Question 1

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

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Question 2

When a country experiences capital flight its currency

Accepted Answer

Capital flight leads to an outflow of capital from a country, which decreases the demand for its currency and ultimately leads to its depreciation. As the currency depreciates, goods and services become relatively cheaper for foreign buyers, leading to an increase in net exports.

Question 3

If a country experiences capital flight, which of the following curves shift right?

Accepted Answer

When a country experiences capital flight, investors are taking their money out of the country and exchanging it for foreign currency, which increases the supply of dollars in the market for foreign-currency exchange. This also leads to a decrease in the net capital outflow, as there are fewer investments being made in the domestic country. With the decrease in investment, the demand for loanable funds also decreases. Therefore, all three curves shift right, resulting in higher interest rates and a weaker currency.

Question 4

When a country experiences capital flight, the interest rate

Accepted Answer

Capital flight means that investors are moving their capital out of the country, which decreases the supply of loanable funds in the country. As a result, the demand for loanable funds from those remaining in the country increases, causing interest rates to rise in order to entice lenders.

Question 5

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

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Question 6

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

Accepted Answer

If the world believes that many banks in a country are near bankruptcy, it will lead to a decrease in confidence in that country's financial system. This would cause investors to pull out their investments in that country, resulting in a decrease in demand for that country's currency. As a result, the real exchange rate of the country would depreciate (fall), making its goods cheaper for foreign buyers. This would lead to an increase in net exports as foreign buyers would want to purchase the country's cheaper goods.

Question 7

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?

Accepted Answer

An increase in the budget deficit and increased concerns about the ability of the government to pay back its debt both create greater default risk for lenders, which will result in higher interest rates for the borrowing country.

Question 8

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

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Question 9

When a country suffers from capital flight, the exchange rate

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Question 10

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

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Question 11

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

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Question 12

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 of default would increase U.S. interest rates, as lenders would be unwilling to lend money to the U.S. government. This increase in interest rates would result in a depreciation of the real exchange rate of the U.S. dollar, as investors sell off dollar-denominated assets and buy foreign assets with higher returns. Therefore, both the increase in U.S. interest rates and the depreciation of the real exchange rate of the U.S. dollar are consistent with the results of the open-economy macroeconomic model.

Question 13

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?

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Question 14

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?

Accepted Answer

Increased concerns about the ability of the government to pay back its debt can lead to a decrease in foreign investment and a decrease in demand for the country's currency, which in turn leads to a decrease in the real exchange rate. An increase in the budget deficit on its own does not necessarily reduce the real exchange rate.

Question 15

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

According to the open-economy macroeconomic model, a government default on its debt is likely to raise interest rates in order to compensate investors for the increased risk. This increase in interest rates should lead to a depreciation of the currency, as foreigners demand a higher return on their investments in order to offset the increased risk. Therefore, choice B is the most accurate prediction.

Question 16

If a country experiences capital flight, which of the following lists only curves that shift right?

Accepted Answer

Capital flight refers to the large-scale movement of financial assets and capital from a country due to events such as political instability, economic crisis or unfavorable investment climate. In such a scenario, investors tend to move their assets from one country to another, leading to a decrease in demand for the domestic currency and an increase in the supply of dollars in the foreign exchange market. This results in a rightward shift in the supply of dollars and a leftward shift in the demand for dollars. The demand for loanable funds also decreases due to decreased investment opportunities, resulting in a rightward shift in the demand for loanable funds. Therefore, the only option with both curves shifting right is B - the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange.

Question 17

If Kenya experienced capital flight, the supply of Kenyan schillings in the market for foreign-currency exchange would shift

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Question 18

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

Accepted Answer

If fear of default on bonds issued by U.S. corporations rise, investors may choose to withdraw their capital, leading to an increase in net capital outflow. This increase in capital outflow will put pressure on the exchange rate, causing it to fall. Therefore, option B is correct.

Question 19

When a country experiences capital flight its

Accepted Answer

Capital flight refers to the movement of a large amount of money or assets out of a country due to concerns over economic or political instability. As a result, the country's net capital outflow (the amount of money leaving the country minus the amount of money coming in) increases. This is because domestic investors are sending their money abroad, while foreign investors are hesitant to invest in the country. An increase in net capital outflow leads to a decrease in the supply of domestic currency in the foreign exchange market, which causes the real exchange rate to fall. Therefore, Choice B is correct.

Question 20

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

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Quiz 14: A Macroeconomic Theory of the Open Economy