Deck 13: A Macroeconomic Theory of the Small Open Economy

Question 1

If a country's exports are greater than its imports, what is the country said to have?

A) a trade surplus
B) a trade deficit
C) a comparative advantage
D) an absolute advantage

Answer 1

a trade surplus

Question 2

In an open economy, what does the market for loanable funds equate national saving with?

A) domestic investment
B) net capital outflow
C) the sum of national consumption and net exports
D) the sum of domestic investment and net capital outflow

Answer 2

the sum of domestic investment and net capital outflow

Question 3

Suppose a foreign energy company wants to build a number of new solar parks in Canada. How does this affect the Canadian market for loanable funds?

A) The supply of loanable funds increases.
B) The demand for loanable funds increases.
C) The supply of loanable funds decreases.
D) The demand for loanable funds decreases.

Answer 3

The supply of loanable funds decreases.

Question 4

In an open economy, what does the market for loanable funds take as given?

A) saving
B) investment
C) exchange rate
D) real interest rate

Question 5

Which statement could be prompted by an interest rate that is temporarily higher in Canada than in the rest of the world?

A) A Bahamian bank purchases a Canadian bond instead of the British bond it had considered purchasing.
B) Canadian firms decide, because interest rates are higher, to do more investment spending.
C) Cole, a Canadian resident, decides to spend his savings on a trip to Hawaii.
D) Canadian net capital outflow increases.

Question 6

Which statement best describes the effects of a decrease in the real interest rate?

A) It discourages people from saving and so increases the quantity of loanable funds demanded.
B) It discourages people from saving and so decreases the quantity of loanable funds demanded.
C) It encourages people to save and so increases the quantity of loanable funds supplied.
D) It encourages people to save and so decreases the quantity of loanable funds supplied.

Question 7

Peter and Wendy are co-owners of the Canadian firm, Tick Tock Airlines. Peter borrows money to build airplanes in Quebec. Wendy borrows money to build airplanes in England. How does this affect the market for loanable funds in Canada?

A) Peter increases the demand for loanable funds.
B) Wendy increases the demand for loanable funds.
C) Peter increases the supply for loanable funds.
D) Wendy increases the supply of loanable funds.

Question 8

In the open-economy macroeconomic model, where does the demand for loanable funds come from?

A) domestic investment
B) net exports
C) net capital outflow
D) the sum of net capital outflow and domestic investment

Question 9

Which statement best describes the effects of an increase in real interest rates in Canada?

A) It discourages both Canadian and foreign residents from buying Canadian assets.
B) It encourages both Canadian and foreign residents to buy Canadian assets.
C) It encourages Canadian residents to buy Canadian assets, but discourages foreign residents from buying Canadian assets.
D) It encourages foreign residents to buy Canadian assets, but discourages Canadian residents from buying Canadian assets.

Question 10

What does the open-economy macroeconomic model examine?

A) the determination of output growth rate and the real interest rate
B) the determination of unemployment rates and the exchange rate
C) the determination of output growth rate and the inflation rate
D) the determination of the trade balance and the exchange rate

Question 11

What macroeconomic measures are considered fixed in our open-economy model?

A) the exchange rate, GDP, and the world real interest rate
B) the exchange rate, world real interest rate, and the inflation rate
C) net capital outflow, the inflation rate, and the price level
D) GDP, the price level, and the world real interest rate

Question 12

What effect does a fall in the real interest rate have on the quantity of loanable funds?

A) It increases the quantity demanded and decreases the quantity supplied.
B) It decreases both the quantity demanded and supplied.
C) It increases both the quantity demanded and supplied.
D) It decreases the quantity demanded and increases the quantity supplied.

Question 13

What are the main elements of our open-economy macroeconomic model?

A) the market for loanable funds, the foreign-currency market, and the price level
B) the market for goods and services, the price level, and GDP
C) the market for goods and services, net exports, and GDP
D) the market for loanable funds, net capital outflow, and the foreign-currency market

Question 14

What does the open-economy macroeconomic model take as given?

