Question 1

Recently Greece ran large deficits and people became worried about the ability of its government to make payments on its debt.Which of the these events reduces a country's real exchange rate?
A) an increase in the budget deficit,and increased concerns about the ability of the government to pay back its debt
B) an increase in the budget deficit,but not increased concerns about the ability of the government to pay back its debt
C) increased concerns about the ability of the government to pay back its debt,but not an increase in the budget deficit
D) neither an increase in the budget deficit,nor increased concerns about the ability of the government to pay back its debt

Accepted Answer

Increased concerns about the ability of the government to pay back its debt would lead to a decrease in investor confidence, which can cause a decrease in foreign investment and capital outflows, thereby reducing the demand for the country's currency and decreasing its real exchange rate. An increase in the budget deficit (as in choices A and B) may lead to inflation and higher interest rates, which could lead to an appreciation of the country's currency and an increase in the real exchange rate. Therefore, only option C reduces the real exchange rate without any mention of an increase in the budget deficit. Option D is incorrect as it does not describe any factors that would affect the real exchange rate.

Question 2

When a country experiences capital flight,the interest rate
A) falls because the demand for loanable funds shifts left.
B) falls because the supply for loanable funds shifts right.
C) rises because the demand for loanable funds shifts right.
D) rises because the supply for loanable funds shifts left.

Accepted Answer

Capital flight refers to when investors move their money out of a country, often due to economic or political instability. This can lead to a decrease in the supply of loanable funds in the country, causing an increase in the interest rate. Therefore, the correct answer is C, as the demand for loanable funds will shift right as investors who do not engage in capital flight will seek to borrow more funds, leading to an increase in the interest rate.

Question 3

When a country experiences capital flight its
A) net capital outflow increases and its real exchange rate rises.
B) net capital outflow increases and its real exchange rate falls.
C) net capital outflow decreases and its real exchange rate rises.
D) net capital outflow decreases and its real exchange rate falls.

Accepted Answer

Capital flight refers to the movement of capital from one country to another due to economic or political instability. This leads to an increase in net capital outflow from the country experiencing capital flight. As a result, the demand for the country's currency falls and its exchange rate depreciates. Therefore, the real exchange rate falls.

Question 4

When a country suffers from capital flight,the exchange rate
A) depreciates,because demand in the market for foreign-currency exchange shifts left.
B) depreciates,because supply in the market for foreign-currency exchange shifts right.
C) appreciates,because demand in the market for foreign-currency exchange shifts right.
D) None of the above is correct.

Accepted Answer

The answer of When a country suffers from capital flight,the...

Question 5

If a country experiences capital flight,which of the following curves shift right?
A) only the demand for loanable funds.
B) only the supply of dollars in the market for foreign-currency exchange.
C) only the net capital outflow curve and the supply of dollars in the market for foreign currency exchange.
D) the demand for loanable funds,the net capital outflow curve,and the supply of dollars in the market for foreign currency exchange.

Accepted Answer

Capital flight means that investors in a country are moving their funds abroad, thereby increasing the net capital outflow. This, in turn, shifts the net capital outflow curve to the right. As a result, the supply of dollars in the market for foreign currency exchange also increases, which shifts the supply curve to the right. Finally, given that capital flight reduces investment in the country, the demand for loanable funds decreases, which shifts the demand curve to the left. The net effect is that the equilibrium exchange rate depreciates and the equilibrium quantity of loanable funds decreases.

Question 6

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?
A) both what happens to the interest rate and what happens to the exchange rate
B) what happens to the interest rate but not what happens to the exchange rate
C) what happens to the exchange rate but not what happens to the interest rate
D) neither what happens to the interest rate nor what happens to the interest rate.

Accepted Answer

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

Question 7

If a country experiences capital flight,which of the following lists only curves that shift right?
A) the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange
B) the demand for loanable funds and the supply of dollars in the market for foreign-currrency exchange
C) the supply of loanable funds and the demand for dollars in the market for foreign-currency exchange
D) the supply of loanable funds and the supply of dollars in the market for foreign-currency exchange

Accepted Answer

Capital flight occurs when investors move their funds from one country to another due to various reasons such as political instability, economic crisis, or high taxes. This results in a decrease in the supply of loanable funds and an increase in the demand for foreign currency, specifically dollars. As a result, the demand for loanable funds shifts rightward as investors demand more funds to invest abroad, and the supply of dollars in the foreign currency exchange market shifts rightward as investors sell the domestic currency and buy dollars. Therefore, only option B correctly lists the curves that shift rightward.

