Question 1

In the open-economy macroeconomic model, the supply curve of currency is vertical because the quantity of currency supplied does not depend on the real exchange rate.

Accepted Answer

The supply curve of currency is vertical in the open-economy macroeconomic model because the central bank can control the quantity of currency in circulation through its monetary policy tools. The real exchange rate does not affect this quantity, so the supply curve is vertical.

Question 2

If the real interest rate were above the equilibrium rate, there would be a shortage of loanable funds.

Accepted Answer

If the real interest rate were above the equilibrium rate, borrowers would be discouraged from taking out loans, and lenders would have more funds available to lend out. This would lead to a surplus of loanable funds, not a shortage.

Question 3

Other things the same, when the real exchange rate of the dollar appreciates, U.S. goods become more attractive to U.S. residents, but less attractive to foreign residents.

Accepted Answer

When the real exchange rate of the dollar appreciates, U.S. goods become more expensive for foreign residents and less expensive for U.S. residents. Therefore, U.S. goods become less attractive to foreign residents and more attractive to U.S. residents.

Question 4

In the open-economy macroeconomic model, net capital outflow links the markets for loanable funds and foreign-currency exchange.

Accepted Answer

Net capital outflow represents the difference between the amount of domestic savings and the amount of domestic investment. It also represents the amount of funds that flow out of the domestic economy in order to purchase foreign assets, which are typically denominated in foreign currencies. Therefore, net capital outflow links the markets for loanable funds (where savings and investment are determined) and foreign-currency exchange (where exchange rates and the demand for and supply of foreign currencies are determined).

Question 5

Net capital outflow represents the quantity of dollars supplied in the foreign-currency exchange market.

Accepted Answer

Net capital outflow refers to the difference between the domestic country's purchases of foreign assets and foreign purchases of the domestic country's assets. When a country's residents invest more abroad than foreigners invest in the country, this results in a net outflow of capital, which corresponds to the supply of dollars in the foreign exchange market, as these dollars are exchanged for foreign currency to facilitate these investments.

Question 6

As the interest rate rises, it is possible that net capital outflow could move from a positive to a negative value.

Accepted Answer

When the interest rate rises, the attraction of borrowing and investing in the domestic economy decreases, as the cost of borrowing increases. This could decrease net capital inflow, or increase net capital outflow, potentially leading to a negative value.

Question 7

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 8

The key determinant of net capital outflow is the real interest rate.

Accepted Answer

The real interest rate is the primary factor that determines the net capital outflow, as investors tend to invest in countries with higher real interest rates. When a country's real interest rate is higher than in other countries, capital tends to flow into that country as investors seek to benefit from the higher returns. Conversely, when a country's real interest rate is lower than in other countries, capital tends to flow out of that country as investors seek higher returns elsewhere.

Question 9

In the open-economy macroeconomic model, if there is currently a surplus in the foreign exchange market, the quantity of desired net exports will increase as the market moves to equilibrium.

Accepted Answer

The answer of In the open-economy macroeconomic model, if there...

Question 10

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange is upward sloping.

Accepted Answer

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange is vertical, reflecting that the supply of dollars is determined by the domestic money supply and is not directly affected by the exchange rate.

Question 11

In the open-economy macroeconomic model, the real exchange rate does not affect net capital outflow.

Accepted Answer

The answer of In the open-economy macroeconomic model, the real...

Question 12

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 statement is known as the saving-investment equality and is a key feature of the open-economy macroeconomic model. At equilibrium, the demand for investment and net capital outflow equals the supply of savings in the economy.

Question 13

Other things the same, a higher real exchange rate reduces net exports.

Accepted Answer

A higher real exchange rate means that a country's currency is more valuable relative to other currencies, making its exports more expensive for foreign buyers and imports cheaper for domestic buyers. This tends to reduce net exports as exports decrease and imports increase.

Question 14

If C+I+G>Y, then net exports and net capital outflow are both less than zero.

Accepted Answer

By definition, Y=C+I+G+NX+Net Capital Outflow. If C+I+G>Y, then NX+Net Capital Outflow must be negative. Therefore, both net exports and net capital outflow are less than zero.

Question 15

A higher U.S. interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S. assets.

Accepted Answer

A higher interest rate provides a higher return on investment for individuals who invest in the United States, making U.S. assets more attractive to foreigners. Additionally, higher interest rates in the U.S. make it more expensive for Americans to borrow money to invest in foreign assets.

Question 16

In the open-economy macroeconomic model, a higher domestic interest rate reduces the quantity of loanable funds demanded

Accepted Answer

A higher domestic interest rate makes domestic bonds more attractive to foreign investors, resulting in an increase in the supply of loanable funds and a decrease in the demand for loanable funds domestically.

Question 17

In the open-economy macroeconomic model, if the real exchange rate of the U.S. dollar were above its equilibrium level, the real exchange rate of the U.S. dollar would appreciate.

Accepted Answer

If the real exchange rate of the U.S. dollar were above its equilibrium level, this would actually mean that the real exchange rate is overvalued or too high, relative to other currencies. In order to return to equilibrium, the real exchange rate would need to depreciate, not appreciate. Therefore, the statement in the question is incorrect.

Question 18

In the open-economy macroeconomic model, other things the same, when a U.S. resident imports a foreign good, the demand for dollars in the foreign-currency exchange market decreases.

Accepted Answer

The answer of In the open-economy macroeconomic model, other things...

Question 19

In the open-economy macroeconomic model, net exports equal the quantity of dollars demanded in the foreign-currency exchange market.

Accepted Answer

In the open-economy macroeconomic model, net exports (exports minus imports) equal the quantity of dollars demanded (in exchange for foreign currency) in the foreign-currency exchange market.

Question 20

In the open-economy macroeconomic model, other things the same, an increase in the exchange rate raises the quantity of dollars supplied in the market for foreign-currency exchange.

Accepted Answer