances desired domestic investment.

Accepted Answer

In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that people (including government) want to save exactly balances the sum of desired domestic investment and the net capital outflow (which includes the current account balance).

Question 5

In the open-economy macroeconomic model,other things the same,when a U.S.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 US resident imports a foreign good, they must exchange dollars for the foreign currency to make the purchase. This increases the supply of dollars in the foreign-currency exchange market and decreases the demand for dollars, as the foreign currency is in higher demand to make the purchase. Therefore, the given statement is true.

Question 6

The primary focus of the open-economy macroeconomic model is the determination of GDP and the price level.

Accepted Answer

The primary focus of the open-economy macroeconomic model is to understand the interactions between the domestic economy and the rest of the world, including trade balances, exchange rates, and capital flows, rather than solely determining GDP and the price level.

Question 7

In the open-economy macroeconomic model,a higher domestic interest rate reduces the quantity of loanable funds demanded

Accepted Answer

In the open-economy macroeconomic model, a higher domestic interest rate makes domestic assets more attractive compared to assets in foreign countries. This leads to an inflow of foreign capital, which increases the supply of loanable funds and reduces the domestic interest rate. Conversely, a lower domestic interest rate makes domestic assets less attractive and leads to an outflow of foreign capital, which reduces the supply of loanable funds and increases the domestic interest rate. Thus, a higher domestic interest rate reduces the quantity of loanable funds demanded.

Question 8

In an open economy,the supply of loanable funds comes from national saving.

Accepted Answer

In an open economy, national saving is the primary source of loanable funds as it includes savings by households, businesses, and the government. Foreign savings may also contribute to the supply of loanable funds, but national saving is the dominant factor.

Question 9

In the open-economy macroeconomic model,the supply curve of currency is vertical because the quantity of currency supplied does not depend on the real exchange rate.

Accepted Answer

In an open economy, the supply of currency is determined by the central bank, and is not affected by the real exchange rate. Therefore, the supply curve of currency is vertical.

Question 10

Over the past two decades the U.S.has persistently had trade deficits.

Accepted Answer

The U.S. trade deficit has been a persistent issue for the past two decades, with imports consistently exceeding exports.

Question 11

In the open-economy macroeconomic model,net exports equal the quantity of dollars demanded in the foreign-currency exchange market.

Accepted Answer

This is known as the net exports identity, which states that net exports (NX) equal the difference between the quantity of dollars demanded in the foreign-currency exchange market (IM) and the quantity of dollars supplied in the foreign-currency exchange market (EX) (NX = IM - EX). In an open economy, net exports are determined by the interaction of domestic and foreign demand for goods and services, and their prices relative to each other.

Question 12

Over the past two decades,the United States has persistently exported more goods and services than it has imported.

Accepted Answer

The United States has persistently imported more goods and services than it has exported over the past two decades.

Question 13

Other things the same,a higher real exchange rate raises net exports.

Accepted Answer

A higher real exchange rate makes domestic goods more expensive relative to foreign goods, which tends to decrease exports and increase imports, thereby reducing net exports.

Question 14

In the open-economy macroeconomic model,the supply of dollars in the market for foreign-currency exchange is upward sloping.

Accepted Answer

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange is vertical, reflecting that the supply of dollars is determined by the domestic money supply and is not directly affected by the exchange rate.

Question 15

In an open economy,the demand for loanable funds comes from both domestic investment and net capital outflow.

Accepted Answer

In an open economy, the demand for loanable funds comes from both domestic investment and net capital outflow, which refers to the amount of domestic currency that is used to purchase foreign assets minus the amount of foreign currency used to purchase domestic assets. This demand for loanable funds affects the interest rate in the economy.

Question 16

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

Accepted Answer

The real interest rate is the cost of borrowing or lending in terms of goods and services, and therefore plays a crucial role in determining the desire of domestic investors to invest abroad and foreigners to invest domestically. This, in turn, affects the net capital outflow of a country. When the real interest rate in a country increases, the return on domestic assets relative to foreign assets increases, leading to an increase in net capital outflow as domestic investors seek higher returns abroad and foreign investors become more willing to invest domestically. Conversely, when the real interest rate decreases, the opposite effect is observed. Therefore, the real interest rate is the key determinant of net capital outflow.

Question 17

If the real interest rate were above the equilibrium rate,there would be a shortage of loanable funds.

Accepted Answer

If the real interest rate were above the equilibrium rate, it would indicate that lenders are demanding a higher return on their loanable funds than borrowers are willing to pay. This would lead to a surplus of loanable funds, not a shortage.

Question 18

A higher U.S.interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S.assets.

Accepted Answer

When interest rates in the United States are high, it becomes more expensive for Americans to borrow money to buy assets in foreign countries. On the other hand, foreign investors are attracted to the higher returns offered by U.S. assets, leading to an increase in demand for U.S. securities and a corresponding increase in the value of the U.S. dollar.

Question 19

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

Accepted Answer

If the real exchange rate is above its equilibrium level, it means the dollar is overvalued, and it would likely depreciate to return to equilibrium.

Question 20

Other things the same,when the real exchange rate of the dollar appreciates,U.S.goods become more attractive to U.S.residents,but less attractive to foreign residents.

Accepted Answer

The answer of Other things the same,when the real exchange...

Quiz 32: A Macroeconomic Theory of the Open Economy