Deck 32: A Macroeconomic Theory of the Open Economy

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

Other things the same, if foreigners desire to purchase more U.S. bonds, then the demand for loanable funds shifts left.

Question 9

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.

Question 10

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

Question 11

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

Question 12

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

Question 13

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.

Question 14

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

Question 15

In the open economy model, the supply of loanable funds comes from national saving and net capital outflow.

Question 16

In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that people (including government) want to save equals desired quantities of domestic investment and net capital outflow.

Question 17

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

Question 18

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

Question 19

An increase in a country's real interest rate reduces that country's net capital outflow.

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

When the government budget deficit increases, national saving decreases.

Question 25

If C+I+G>Y, then net exports and net capital outflow are both greater than zero.

Question 26

In the open-economy macroeconomic model, other things the same, when a U.S. resident imports a foreign good, the demand for dollars in the foreign-currency exchange market decreases.

Question 27

According to the open-economy macroeconomic model, if the U.S. government budget deficit decreases, then both U.S. domestic investment and net capital outflow increase.

Question 28

According to the open-economy macroeconomic model, a decrease in the U.S. government budget deficit increases U.S. net capital outflow, causes the real exchange rate of the dollar to depreciate, and increases U.S. net exports.

Question 29

An increase in the government budget deficit shifts the demand for loanable funds to the right.

Question 30

An increase in the government budget deficit shifts the supply of loanable funds to the left.

Question 31

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

Question 32

According to the open-economy macroeconomic model, if the U.S. government budget deficit increases, then both U.S. domestic investment and U.S. net capital outflow decrease.

Question 33

In the open-economy macroeconomic model, the real exchange rate does not affect net capital outflow.

Question 34

In the open-economy macroeconomic model, other things the same, an increase in the exchange rate raises the quantity of dollars supplied in the market for foreign-currency exchange.

Question 35

In the 1980s, both the U.S. government budget and U.S. trade deficits increased.

Question 36

An increase in the U.S. interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S. assets.

Question 37

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.

Question 38

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

Question 39

As the interest rate rises, it is possible that net capital outflow could move from a positive to a negative value.

Question 40

In the open-economy macroeconomic model, if there were a surplus in the market for foreign-currency exchange, the real exchange rate would appreciate.

Question 41

In the long run, import quotas increase net exports.

Question 42

Capital flight raises a country's interest rate.

Question 43

In the long run import quotas do not affect the size of net exports.

Question 44

If policymakers impose import restrictions on clothing, the U.S. trade deficit will shrink.

Question 45

Capital flight raises both a country's exchange rate and its interest rate.

Question 46

What happens to the quantity of loanable funds supplied when the interest rate rises? Explain why this change happens.

Question 47

If Argentina suffers from capital flight, Argentinean domestic investment and Argentinean net exports will both decline.

Question 48

Capital flight increases a country's interest rate. This increase in the interest rate makes net capital outflow lower than it would be had the interest rate stayed the same.

Question 49

When a country imposes a trade quota, the demand for currency in the market for foreign exchange shifts to the right

Question 50

Capital flight shifts the demand for loanable funds to the left.

Question 51

What is the source of the demand for loanable funds in the open-economy macroeconomic model ?

Question 52

What is the source of the supply of loanable funds in the open-economy macroeconomic model?

Question 53

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

Question 54

Capital flight raises a country's real exchange rate.

Question 55

An increase in national saving reduces the interest rate and so reduces net capital outflow.

Question 56

Capital flight shifts the NCO curve to the left.

Question 57

A tax credit for purchases of capital goods causes the interest rate to increase and the exchange rate to appreciate.

Question 58

What are the sources of the demand for loanable funds? What happens to the quantity of loanable funds demanded when the interest rate rises?

Question 59

An import quota imposed by the U.S. would reduce U.S. imports, but have no impact on U.S. exports.

Question 60

An increase in the government budget deficit shifts the supply of domestic currency in the market for foreign exchange to the right.

Question 61

In the market for foreign-currency exchange, the source of the supply of dollars is _________. The supply curve is _________ because _____________.

Question 62

If the exchange rate rises, foreign residents want to purchase ______ domestic goods and domestic residents want to purchase _____ foreign goods. In the market for foreign-currency exchange, these changes are shown as a _______ in the quantity of dollars ______.

Question 63

An economy recently had 800 billion euros of saving and 600 billion euros of net capital outflow. What was its investment? What was its quantity of loanable funds supplied?

Question 64

Other things the same, if the U.S. interest rate rises, what happens to the net capital outflow of other countries?

Question 65

What is the source of the demand for dollars in the market for foreign-currency exchange?

Question 66

If the government budget deficit rises, what happens to the interest rate? What does this change in the interest rate do to net capital outflow? Provide a detailed explanation of why this change in the interest rate changes net capital outflow.

Question 67

If the exchange rate rises, domestic goods become relatively ______ expensive. This change in the affordability of domestic goods makes domestic goods _____ attractive to foreigners. So, _______ ______.

Question 68

Other things the same, which curve in the market for foreign-currency exchange shifts and which direction does it shift if net capital outflow rises?

Question 69

If a country's government moves from a budget deficit to a budget surplus, which curve in the market for loanable funds shifts and which direction does it shift? What happens to the interest rate?

Question 70

A country recently had 500 billion euros of national saving and -200 billion euros of net capital outflow. What was its domestic investment? What was its quantity of loanable funds supplied?

Question 71

If the exchange rate falls, domestic goods become relatively ______ expensive. This change in the affordability of domestic goods makes domestic goods _____ attractive to domestic residents. So, _______ ______.

Question 72

Other things the same, which of the following would a rise in the real interest rate raise:
desired investment spending, desired national saving, desired net capital outflow?

Question 73

What happens to net capital outflow as the real interest rate falls? Explain your answer.

Question 74

Other things the same, if the U.S. interest rate rises, U.S. assets become ____ attractive. So, desired net capital outflow _____. This change in net capital outflow, shifts the __________ curve in the market for foreign-currency exchange to the ______.

Question 75

If a country's exchange rate rises, what happens to its exports and what happens to its imports?

Question 76

What is the source of the supply of dollars in the market for foreign-currency exchange?

Question 77

What happens to domestic investment as the real interest rate rises? Explain your answer.

Question 78

Define net capital outflow.

Question 79

A country recently had 500 billion euros of national saving and 200 billion euros of domestic investment. What was its net capital outflow? What was its quantity of loanable funds demanded?

Question 80

If there is a shortage in the market for foreign-currency exchange, what happens to the exchange rate and to net exports?