Question 1

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 2

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, adds to the demand for loanable funds.

Question 3

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 funds needed by businesses and individuals within the country to finance their own investments. Net capital outflow refers to the difference between the amount of money flowing out of a country (in the form of foreign investments) and the amount of money coming into the country (in the form of domestic investments made by foreigners). Together, these two factors determine the demand for loanable funds in an open economy.

Question 4

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 because it is determined by the monetary authority, which does not directly consider the real exchange rate. However, changes in the real exchange rate can affect other factors (such as inflation and output), which can ultimately impact the supply of currency in the long run.

Question 5

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 6

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 one of the main conditions of the open-economy macroeconomic model, known as the saving-investment equality identity. It states that savings (private and government) must equal investment (domestic and foreign) at the equilibrium real interest rate.

Question 7

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

Accepted Answer

According to the capital flow equation, an increase in a country's real interest rate will make its assets more attractive to foreign investors, leading to an increase in capital inflows and a reduction in net capital outflow.

Question 8

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, U.S. goods become relatively cheaper for foreign buyers, leading to an increase in demand for U.S. exports and thus an increase in demand for dollars in the foreign currency exchange market. This increase in demand for dollars leads to an upward pressure on the value of the dollar, causing the demand curve for dollars to be downward sloping.

Question 9

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

Accepted Answer

The equation C+I+G>Y represents a situation where domestic spending (consumption, investment, and government spending) exceeds the domestic output (GDP). This means that there is a deficit in the current account (exports-imports) because the country is spending more on goods and services than it is producing. However, this does not necessarily mean that there is a surplus in the financial account (capital inflow-capital outflow), which measures the flow of funds between a country and the rest of the world. It is possible that the capital outflow (domestic investment abroad) is also high due to attractive foreign investment opportunities, which would offset the current account deficit. Therefore, it is not always true that net exports and net capital outflow are both greater than zero when C+I+G>Y.

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, 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 12

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 13

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 relatively more expensive for foreign residents, making them less desirable, while they become relatively cheaper for U.S. residents, making them more desirable.

Question 14

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, there would be a surplus of loanable funds, not a shortage, because the higher interest rate would discourage borrowers and attract more savers.

Question 15

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

Accepted Answer

Net capital outflow measures the difference between the amount of money entering and leaving a country's economy through purchases of foreign assets. Therefore, it represents the quantity of dollars supplied in the foreign-currency exchange market.

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 typically leads to a stronger domestic currency, which reduces the quantity of loanable funds demanded by foreign investors due to the relatively higher return they can get in their own countries. As a result, the supply of loanable funds increases as domestic savers are incentivized to save more, leading to a decrease in the equilibrium interest rate.

Question 17

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

When a U.S. resident buys a foreign good, they need to pay for it in the currency of the foreign country. This increases the supply of U.S. dollars in the foreign-currency exchange market and decreases the demand for U.S. dollars, as they are exchanging their dollars for the foreign currency.

Question 18

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 19

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

Accepted Answer

The real interest rate is the interest rate adjusted for inflation. If the real interest rate in a country is higher than the real interest rate in other countries, then it becomes more attractive for investors to invest in that country, leading to capital inflows. Conversely, if the real interest rate in a country is lower than in other countries, then it becomes less attractive for investors to invest in that country, leading to capital outflows. Therefore, the real interest rate is a key determinant of net capital outflow.

Question 20

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 the quantity of dollars demanded in the market for foreign currency exchange because net exports are the difference between a country's exports and imports and these trade transactions involve exchange of domestic currency (dollars) for foreign currency.

Quiz 32: A Macroeconomic Theory of the Open Economy