A) GDP, but not the price level
B) the price level, but not GDP
C) both the price level and GDP
D) the exchange rate

Question 15

In an open economy, what are the determinants of the prevailing real interest rate?

A) domestic supply and domestic demand for loanable funds
B) world supply and domestic demand for loanable funds
C) world supply and world demand for loanable funds
D) domestic supply and world demand for loanable funds

Question 16

In the open-economy macroeconomic model, how can the market for loanable funds identity be written?

A) S = I
B) S = NCO - I
C) S = I + NCO
D) S + I = NCO

Question 17

What is the effect of an increase in the Canadian real interest rate above the world interest rate?

A) Canadians buy more foreign assets, which increases Canadian net capital outflow.
B) Canadians buy more foreign assets, which reduces Canadian net capital outflow.
C) Foreigners buy more Canadian assets, which reduces Canadian net capital outflow.
D) Foreigners buy more Canadian assets, which increases Canadian net capital outflow.

Question 18

What does a higher real interest rate lower the quantity of?

A) national saving
B) net capital outflow
C) loanable funds demanded
D) loanable funds supplied

Question 19

What does a lower real interest rate decrease the quantity of?

A) loanable funds demanded
B) loanable funds supplied
C) domestic investment
D) net capital outflow

Question 20

In the open-economy macroeconomic model, where does the supply of loanable funds come from?

A) national saving
B) private saving
C) public saving
D) the sum of domestic investment and net capital outflow

Question 21

What would make the equilibrium interest rate decrease and the equilibrium quantity of funds increase?

A) The supply of loanable funds shifts right.
B) The supply of loanable funds shifts left.
C) The demand for loanable funds shifts right.
D) The demand for loanable funds shifts left.

Question 22

If the quantity of loanable funds supplied is greater than the quantity demanded, what best describes the difference?

A) There is a surplus of loanable funds, and the interest rate will fall.
B) There is a shortage of loanable funds, and the interest rate will rise.
C) There is a surplus of loanable funds that is used to buy foreign assets.
D) There is a shortage of loanable funds that is used to buy foreign assets.

Question 23

What would make both the equilibrium interest rate and the equilibrium quantity of loanable funds decrease?

A) The demand for loanable funds shifts right.
B) The demand for loanable funds shifts left.
C) The supply of loanable funds shifts right.
D) The supply of loanable funds shifts left.

Question 24

At the equilibrium interest rate in the open-macroeconomic model, what is the amount that people want to save?

A) the desired quantity of net capital outflow
B) the desired quantity of domestic investment
C) the desired quantity of net capital outflow plus domestic investment
D) the desired quantity of net capital outflow minus domestic investment

Question 25

What changes will a shortage of loanable funds induce in a savings-investment diagram in a closed economy?

A) The demand for loanable funds curve will shift right, so the interest rate will rise.
B) The supply of loanable funds curve will shift left, so the interest rate will fall.
C) There will be no shifts of the curves, but the interest rate will rise.
D) There will be no shifts of the curves, but the interest rate will fall.

Question 26

If the world real interest rate is less than the real interest rate that would occur in Canada if there was no trade, what should we expect to happen in the supply and demand for loanable funds graph?

A) the supply curve to shift to the left
B) the demand curve to shift to the right
C) net capital outflow to remain unchanged
D) net capital outflow to decrease

Question 27

Figure 13-1
Refer to Figure 13-1. In the figure shown, if the world real interest rate went from 7 to 6 percent, what changes would occur?

A) There would be an increase in net capital outflow.
B) The demand for loanable funds curve to shift right.
C) The supply for loanable funds curve to shift left.
D) There would be a decrease in net capital outflow.

Question 28

Figure 13-1
Refer to Figure 13-1. If the world interest rate equals 3 percent, what is the net capital outflow?

A) -$4000
B) -$2000
C) $2000
D) $4000

Question 29

Figure 13-1
Refer to Figure 13-1. If the world interest rate equals 7 percent, what is the net capital outflow?

