Question 1

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. Domestic investment refers to the demand for funds by businesses and households within the economy to invest in new projects, expand production capacity, or purchase new equipment. Net capital outflow refers to the difference between a country's exports of goods and services and its imports of goods and services. If a country has a trade surplus, it is a net lender to the world, and its domestic savings exceed its domestic investment. As a result, it exports capital and the demand for loanable funds comes from net capital outflow.

Question 2

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 the definition of the equilibrium condition in the open-economy macroeconomic model, known as the saving-investment identity. At the equilibrium real interest rate, savings (both private and government) equals desired domestic investment and net capital outflow.

Question 3

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

Accepted Answer

In an open economy, national saving is the source of loanable funds available for both domestic investment and borrowing from abroad. Thus, the supply of loanable funds comes from national saving.

Question 4

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 5

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.

Question 6

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

In the open-economy macroeconomic model, the supply of currency is mainly determined by the central bank's monetary policy and is therefore independent of the real exchange rate. The demand for currency, on the other hand, is negatively related to the real exchange rate, which creates a downward-sloping demand curve for currency. This results in a vertical supply curve for currency and a floating exchange rate determined by the intersection of the supply and demand curves for currency.

Question 7

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 8

In the open-economy macroeconomic model, if there were a surplus in the market for foreign-currency exchange, the real exchange rate would appreciate.

Accepted Answer

In the case of a surplus in the market for foreign-currency exchange, the real exchange rate would actually depreciate, as the surplus indicates that the supply of foreign currency is greater than the demand, leading to a decrease in the value of the foreign currency relative to the domestic currency.

Question 9

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

Accepted Answer

When the real exchange rate of the dollar appreciates, U.S. goods become more expensive for foreign residents, making them less desirable. However, U.S. residents may still find U.S. goods desirable, but may have to pay more for them due to the appreciation of the dollar.

Question 10

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 11

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, whether domestic or foreign, can add to the demand for loanable funds.

Question 12

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

Accepted Answer

A higher real exchange rate makes domestic goods more expensive relative to foreign goods, which tends to decrease exports and increase imports, thereby reducing net exports.

Question 13

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 14

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 15

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

Accepted Answer

In the open-economy macroeconomic model, a higher domestic interest rate will make domestic assets more attractive to foreign investors, which will increase the demand for domestic currency and raise its value. This, in turn, will decrease the quantity of loanable funds demanded domestically as the cost of borrowing rises.

Question 16

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

Accepted Answer

In the open-economy macroeconomic model, net exports are equal to exports minus imports, while the demand for foreign currency exchange represents the quantity of dollars that people and firms demand to buy foreign currency to purchase foreign goods and assets. Therefore, net exports and the quantity of dollars demanded in the market for foreign currency exchange are related but not equivalent concepts.

Question 17

Because depreciation of the real exchange rate of the dollar increases U.S. net exports, the demand curve for dollars in the foreign-currency exchange market is downward sloping.

Accepted Answer

When the real exchange rate of the dollar depreciates, it becomes relatively cheaper for foreigners to purchase U.S. goods and services, leading to an increase in U.S. net exports. This, in turn, increases the demand for dollars in the foreign-currency exchange market, causing the demand curve for dollars to shift to the right and become downward sloping.

Question 18

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, it would lead to a surplus of loanable funds, not a shortage, as lenders would be willing to supply more funds than borrowers would be willing to borrow. This would eventually force the interest rate down to the equilibrium rate.

Question 19

An increase in a country's real interest rate reduces that country's net capital outflow.

Accepted Answer

When a country's real interest rate increases, it becomes more attractive for foreign investors to invest in that country's financial assets, leading to an increase in capital inflow and a decrease in net capital outflow. This is because the higher interest rates offer better returns on investments, making the country a more profitable destination for investment.

Question 20

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.

Quiz 14: A Macroeconomic Theory of the Open Economy