Question 1

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

Accepted Answer

If the risk of buying U.S. assets rises due to the discovery of careless lending practices, investors will demand a higher return to compensate for the increased risk. This will lead to a rise in interest rates and a consequent increase in net capital outflow as investors move their funds to countries with less risk. The increase in net capital outflow will cause the value of the dollar to fall relative to other currencies, leading to a fall in the real exchange rate.

Question 2

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

Accepted Answer

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Question 3

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

Accepted Answer

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Question 4

When a country experiences capital flight its

Accepted Answer

Capital flight refers to the situation where investors move their assets out of a country to seek safer or more profitable opportunities abroad. This leads to an increase in the net capital outflow of the country, as capital is leaving the country. As a result, demand for the country's currency decreases, causing its real exchange rate to fall. This makes the country's exports cheaper and more attractive to foreign buyers, which could help to offset some of the negative effects of capital flight.

Question 5

When a country experiences capital flight its currency

Accepted Answer

Capital flight leads to a depreciation of the country's currency as investors sell off assets and convert the currency into foreign currencies. This depreciation makes the country's goods cheaper for foreign buyers, thus increasing net exports.

Question 6

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

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Question 7

If China experienced capital flight,the supply of Chinese yuan in the market for foreign-currency exchange would shift

Accepted Answer

Capital flight from China would increase the supply of Chinese yuan in the foreign exchange market as investors convert yuan to foreign currencies, causing the yuan to depreciate.

Question 8

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

Accepted Answer

If other countries become politically unstable, investors may seek a safe haven for their investments, leading to increased demand for Solidia's currency. This increased demand would cause the real exchange rate to rise.

Question 9

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

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Question 10

If the risk of holding assets in foreign countries rises relative to the risk of holding U.S assets,then

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Question 11

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

Accepted Answer

If foreigners withdraw funds, it means they are reducing their investment in the U.S., leading to an increase in U.S. net capital outflow as the U.S. will have to finance its deficit through other means.

Question 12

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

Accepted Answer

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Question 13

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

Accepted Answer

If people think that many banks in a certain country are at the point of bankruptcy, it would create a sense of uncertainty and reduce confidence in that country's economy. As a result, foreign investors would withdraw their investments, causing a decrease in demand for that country's currency, thereby reducing the exchange rate. However, a decrease in exchange rate would make that country's goods cheaper for foreign buyers, so there would be an increase in the demand for that country's exports, leading to an increase in net exports.

Question 14

In 2009 Greece's budget deficit rose and people became worried about the ability of the Greek government to make payments on its debt.Which of the these events reduces a country's real exchange rate?

Accepted Answer

Increased concerns about the ability of the government to pay back its debt would lead to a decrease in investor confidence in the country, which would result in a decrease in demand for the country's currency and a decrease in its real exchange rate. An increase in the budget deficit alone may not necessarily lead to a decrease in the real exchange rate, as it depends on the specific policies and actions taken by the government in response to the deficit.

Question 15

A firm produces construction equipment,some of which it sells to domestic businesses and some of which it exports.Which of the following effects of capital flight in the country where it produces would likely increase the quantity of equipment it sells?

Accepted Answer

Capital flight often leads to a decrease in the demand for the domestic currency, which in turn leads to a depreciation of the domestic currency's exchange rate. This makes exports cheaper and more attractive to foreign buyers, increasing the quantity of equipment that the firm can sell overseas. Changes in the interest rate would have no immediate effect on the quantity of equipment the firm sells.

Question 16

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

Accepted Answer

The prediction of the open-economy macroeconomic model is that a possible default by a government would increase the perceived risk of investing in that country, leading to a decrease in foreign investment and an increase in the demand for domestic currency to hold domestic assets. This increased demand for the domestic currency should cause it to appreciate. At the same time, the government may need to raise interest rates to attract enough domestic investors to take up new debt issues, otherwise they may have to monetize their debt, which would contribute to inflation, and further reduce confidence in the economy.

Question 17

When fear of default on bonds issued by U.S.corporations decline,then

Accepted Answer

When fear of default on bonds issued by U.S. corporations decline, investors are more willing to invest in these bonds, leading to an increase in demand for the bonds and an increase in their price. This leads to a decrease in the yield on the bonds, making them less attractive to foreign investors. As a result, net capital outflow falls, as foreign investors sell their U.S. bonds and invest their capital elsewhere. This decrease in net capital outflow leads to an increase in the demand for U.S. dollars, causing the exchange rate to rise.

Question 18

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?

Accepted Answer

According to the open-economy macroeconomic model, a threat to default on debt would lead to a decrease in the demand for U.S. assets and an increase in U.S. interest rates. This is consistent with the increase in U.S. interest rates observed during the day of the announcement. Additionally, the increase in U.S. interest rates would lead to a depreciation of the real exchange rate of the U.S. dollar. This is consistent with the observed depreciation of the U.S. dollar. Therefore, both a and b are consistent with the open-economy macroeconomic model.

Question 19

When a country experiences capital flight its interest rate

Accepted Answer

Capital flight refers to the situation where investors move their funds out of a country due to economic or political concerns. This leads to a decrease in the demand for domestic assets and an increase in the supply of domestic currency, causing the value of the currency to depreciate. To counter this, the central bank raises interest rates to make domestic assets more attractive to investors, which leads to an increase in interest rates and net capital outflow.

Question 20

In 2009 Greece's budget deficit rose and people became worried about the ability of the Greek government to continue to make payments on its debt.Which of these events raise a country's interest rates?

Accepted Answer

Both an increase in the budget deficit and concerns about the ability of the government to pay back its debt are factors that can lead to higher interest rates. Lenders require higher interest rates as compensation for taking on the higher risk of lending to a country with a larger budget deficit and uncertain ability to pay back its debt.

Quiz 19: A Macroeconomic Theory of the Open Economy: How Policies and Events Affect an Open Economy