Question 1

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

The answer of The country of Frequencia is politically very...

Question 2

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...

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 usually because of political or economic instability in a country. As a result, the net capital outflow (NCFO) of the country experiencing capital flight increases because money is flowing out of the country. This leads to a decrease in the country's supply of domestic currency and an increase in the demand for foreign currency, causing a depreciation of the country's real exchange rate (RER). Therefore, the correct choice is B where the net capital outflow increases and the real exchange rate falls.

Question 4

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

A country's interest rates are raised when there are concerns about the government's ability to pay back its debt because investors demand higher rates of return for taking on additional risk. An increase in the budget deficit also indicates that the government may struggle to handle its debt obligations in the future, which can further increase interest rates as investors become more hesitant to lend to the country. Therefore, the combination of increased concerns about debt repayment and a large budget deficit is likely to raise interest rates.

Question 5

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...

Question 6

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

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

Question 7

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then
A)net capital outflow and the real exchange rate will rise.
B)net capital outflow will rise and the real exchange rate will fall.
C)net capital outflow will fall and the real exchange rate will rise.
D)net capital outflow and the exchange rate will fall.

Accepted Answer

If there is a higher risk associated with buying U.S. assets due to the discovery of lax lending standards, foreign investors may be hesitant to invest in the U.S. market. This will lead to an increase in net capital outflow, as investors seek opportunities in other countries. Additionally, a decrease in demand for U.S. assets will cause the value of the dollar to fall, leading to a decrease in the real exchange rate. Therefore, the correct answer is B.

Question 8

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 9

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

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

Question 10

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...

Question 11

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

Capital flight increases the supply of the domestic currency in the foreign exchange market as investors sell the currency to move their capital abroad, leading to depreciation.

Question 12

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 can lead to a decrease in foreign demand for the country's currency. This can result in a decrease in the real exchange rate. The increase in the budget deficit alone (option A and B) does not necessarily decrease the real exchange rate. Option D is also incorrect as both the budget deficit and concerns about the government's ability to pay back its debt can affect the real exchange rate.

Question 13

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

According to the open-economy macroeconomic model, a sovereign risk event like a potential government default on its debt is expected to increase country risk premium, which in turn raises domestic interest rates. Higher interest rates will attract more capital inflows, which causes the currency to appreciate. However, in the case of Argentina, the IMF and other international creditors had to provide massive bailouts to prevent the default, which led to a loss of investor confidence and a run on the currency, causing depreciation.

Question 14

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

If foreigners withdraw their funds, the U.S. will have less foreign capital inflow, leading to a decrease in the supply of dollars in the foreign exchange market, causing the dollar to depreciate. This depreciation makes U.S. goods cheaper for foreigners, thus increasing U.S. net exports.

Question 15

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 country's interest rates and exchange rates are interdependent. An increase in the risk of default on debt, as signaled by Gingrich's announcement, would make U.S. bonds less attractive to foreign investors and cause a rise in interest rates. At the same time, the expected depreciation of the U.S. dollar would make U.S. exports more competitive and cheaper for foreign buyers, causing a decline in the real exchange rate. Therefore, both A and B are consistent with the open-economy macroeconomic model.

Question 16

If fear of default on bonds issued by U.S. corporations rise, then
A)net capital outflow and the exchange rate both rise.
B)net capital outflow rises and the exchange rate falls.
C)net capital outflow falls and the exchange rate rises.
D)net capital outflow and the exchange rate both fall.

Accepted Answer

If fear of default on bonds issued by U.S. corporations rise, investors may become more hesitant to invest in those corporations, leading to a decrease in net capital inflow and an increase in net capital outflow. This would result in a decrease in demand for the U.S. currency, leading to a fall in the exchange rate. Therefore, option B is the most appropriate choice.

Question 17

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then
A)the real exchange rate and the interest rate will rise.
B)the real exchange rate will rise and the interest rate will fall.
C)the real exchange rate will fall and the interest rate will rise.
D)the real exchange rate and the interest rate will fall.

Accepted Answer

If lending institutions had not carefully evaluated borrowers prior to lending them funds, it means that there is a higher probability of default on loans, which increases the risk of buying U.S. assets. This will lead to a decrease in demand for U.S. assets, causing the real exchange rate to fall. To compensate for the higher risk, lenders will demand a higher interest rate, leading to a rise in the interest rate. Hence, the correct choice is C - the real exchange rate will fall and the interest rate will rise.

Question 18

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 19

If the world thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate
A)and net exports would rise.
B)would rise and net exports would fall.
C)would fall and net exports would rise.
D)and net exports would fall.

Accepted Answer

If people believe that many banks in a country are close to bankruptcy, they will likely lose confidence in that country's economy, causing investors to withdraw money, leading to a decline in the country's currency value. A reduction in the value of the currency will result in an increase in exports, as goods will appear less expensive, leading to an increase in net exports. Therefore, the correct option is C, which states that the country's real exchange rate would decline, and net exports would rise.

Question 20

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 means that investors are taking their money out of the country, so the supply of loanable funds decreases. As a result, the demand for loanable funds exceeds supply, which leads to an increase in interest rates.

Quiz 19: A Macroeconomic Theory of the Open Economy

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

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

When a country experiences capital flight its

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?

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

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

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then

When Mexico suffered from capital flight in 1994, the U.S. real interest 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 Kenya experienced capital flight, the supply of Kenyan schillings in the market for foreign-currency exchange would shift

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?

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

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

If fear of default on bonds issued by U.S. corporations rise, then

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then

When a country experiences capital flight its currency

If the world thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate

When a country experiences capital flight, the interest rate