Question 8

When a country experiences capital flight,which of the following rise?
A) its real interest rate and its real exchange rate
B) its real interest rate but not its real exchange rate
C) its real exchange rate but not its real interest rate
D) neither its real interest rate nor its foreign exchange rate

Accepted Answer

The answer of When a country experiences capital flight,which of...

Question 9

If Kenya experienced capital flight,the supply of Kenyan schillings in the market for foreign-currency exchange would shift
A) left,which would make the real exchange rate of the Kenyan schilling appreciate.
B) left,which would make the real exchange rate of the Kenyan schilling depreciate.
C) right,which would make the real exchange rate of the Kenyan schilling appreciate.
D) right,which would make the real exchange rate of the Kenyan schilling depreciate.

Accepted Answer

The answer of If Kenya experienced capital flight,the supply of...

Question 10

Recently the Greek government had large deficits and people became worried about Greece's ability to continue to make payments on its debt.Which of the these events raise a country's interest rates?
A) an increase in the budget deficit,and increased concerns about the ability of the government to pay back its debt
B) an increase in the budget deficit,but not increased concerns about the ability of the government to pay back its debt
C) increased concerns about the ability of the government to pay back its debt,but not an increase in the budget deficit
D) neither an increase in the budget deficit,nor increased concerns about the ability of the government to pay back its debt

Accepted Answer

An increase in the budget deficit and increased concerns about the ability of the government to pay back its debt can lead to a downgrading of a country's credit rating, which in turn increases the interest rates that they must pay on their debt. This is because lenders demand higher interest rates to compensate for the increased risk of default.

Question 11

In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its debt.During the day of this announcement,U.S.interest rates rose and the real exchange rate of the U.S.dollar depreciated.Which of these changes is consistent with the results of the open-economy macroeconomic model?
A) the increase in U.S.interest rates
B) the depreciation of the real exchange rate of the U.S.dollar
C) Both a and b are consistent.
D) Neither a nor b are consistent.

Accepted Answer

According to the open-economy macroeconomic model, a threat of default on the U.S. debt would increase U.S. interest rates as lenders demand a higher return to compensate for the increased risk. This increase in interest rates would also lead to a depreciation of the real exchange rate of the U.S. dollar as foreign investors seek higher returns elsewhere, driving down the value of the dollar. Therefore, both options A and B are consistent with the results of the open-economy macroeconomic model.

Question 12

If people decide that some country is now a more risky place to keep their saving,then at the original interest rate in that country there is a
A) surplus of loanable funds,so the interest rate increases.
B) surplus of loanable funds,so the interest rate decreases.
C) shortage of loanable funds,so the interest rate increases.
D) shortage of loanable funds,so the interest rate decreases.

Accepted Answer

When people decide that a country is a more risky place to keep their savings, they will withdraw their funds from banks and other financial institutions. This will result in a shortage of loanable funds, as there will be less money available for banks to lend out. As a result, the interest rate will increase to attract funds back into the market. Therefore, the best choice is C- shortage of loanable funds, so the interest rate increases.

Question 13

When Mexico suffered from capital flight in 1994,the U.S.real interest rate
A) rose and the real exchange rate of the dollar appreciated.
B) rose and the real exchange rate of the dollar depreciated.
C) fell and the real exchange rate of the dollar appreciated.
D) fell and the real exchange rate of the dollar depreciated.

Accepted Answer

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

Question 14

In 2002 it looked like the Argentinean government might default on its debt (which eventually it did).The open-economy macroeconomic model predicts that this should have
A) raised Argentinean interest rates and caused the Argentinean currency to appreciate.
B) raised Argentinean interest rates and caused the Argentinean currency to depreciate.
C) lowered Argentinean interest rates and caused the Argentinean currency to appreciate.
D) lowered Argentinean interest rates and caused the Argentinean currency to depreciate.

Accepted Answer

The open-economy macroeconomic model predicts that a default on government debt would increase risk and uncertainty, leading to a higher demand for higher interest rates by investors. This higher interest rate would cause the Argentinean currency to depreciate as investors sell their Argentinean assets and move their money to safer countries.