A) -$4000
B) -$2000
C) $2000
D) $4000

Question 30

In an open economy, what best identifies the sources of loanable funds?

A) Canadians who consume less than their income and government budget deficit
B) Canadians who consume less than their income and government budget surplus
C) foreigners who buy Canadian bonds and shares of stock and Canadian government surplus
D) foreigners who invest in Canada and Canadian government surplus

Question 31

In an open economy, where does the demand for loanable funds come from?

A) from those who want to borrow funds to buy domestic capital goods
B) from those who want to borrow funds to buy foreign assets
C) from those who want to borrow funds to buy either domestic capital goods or foreign assets
D) from those who want to borrow funds to buy Canadian bonds or shares of stock in Canadian companies

Question 32

If the world real interest rate was lower than the interest rate that would occur if the Canadian economy were closed, then what would the Canadian net capital outflow be?

A) positive
B) negative
C) decreasing
D) increasing

Question 33

Figure 13-1
Refer to Figure 13-1. In the figure shown, if the real interest rate is 7 percent, what is the result?

A) surplus of $4000
B) surplus of $2000
C) shortage of $4000
D) shortage of $2000

Question 34

In an open economy, what does net capital outflow equal?

A) imports
B) net exports
C) exports
D) net imports

Question 35

Which statement is consistent with negative net exports?

A) Exports are greater than imports.
B) Net capital outflow is positive.
C) Exports are less than imports.
D) Net capital outflow is zero.

Question 36

In the market for foreign-currency exchange in the open-economy macroeconomic model, what does the amount of net capital outflow represent?

A) the quantity of dollars supplied for the purpose of selling assets domestically
B) the quantity of dollars supplied for the purpose of buying assets abroad
C) the quantity of dollars demanded for the purpose of buying Canadian exports of goods and services
D) the quantity of dollars demanded for the purpose of importing foreign goods and services

Question 37

Figure 13-1
Refer to Figure 13-1. In the figure shown, if the real interest rate is 3 percent, what is the quantity of loanable funds demanded?

A) $3000
B) $5000
C) $7000
D) $10000

Question 38

Which statement is consistent with negative net exports?

A) Net capital outflow is positive, so foreign assets bought by Canadians are greater than Canadian assets bought by foreigners.
B) Net capital outflow is positive, so Canadian assets bought by foreigners are greater than foreign assets bought by Canadians.
C) Net capital outflow is negative, so foreign assets bought by Canadians are greater than Canadian assets bought by foreigners.
D) Net capital outflow is negative, so Canadian assets bought by foreigners are greater than foreign assets bought by Canadians.

Question 39

If there is a surplus of loanable funds, what best describes the difference?

A) The quantity demanded is less than the quantity supplied, and the interest rate will rise.
B) The quantity demanded is greater than the quantity supplied, and the interest rate will fall.
C) The quantity demanded is less than the quantity supplied, and the excess is the net capital outflow
D) The quantity demanded is less than the quantity supplied, and the shortage is the net capital inflow.

Question 40

In the open-economy macroeconomic model, what is net capital outflow equal to?

A) the quantity of dollars supplied in the foreign exchange market
B) the quantity of dollars demanded in the foreign exchange market
C) the quantity of funds supplied in the loanable funds market
D) the quantity of funds demanded in the loanable funds market

Question 41

Which of the following is included in the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

A) An oil company in Nigeria wants to buy oil rigging equipment from a Canadian manufacturer.
B) A Canadian bank loans dollars to Makena, a Canadian resident, who wants to purchase a new car made in Canada.
C) A Canadian-based mutual fund wants to purchase shares issued by a Polish company.
D) A Canadian resident imports a car made in Sweden.

Question 42

Which of the following would tend to shift the supply of dollars in the foreign-currency exchange market model to the left?

A) The exchange rate rises.
B) The exchange rate falls.
C) The expected rate of return on Canadian assets rises.
D) The expected rate of return on Canadian assets falls.

