Question 1

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

Accepted Answer

Capital flight refers to a significant and rapid outflow of capital or financial assets from a country usually due to economic, social, or political factors which cause concern to investors about the safety of their investments. The sudden movement of funds can destabilize the financial system of the country leading to a currency crisis, economic recession, and high unemployment.

Question 2

Figure 33-6 -Refer to Figure 33-6.If the economy were initially in equilibrium at r₂and E₃ and the government removed import quotas,the exchange rate would

Accepted Answer

The answer of Figure 33-6

-Refer to Figure 33-6.If the...

Question 3

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

Accepted Answer

A higher real exchange rate means that the currency is stronger relative to other currencies, making exports more expensive for foreign buyers and imports cheaper for domestic buyers. This typically leads to a decrease in net exports, as foreign buyers may choose to purchase goods from other countries with weaker currencies.

Question 4

In the open-economy macroeconomic model,if there is currently a surplus in the foreign exchange market,the quantity of desired net exports will increase as the market moves to equilibrium.

Accepted Answer

The answer of In the open-economy macroeconomic model,if there is...

Question 5

When the government budget deficit increases,national saving increases.

Accepted Answer

When the government budget deficit increases, it means that there is more government spending than revenue. This can lead to a decrease in national saving as the government may need to borrow more money, which can reduce the amount of funds available for private investment. Therefore, an increase in government budget deficit does not necessarily lead to an increase in national saving.

Question 6

Which of the following is the correct way to show the effects of a newly imposed import quota?

Accepted Answer

The answer of Which of the following is the correct...

Question 7

If a country removed an import quota on cotton,then overall that country's

Accepted Answer

By removing the import quota on cotton, the supply of cotton in that country would increase, which would lead to a decrease in price. This would make cotton products produced in that country more expensive in comparison, leading to a rise in exports. Additionally, the increase in supply would lead to more imports of cotton, thus increasing overall import levels. Therefore, both exports and imports would rise.

Question 8

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 (which requires borrowing to finance new projects) and net capital outflow (which occurs when domestic investors purchase foreign assets, requiring them to borrow funds from other countries).

Question 9

A firm produces manufacturing equipment,some of which it exports.Which of the following effects of capital flight in the country it produces in would likely reduce the quantity of equipment it sells?

Accepted Answer

The answer of A firm produces manufacturing equipment,some of which...

Question 10

Figure 33-6 -Refer to Figure 33-6.If the interest rate were initially at r₂ and an import quota were imposed,the interest rate would

Accepted Answer

The answer of Figure 33-6

-Refer to Figure 33-6.If the...

Question 11

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 12

A drop in a country's real interest rate reduces that country's net capital outflow.

Accepted Answer

The answer of A drop in a country's real interest...

Question 13

Other things the same,when a Canadian company imports bicycles from the U.S.,the open-economy macroeconomic model treats this transaction as an increase in the quantity of dollars demanded in the U.S.foreign-currency exchange market.

Accepted Answer

When a Canadian company imports bicycles from the U.S., they must pay for them in U.S. dollars. This increases the demand for U.S. dollars in the foreign-currency exchange market. Other things remaining the same, this leads to an appreciation of the U.S. dollar relative to the Canadian dollar.

Question 14

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, the demand for its goods and services decreases while the demand for imported goods and services increases. This leads to a decrease in the supply of the country's currency in the foreign exchange market and an increase in the demand for foreign currencies. As a result, the country's currency appreciates and its real exchange rate increases.

Question 15

Capital flight raises a country's interest rate.

Accepted Answer

When capital is leaving a country, there is less demand for that country's currency. This leads to a decrease in the value of the currency, which in turn raises the country's interest rate in order to attract foreign investment and increase demand for the currency.

Question 16

In the long run,import quotas increase net exports.

Accepted Answer

Import quotas restrict the amount of imported goods, which may lead to retaliation from trading partners, resulting in reduced exports. Additionally, import quotas may drive up prices for consumers and decrease competition, leading to reduced incentives for domestic firms to innovate and increase exports. Therefore, import quotas do not necessarily increase net exports in the long run.

Question 17

When Mexico suffered from capital flight in 1994,Mexico's net exports

Accepted Answer

The answer of When Mexico suffered from capital flight in...

Question 18

When a country imposes an import quota,its

Accepted Answer

The answer of When a country imposes an import quota,its
...

Question 19

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 tariffs, quotas, and subsidies, which can impact specific industries and firms within a country. These policies can make it easier or more difficult for certain businesses to trade with other countries, potentially affecting their competitiveness and trade balance.

Question 20

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

Accepted Answer

According to the international finance theory, the real interest rate is the key determinant of net capital outflow. A higher real interest rate in a country will attract more foreign investment, leading to an increase in net capital outflow, and vice versa.

Quiz 33: A Macroeconomic Theory of the Open Economy