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.

Accepted Answer

A depreciation of the real exchange rate of the dollar makes U.S. goods cheaper for foreigners, increasing U.S. exports and decreasing imports, thus increasing the demand for dollars in the foreign exchange market to purchase these cheaper U.S. goods. This relationship between the exchange rate and the quantity of dollars demanded is why the demand curve for dollars in the foreign-currency exchange market is downward sloping.

Question 2

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

Accepted Answer

In an open economy, the supply of loanable funds is indeed derived from national saving, which includes both private saving (by households and businesses) and public saving (the surplus of tax revenue over government spending).

Question 3

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 4

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 is driven by the need for financing both domestic investment projects and net capital outflow, which includes investments in foreign assets.

Question 5

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 6

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 7

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

Accepted Answer

The U.S. has consistently run a trade deficit over the past two decades, meaning it has imported more goods and services than it has exported.

Question 8

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

Accepted Answer

If foreigners desire to purchase more U.S. bonds, they will need to sell their own currency to buy U.S. dollars, which will increase the supply of foreign currency and decrease the demand for U.S. dollars. This will lead to a decrease in the value of the U.S. dollar, which will make it more expensive for foreigners to purchase U.S. bonds. As a result, the demand for loanable funds will shift 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.

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 10

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 borrowing more expensive, thereby reducing the quantity of loanable funds demanded as firms and consumers are less inclined to take out loans at higher costs.

Question 11

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

Accepted Answer

The U.S. has consistently run trade deficits since the 1970s, importing more goods and services than it exports, which has continued over the past two decades.

Question 12

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

Accepted Answer

Net exports are the value of a country's exports minus the value of its imports. In the open-economy macroeconomic model, the quantity of dollars demanded in the market for foreign currency exchange is equal to the value of imports. Therefore, net exports are equal to 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.

Accepted Answer

In the open-economy macroeconomic model, the supply of currency is determined by the domestic central bank and is not influenced by changes in the real exchange rate, hence the supply curve is vertical.

Question 14

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, there would be a surplus of loanable funds, not a shortage, because the higher interest rate would discourage borrowers and attract more savers.

Question 15

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

Accepted Answer

The answer of In the open economy model, the supply...

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.

Accepted Answer

In the open-economy macroeconomic model, equilibrium is achieved at the real interest rate where the amount people (including the government) want to save exactly equals the sum of the desired quantities of domestic investment and net capital outflow. This balance ensures that the supply of loanable funds meets the demand for those funds both for domestic investment and for investment abroad.

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.

Accepted Answer

When the real exchange rate of the dollar appreciates, U.S. goods become more expensive to foreign residents, making them less desirable abroad, but this does not necessarily make them more desirable to U.S. residents; it just makes foreign goods relatively cheaper for U.S. residents.

Question 18

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 19

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

Accepted Answer

An increase in a country's real interest rate makes domestic assets more attractive to foreign investors, leading to an inflow of capital into the country. This reduces the net capital outflow as more investment is coming into the country rather than leaving it.

Question 20

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 the asset is domestic or foreign, as it involves spending that requires financing.

Quiz 32: A Macroeconomic Theory of the Open Economy