Question 43

What does the value of net exports equal?

A) the value of national saving-net capital outflow
B) the value of public saving
C) the value of national saving minus imports
D) the value of national saving minus domestic investment

Question 44

Which statement is consistent with a below-the-equilibrium exchange rate of the dollar?

A) The quantity of dollars supplied is less than the quantity demanded, and the dollar will appreciate.
B) The quantity of dollars supplied is less than the quantity demanded, and the dollar will depreciate.
C) The quantity of dollars supplied is greater than the quantity demanded, and the dollar will appreciate.
D) The quantity of dollars supplied is greater than the quantity demanded, and the dollar will depreciate.

Question 45

Which statement is consistent with a depreciation of the dollar?

A) Canadian goods become less expensive relative to foreign goods, which makes exports rise and imports fall.
B) Canadian goods become less expensive relative to foreign goods, which makes exports fall and imports rise.
C) Canadian goods become more expensive relative to foreign goods, which makes exports rise and imports fall.
D) Canadian goods become more expensive relative to foreign goods, which makes exports fall and imports rise.

Question 46

According to the theory of purchasing-power parity, what is the shape of the demand curve for foreign-currency exchange?

A) downward sloping
B) upward sloping
C) horizontal
D) vertical

Question 47

What does the identity "net capital outflow = net exports" imply?

A) The supply of dollars equals the demand for dollars in the foreign-currency market.
B) National saving equals domestic investment.
C) The volume of exports equals the volume of imports.
D) Canadian investment abroad is equal to foreign investment in Canada.

Question 48

What is the real exchange rate equal to?

A) the relative price of domestic and foreign currency
B) the relative price of domestic and foreign goods
C) the ratio between the domestic and foreign interest rates
D) the nominal exchange rate minus the inflation rate

Question 49

Where does the supply of dollars in the foreign-currency exchange market come from?

A) from Canadian national saving
B) from Canadian net capital outflow
C) from domestic investment
D) from foreign demand for Canadian goods

Question 50

What is the variable that links the loanable funds market and the foreign-currency exchange market?

A) net capital outflow
B) national saving
C) exports
D) imports

Question 51

Which statement is consistent with an above-the-equilibrium exchange rate of the dollar?

A) The quantity of dollars supplied is greater than the quantity demanded, and the dollar will appreciate.
B) The quantity of dollars supplied is greater than the quantity demanded, and the dollar will depreciate.
C) The quantity of dollars supplied is less than the quantity demanded, and the dollar will appreciate.
D) The quantity of dollars supplied is less than the quantity demanded, and the dollar will depreciate.

Question 52

In the market for foreign-currency exchange in the open-economy macroeconomic model, which of the following results from a higher real exchange rate?

A) It makes Canadian goods more expensive relative to foreign goods and reduces the quantity of dollars supplied.
B) It makes Canadian goods more expensive relative to foreign goods and reduces the quantity of dollars demanded.
C) It makes foreign goods more expensive relative to Canadian goods and reduces the quantity of dollars supplied.
D) It makes foreign goods more expensive relative to Canadian goods and reduces the quantity of dollars demanded.

Question 53

What is net capital outflow equal to?

A) national saving minus the net exports
B) domestic investment plus national saving
C) national saving minus domestic investment
D) domestic investment minus national saving

Question 54

Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-market macroeconomic model?

A) A firm in the United States wants to buy softwood lumber from a Canadian firm.
B) A Bahamian bank desires to purchase Canadian government securities.
C) A Canadian citizen wants to buy a bond issued by a Swiss corporation.
D) A Canadian citizen exchanges dollars for UK pounds.

Question 55

In the open-economy macroeconomic model, what is the key determinant of net capital outflow?

A) the nominal exchange rate
B) the nominal interest rate
C) the real exchange rate
D) the real interest rate

Question 56

Which statement is consistent with an appreciation of the dollar?

