Question 1

An economy with a trade surplus must also have:

Accepted Answer

This follows from the accounting identity NX + KI = 0, where NX is net exports and KI is net capital inflows. A trade surplus implies a positive NX, so KI must be negative, meaning there is capital outflow.

Question 2

Which of the following events will decrease the domestic real interest rate in an open economy?

Accepted Answer

An increase in domestic saving shifts the supply curve of loanable funds rightward which decreases the equilibrium real interest rate.

Question 3

Holding constant risk and the real returns available abroad, higher domestic real interest rates ________ capital inflows, ________ capital outflows, and ________ net capital inflows.

Accepted Answer

Higher domestic real interest rates make investors domestic and foreign more likely to invest in the domestic economy compared to foreign economies. This reduces capital outflows and increases net capital inflows.

Question 4

An economy with a trade deficit must also have:

Accepted Answer

This follows from the accounting identity NX + KI = 0, where NX is net exports and KI is net capital inflows. A trade deficit implies a negative NX, so KI must be positive, meaning there is capital inflow.

Question 5

The benefits of net capital inflows to a country include all of the following except:

Accepted Answer

When net capital flows into a country it creates a larger pool of savings, higher rates of investment and potentially higher growth rates. These are good for the country receiving the net capital inflow. The only negative is higher interest and dividend payments to foreigners.

Question 6

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will ________ and the level of capital investment in the country will ________, holding other factors constant.

Accepted Answer

As domestic citizens decide to save more, more loanable funds are available to borrowers and domestic real interest rates fall, causing capital investment to increase.

Question 7

In an open economy, a decrease in capital inflows ________ the equilibrium domestic real interest rate and ________ the quantity of domestic investment.

Accepted Answer

An decrease in capital inflows increases the real interest rate. This, in turn, decreases domestic investment.

Question 8

In an open economy, domestic investment equals:

Accepted Answer

In an open economy, investment funds come from both domestic saving and net capital inflows from abroad.

Question 9

Which of the following events will increase the domestic real interest rate in an open economy?

Accepted Answer

A decrease in domestic saving increases the domestic interest rate. This happens when the supply curve for investment funds shifts leftward.

Question 10

Holding constant risk and the real returns available abroad, lower domestic real interest rates ________ capital inflows, ________ capital outflows, and ________ net capital inflows.

Accepted Answer

Lower domestic real interest rates make investors domestic and foreign less likely to invest in the domestic economy compared to foreign economies. This increases capital outflows and decreases net capital inflows.

Question 11

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will ________ capital inflows and ________ the equilibrium domestic real interest rate.

Accepted Answer

Increased interest rates abroad cause domestic investors to turn their attention to foreign investments. This decreases capital inflows and thus, increases the domestic real interest rate.

Question 12

If domestic saving is less than domestic investment, then a country will have a ________ and positive net capital ________.

Accepted Answer

If domestic savings is less than domestic investment then capital inflows are positive. This follows from the equation S + KI = I. Since KI is positive, NX must be negative (there must be a trade deficit), as is shown by the equation NX + KI = 0.

Question 13

In an open economy, an increase in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.

Accepted Answer

When the government's budget deficit increases, fewer loanable funds are available to other borrowers and domestic real interest rates rise, causing private capital investment to fall.

Question 14

If domestic saving is greater than domestic investment, then a country will have a ________ and positive net capital ________.

Accepted Answer

If domestic savings is greater than domestic investment then capital inflows are negative (there are capital outflows). This follows from the equation S + KI = I. Since KI is negative, NX must be positive (there must be a trade surplus), as is shown by the equation NX + KI = 0.

Question 15

At each value of the domestic interest rate, increases in the riskiness of domestic assets ________ capital inflows, ________ capital outflows, and ________ net capital inflows.

Accepted Answer

Increased riskiness of domestic assets induces investors domestic and foreign to desire foreign investments. This decreases capital inflows, increases capital outflows and decreases net capital inflows.

Question 16

In an open economy, a decrease in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.

Accepted Answer

As the government's budget deficit decreases, more loanable funds are available to other borrowers and domestic real interest rates fall, causing private capital investment to increase.

Question 17

At each value of the domestic interest rate, decreases in the riskiness of domestic assets ________ capital inflows, ________ capital outflows, and ________ net capital inflows.

Accepted Answer

Decreased riskiness of domestic assets induces investors domestic and foreign to desire domestic investments. This increases capital inflows, decreases capital outflows and increases net capital inflows.

Question 18

In an open economy, an increase in capital inflows ________ the equilibrium domestic real interest rate and ________ the quantity of domestic investment.

Accepted Answer

An increase in capital inflows decreases the real interest rate. This, in turn, increases domestic investment.

Question 19

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ________ capital inflows and ________ the equilibrium domestic real interest rate.

Accepted Answer

Decreased interest rates abroad cause foreign investors to turn their attention to domestic investments. This increases capital inflows and thus, decreases the domestic real interest rate.

Question 20

In an open economy, the domestic real interest rate is determined by:

Accepted Answer

The real interest rate is determined by the interaction of savers and investors. In an open economy, the real interest rate is determined by domestic saving, domestic investment and net capital inflows from abroad.

Quiz 23: Financial Markets and International Capital Flows

An economy with a trade surplus must also have:

Which of the following events will decrease the domestic real interest rate in an open economy?

Holding constant risk and the real returns available abroad, higher domestic real interest rates capital inflows, capital outflows, and net capital inflows.

An economy with a trade deficit must also have:

The benefits of net capital inflows to a country include all of the following except:

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will and the level of capital investment in the country will , holding other factors constant.

In an open economy, a decrease in capital inflows the equilibrium domestic real interest rate and the quantity of domestic investment.

In an open economy, domestic investment equals:

Which of the following events will increase the domestic real interest rate in an open economy?

Holding constant risk and the real returns available abroad, lower domestic real interest rates capital inflows, capital outflows, and net capital inflows.

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will capital inflows and the equilibrium domestic real interest rate.

If domestic saving is less than domestic investment, then a country will have a and positive net capital .

In an open economy, an increase in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

If domestic saving is greater than domestic investment, then a country will have a and positive net capital .

At each value of the domestic interest rate, increases in the riskiness of domestic assets capital inflows, capital outflows, and net capital inflows.

In an open economy, a decrease in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

At each value of the domestic interest rate, decreases in the riskiness of domestic assets capital inflows, capital outflows, and net capital inflows.

In an open economy, an increase in capital inflows the equilibrium domestic real interest rate and the quantity of domestic investment.

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will capital inflows and the equilibrium domestic real interest rate.

In an open economy, the domestic real interest rate is determined by: