Question 1

If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate
A)increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases.
B)increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.
C)decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow decreases.
D)decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow increases.

Accepted Answer

If U.S. citizens decide to purchase more foreign assets at each interest rate, then their demand for foreign currency increases, leading to a depreciation of the dollar in the foreign exchange market, which reduces the relative price of U.S. assets and makes foreign assets more attractive to U.S. investors. This leads to an increase in U.S. net capital outflow. Additionally, as the demand for foreign assets goes up, the U.S. real interest rate must also increase to induce investors to hold U.S. assets.

Question 2

A drop in a country's real interest rate reduces that country's net capital outflow.

Accepted Answer

A drop in a country's real interest rate typically increases net capital outflow because domestic assets become less attractive, prompting investors to seek higher returns abroad.

Question 3

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

Accepted Answer

The answer of Other things the same, if foreigners desire...

Question 4

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 5

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 it is a domestic or foreign asset. The demand for loanable funds increases due to the need for financing the purchase of the capital asset, which could be sourced from both domestic and foreign lenders.

Question 6

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

Accepted Answer

In an open economy, both domestic national saving and foreign saving can contribute to the supply of loanable funds. However, in the absence of foreign saving, the supply of loanable funds comes solely from national saving.

Question 7

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

Accepted Answer

The United States has experienced a trade deficit for many years, meaning it imports more goods and services than it exports.

Question 8

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 9

If the government of Kenya implemented a policy that decreased national saving, its real exchange rate would
A)depreciate and Kenyan net exports would rise.
B)depreciate and Kenyan net exports would fall.
C)appreciate and Kenyan net exports would rise.
D)appreciate and Kenyan net exports would fall.

Accepted Answer

If the government of Kenya implements a policy that decreases national saving, it will lead to a decrease in the supply of loanable funds. With a decrease in the supply of loanable funds, interest rates will rise, making domestic goods less competitive than foreign goods. As a result, the demand for domestic goods and services will decrease, leading to a decrease in net exports. The decrease in net exports will cause a surplus of domestic currency in the foreign exchange market, leading to an appreciation of the Kenyan shilling. Therefore, the real exchange rate would appreciate, and Kenyan net exports would fall.

Question 10

If a country institutes policies that lead domestic firms to desire more capital stock
A)net capital outflows rise and the real exchange rate rises.
B)net capital outflows rise and the real exchange rate falls.
C)net capital outflows fall and the real exchange rate rises.
D)net capital outflows and the real exchange rate falls.

Accepted Answer

When domestic firms desire more capital stock, they invest more domestically, reducing net capital outflows. This increased demand for domestic currency appreciates the real exchange rate.

Question 11

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would
A)shift both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right
B)shift the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left
C)shift the demand for loanable funds left and shift the supply of dollars in the market for foreign-currency exchange right
D)shift both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange left

Accepted Answer

Providing firms with a tax credit for investment projects would increase the incentive for firms to invest, resulting in a shift in the demand for loanable funds to the right. This would increase the equilibrium interest rate and quantity of loanable funds. However, this would also increase the demand for foreign currency and decrease the supply, resulting in a leftward shift in the supply of dollars in the market for foreign-currency exchange. Therefore, choice B is the correct answer.

Question 12

If a country had capital flight, then the real exchange rate would
A)fall. To offset this fall the government could increase the budget deficit.
B)fall. To offset this fall the government could decrease the budget deficit.
C)rise. To offset this rise the government could increase the budget deficit.
D)rise. To offset this rise the government could decrease the budget deficit.

Accepted Answer

The answer of If a country had capital flight, then...

Question 13

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would
A)raise both the interest rate and the real exchange rate.
B)raise the interest rate and reduce the real exchange rate.
C)reduce the interest rate and raise the real exchange rate.
D)reduce both the interest rate and the real exchange rate.

Accepted Answer

The answer of During the financial crisis it was proposed...

Question 14

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

This is known as the national saving-investment identity in an open economy, which states that domestic saving, domestic investment, and net capital outflow must add up to zero at the equilibrium interest rate. Therefore, at the equilibrium real interest rate, the amount that people want to save equals desired quantities of domestic investment and net capital outflow.

Question 15

If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment
A)increases, and U.S. net capital outflow increases.
B)increases, and U.S. net capital outflow decreases.
C)decreases, and U.S. net capital outflow increases.
D)decreases, and U.S. net capital outflow decreases.

Accepted Answer

The answer of If U.S. citizens decide to save a...

Question 16

If the government of Colombia made policy changes that increased national saving, the real exchange rate of the peso would
A)depreciate and Colombian net exports would rise.
B)depreciate and Colombian net exports would fall.
C)appreciate and Colombian net exports would rise.
D)appreciate and Colombian net exports would fall.

Accepted Answer

An increase in national saving leads to an appreciation of the real exchange rate, making Colombian exports more expensive and imports cheaper. This leads to a fall in net exports.

Question 17

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

Accepted Answer

The U.S. has had trade deficits in almost every year since 1992, with a few exceptions.

Question 18

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 comes from both domestic investment and net capital outflow, as domestic investment requires financing, and net capital outflow represents the amount of domestic savings that is invested abroad.

Question 19

If government policy encouraged households to save more at each interest rate, then
A)the real exchange rate and net exports would rise.
B)the real exchange rate and net exports would fall.
C)the real exchange rate would rise and net exports would fall.
D)the real exchange rate would fall and net exports would rise.

Accepted Answer

When households save more at each interest rate, there will be an increase in the supply of loanable funds, which will drive down interest rates. This will lead to a decrease in the demand for domestic goods and an increase in the demand for foreign goods, causing the domestic currency to depreciate (fall) and making exports more attractive to foreign buyers. As a result, net exports will rise. Hence, the correct answer is D, the real exchange rate would fall and net exports would rise.

Question 20

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.

Quiz 19: A Macroeconomic Theory of the Open Economy

If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate

A drop in a country's real interest rate reduces that country's net capital outflow.

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

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

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

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

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

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.

If the government of Kenya implemented a policy that decreased national saving, its real exchange rate would

If a country institutes policies that lead domestic firms to desire more capital stock

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would

If a country had capital flight, then the real exchange rate would

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would

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.

If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment

If the government of Colombia made policy changes that increased national saving, the real exchange rate of the peso would

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

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

If government policy encouraged households to save more at each interest rate, then

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