A) Canadian goods become less expensive relative to foreign goods, which makes exports rise and imports fall.
B) Canadian goods become less expensive relative to foreign goods, which makes exports fall and imports rise.
C) Canadian goods become more expensive relative to foreign goods, which makes exports rise and imports fall.
D) Canadian goods become more expensive relative to foreign goods, which makes exports fall and imports rise.

Question 57

Which of the following would tend to shift the supply of dollars in the foreign-currency exchange market model to the right?

A) The exchange rate rises.
B) The exchange rate falls.
C) The expected rate of return on Canadian assets rises.
D) The expected rate of return on Canadian assets falls.

Question 58

What is the price that balances supply and demand in the market for foreign-currency exchange in the open-economy macroeconomic model?

A) the nominal exchange rate
B) the nominal interest rate
C) the real exchange rate
D) the real interest rate

Question 59

What is the supply and demand for loanable funds equation in an open economy?

A) S = I
B) S = NX + NCO
C) S = NCO
D) S = I + NCO

Question 60

In the open-economy macroeconomic model, what does the quantity of dollars demanded in the foreign-currency exchange market depend on?

A) the real exchange rate and import quotas
B) the real exchange rate and government deficit
C) the real interest rate and import quotas
D) the real interest rate and government deficit

Question 61

If Canadian citizens decide to save a smaller fraction of their incomes, which statement would best describe the effects?

A) Canadian domestic investment increases, and Canadian net capital outflow increases.
B) Canadian domestic investment increases, and Canadian net capital outflow decreases.
C) Canadian domestic investment decreases, and Canadian net capital outflow increases.
D) Canadian domestic investment decreases, and Canadian net capital outflow decreases.

Question 62

In the open-economy macroeconomic model, what would make Trinidad's net capital outflow decrease?

A) a decrease in Canadian interest rates
B) a decrease in Trinidadian interest rates
C) an appreciation of the Trinidadian dollar
D) an increase in Trinidad's net exports

Question 63

What are the effects of an increase in the supply of loanable funds?

A) Net capital outflow and the real exchange rate both increase.
B) Net capital outflow and the real exchange rate both decrease.
C) Net capital outflow increases, and the real exchange rate decreases.
D) Net capital outflow decreases, and the real exchange rate increases.

Question 64

If Canadian citizens decide to purchase more foreign assets at each interest rate, which statement would best describe the effects?

A) The real interest rate increases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
B) The real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.
C) The real interest rate decreases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow decreases.
D) The real interest rate decreases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow increases.

Question 65

Suppose that Peru has a budget surplus, and then goes into deficit. Which statement best predicts the consequences?

A) National saving would increase, and Peru's supply of loanable funds would shift to the left.
B) National saving would increase, and Peru's demand for loanable funds would shift to the right.
C) National saving would decrease, and Peru's supply of loanable funds would shift to the left.
D) National saving would decrease, and Peru's demand for loanable funds would shift to the right.

Question 66

If Canadian firms decide to invest more domestically at each interest rate, which statement would best describe the results?

A) The real interest rate decreases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow decreases.
B) The real interest rate decreases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow increases.
C) The real interest rate increases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
D) The real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.

Question 67

Which statement best predicts the effects of an increase in the supply of loanable funds?

A) The interest rate and the real exchange rate both increase.
B) The interest rate and the real exchange rate both decrease.
C) The interest rate increases, and the real exchange rate decreases.
D) The interest rate decreases, and the real exchange rate increases.

Question 68

If Canadian citizens decide to save a larger fraction of their incomes, which statement would best identify the effects?

A) The real interest rate decreases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.
B) The real interest rate decreases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
C) The real interest rate increases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
D) The real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.

Question 69

The People's Republic of China has had a large trade surplus in recent years. What is the most likely explanation of this surplus?

A) China has a high rate of inflation, which reduces the value of its currency.
B) China has a large supply of labour, so low wages give it a competitive edge.
C) China has many trade barriers, which restrict the ability of other countries to sell their products in China.
D) China has a large amount of saving relative to domestic investment.