Question 15

The country of Frequencia is politically very stable and has a long tradition of respecting property rights.If several other countries suddenly became politically unstable,we would expect Frequencia's
A) real interest rate to rise.
B) real exchange rate to fall.
C) net exports to fall.
D) None of the above is likely.

Accepted Answer

When other countries become politically unstable, their economies will suffer and their demand for imports (including those from Frequencia) will fall. This would lead to a decrease in net exports from Frequencia, resulting in a fall in the real exchange rate. The stability of Frequencia's political situation and respect for property rights would not directly affect the real interest rate.

Question 16

When a country suffers from capital flight,the demand for loanable funds in that country shifts
A) right,which increases interest rates in that country.
B) right,which decreases interest rates in that country.
C) left,which increases interest rates in that country.
D) left,which decreases interest rates in that country.

Accepted Answer

The answer of When a country suffers from capital flight,the...

Question 17

Which of the following is most likely to result if foreigners decide to withdraw the funds that they have loaned to the United States?
A) U.S.net exports will rise
B) U.S.net capital outflow will fall.
C) U.S.domestic investment will rise
D) the dollar will appreciate

Accepted Answer

The answer of Which of the following is most likely...

Question 18

When Mexico suffered from capital flight in 1994,U.S.demand for loanable funds
A) and U.S.net capital outflow rose.
B) and U.S.net capital outflow fell.
C) fell and U.S.net capital outflow rose.
D) rose and U.S.net capital outflow fell.

Accepted Answer

Capital flight from Mexico would decrease the supply of loanable funds in Mexico, driving up interest rates, which would in turn decrease investment and imports in Mexico. This would make the U.S. relatively more attractive for investment, causing an increase in the U.S. net capital inflow (capital outflow from Mexico). However, the decrease in Mexico's imports and investment would decrease the demand for loanable funds in the U.S., causing the U.S. demand for loanable funds to fall. Therefore, both the U.S. net capital outflow and demand for loanable funds would fall.

Question 19

When a country experiences capital flight its currency
A) appreciates and net exports rise.
B) appreciates and net exports fall.
C) depreciates and net exports rise.
D) depreciates and net exports fall.

Accepted Answer

The answer of When a country experiences capital flight its...

Question 20

In 1998 the Russian government defaulted on its bonds.According to the open-economy macroeconomic model,this should have
A) increased Russian interest rates and net exports.
B) reduced Russian interest rates and net exports.
C) increased Russian interest rates and reduced Russian net exports.
D) reduced Russian interest rates and increased Russian net exports.

Accepted Answer

The answer of In 1998 the Russian government defaulted on...

Quiz 32: A Macroeconomic Theory of the Open Economy

Recently Greece ran large deficits and people became worried about the ability of its government to make payments on its debt.Which of the these events reduces a country's real exchange rate?

When a country experiences capital flight,the interest rate

When a country experiences capital flight its

When a country suffers from capital flight,the exchange rate

If a country experiences capital flight,which of the following curves shift right?

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?

If a country experiences capital flight,which of the following lists only curves that shift right?

When a country experiences capital flight,which of the following rise?

If Kenya experienced capital flight,the supply of Kenyan schillings in the market for foreign-currency exchange would shift

Recently the Greek government had large deficits and people became worried about Greece's ability to continue to make payments on its debt.Which of the these events raise a country's interest rates?

If people decide that some country is now a more risky place to keep their saving,then at the original interest rate in that country there is a

When Mexico suffered from capital flight in 1994,the U.S.real interest rate

In 2002 it looked like the Argentinean government might default on its debt (which eventually it did) .The open-economy macroeconomic model predicts that this should have

The country of Frequencia is politically very stable and has a long tradition of respecting property rights.If several other countries suddenly became politically unstable,we would expect Frequencia's

When a country suffers from capital flight,the demand for loanable funds in that country shifts

Which of the following is most likely to result if foreigners decide to withdraw the funds that they have loaned to the United States?

When Mexico suffered from capital flight in 1994,U.S.demand for loanable funds

When a country experiences capital flight its currency

In 1998 the Russian government defaulted on its bonds.According to the open-economy macroeconomic model,this should have