Question 70

Which statement best predicts the effects of a fall in the Canadian real interest rate?

A) Owning Canadian assets becomes less attractive, and net capital outflow rises.
B) Owning Canadian assets becomes less attractive, and net capital outflow falls.
C) Owning Canadian assets becomes more attractive, and net capital outflow rises.
D) Owning Canadian assets becomes more attractive, and net capital outflow falls.

Question 71

If a government increases its budget deficit, which statement would best describe the consequences?

A) Interest rates and domestic investment rise.
B) Interest rates and domestic investment fall.
C) Interest rates rise, and domestic investment falls.
D) Interest rates fall, and domestic investment rises.

Question 72

If a country went from a government budget deficit to a surplus, which statement would best predict the consequences?

A) National saving would increase, shifting the supply of loanable funds right.
B) National saving would increase, shifting the supply of loanable funds left.
C) National saving would decrease, shifting the demand for loanable funds right.
D) National saving would decrease, shifting the demand for loanable funds left.

Question 73

If a government increases its budget deficit, which statement would best predict the effects?

A) Interest rates rise, and the real exchange rate appreciates.
B) Interest rates fall, and the real exchange rate depreciates.
C) Interest rates rise, and the real exchange rate depreciates.
D) Interest rates fall, and the real exchange rate appreciates.

Question 74

Which statement best predicts the effects of an increase in a country's real interest rate?

A) Its net capital outflow and the real exchange rate increase.
B) Its net capital outflow and the real exchange rate decrease.
C) Its net capital outflow increases, and the real exchange rate decreases.
D) Its net capital outflow decreases, and the real exchange rate increases.

Question 75

Which statement best predicts the effects of an increase in the Canadian real interest rate?

A) Canadian net capital outflow and net capital outflow of other countries would rise.
B) Canadian net capital outflow and net capital outflow of other countries would fall.
C) Canadian net capital outflow would rise, while net capital outflow of other countries would fall.
D) Canadian net capital outflow would fall, while net capital outflow of other countries would rise.

Question 76

If the government of Barbados implemented a policy that reduced national saving, which statement would best predict the consequences?

A) Its real exchange rate would depreciate, and Barbadian net exports would rise.
B) Its real exchange rate would depreciate, and Barbadian net exports would fall.
C) Its real exchange rate would appreciate, and Barbadian net exports would rise.
D) Its real exchange rate would appreciate, and Barbadian net exports would fall.

Question 77

If the government of Pakistan made policy changes that increased national saving, which statement would best predict the consequences?

A) The real exchange rate of the rupee would depreciate, and Pakistan net exports would rise.
B) The real exchange rate of the rupee would depreciate, and Pakistan net exports would fall.
C) The real exchange rate of the rupee would appreciate, and Pakistan net exports would rise.
D) The real exchange rate of the rupee would appreciate, and Pakistan net exports would fall.

Question 78

Suppose that the government of Jordan raises its budget deficit. Which statement best predicts the effects of this action?

A) The real exchange rate of the Jordanian dinar would depreciate, and Jordanian net exports would rise.
B) The real exchange rate of the Jordanian dinar would depreciate, and Jordanian net exports would fall.
C) The real exchange rate of the Jordanian dinar would appreciate, and Jordanian net exports would rise.
D) The real exchange rate of the Jordanian dinar would appreciate, and Jordanian net exports would fall.

Question 79

How does a change in government budget affect national saving?

A) An increase in budget deficit increases national saving.
B) An increase in budget surplus increases national saving.
C) A decrease in budget surplus increases national saving.
D) A decrease in budget deficit does not affect national saving.

Question 80

How does the supply or demand for loanable funds shift when a country decreases its budget deficit?

A) The supply of loanable funds shifts right.
B) The supply of loanable funds shifts left.
C) The demand for loanable funds shifts right.
D) The demand for loanable funds shifts left.