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

A) True 
 B)False

Question 2

If a government increases its budget deficit, which statement would best predict the effects?

Accepted Answer

A)   The real exchange rate appreciates, and the trade balance moves toward surplus.
B)   The real exchange rate appreciates, and the trade balance moves toward deficit.
C)   The real exchange rate depreciates, and the trade balance moves toward surplus.
D)   The real exchange rate depreciates, and the trade balance moves toward deficit.

Question 3

What are the main elements of our open-economy macroeconomic model?

Accepted Answer

A)   the market for loanable funds, the foreign-currency market, and the price level
B)   the market for goods and services, the price level, and GDP
C)   the market for goods and services, net exports, and GDP
D)   the market for loanable funds, net capital outflow, and the foreign-currency market

Question 4

Fill in the table below with the direction of the variables that change in response to the events in the first column.

Accepted Answer

The answer of Fill in the table below with the...

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

What does a lower real interest rate decrease the quantity of?

Accepted Answer

A)   loanable funds demanded
B)   loanable funds supplied
C)   domestic investment
D)   net capital outflow

Question 7

The People's Republic of China has had a large trade surplus in recent years. What is the most likely explanation of this surplus?

Accepted Answer

A)   China has a high rate of inflation, which reduces the value of its currency.
B)   China has a large supply of labour, so low wages give it a competitive edge.
C)   China has many trade barriers, which restrict the ability of other countries to sell their products in China.
D)   China has a large amount of saving relative to domestic investment.

Question 8

Figure 13-2 
-Refer to Figure 13-2. Suppose that these diagrams refer to Canada. Which shift shows the effect of a voluntary export restriction by the Swiss government?

Accepted Answer

A)   a shift from D1 to D2
B)   a shift from D0 to D1
C)   a shift from D0 to D2
D)   a shift from D1 to D0

Question 9

Figure 13-1 
-Refer to Figure 13-1. In the figure shown, if the real interest rate is 3 percent, what is the quantity of loanable funds demanded?

Accepted Answer

A)   $3000
B)   $5000
C)   $7000
D)   $10000

Question 10

If the quantity of loanable funds supplied is greater than the quantity demanded, which statement best describes the difference?

Accepted Answer

A)   There is a deficit of loanable funds and the excess is net capital outflow.
B)   There is a deficit of loanable funds and the shortage is net capital outflow.
C)   There is a surplus of loanable funds and the excess is net capital outflow.
D)   There is a surplus of loanable funds, and the shortage is net capital outflow.

Question 11

Suppose that the world consists of only two countries, A and B, of relatively equal sizes. The world interest rate in such a model is some average of the autarkic (no trade) interest rates in each of the two countries.
a. Draw "parallel" loanable funds markets for the two countries and show the position of the world interest rate. (Hint: What relationship must exist between the NCOs of the two countries?)
b. Suppose country A enacts laws that induce people to save more. Show the effects of such laws on each country's domestic amounts saved and invested.
c. In the currency-exchange diagrams for both countries, show the effect of country A's savings policies on both countries' exchange rates and net exports.

Accepted Answer

a. A country's NCO must be equal to the ...

Question 12

A drop in the Costa Rican real interest rate reduces Costa Rican net capital outflow.

Accepted Answer

A) True 
 B)False  False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

If a government started with a deficit and moved to a surplus, which statement would best describe the effects of these changes?

Accepted Answer

A)   Domestic investment and the real exchange rate would rise.
B)   Domestic investment and the real exchange rate would fall.
C)   Domestic investment would rise, and the real exchange rate would fall.
D)   Domestic investment would fall, and the real exchange rate would rise. C

Question 15

Which of the following is an effect of capital flight in a small economy such as Panama?

Accepted Answer

A)   a shift of the supply of loanable funds to the left
B)   a decrease of the Panamanian interest rate
C)   a shift of the net capital outflow to the right
D)   an appreciation of the Panamanian real exchange rate

Question 16

What is the effect of an increase in the Canadian real interest rate above the world interest rate?

Accepted Answer

A)   Canadians buy more foreign assets, which increases Canadian net capital outflow.
B)   Canadians buy more foreign assets, which reduces Canadian net capital outflow.
C)   Foreigners buy more Canadian assets, which reduces Canadian net capital outflow.
D)   Foreigners buy more Canadian assets, which increases Canadian net capital outflow.

Question 17

According to the theory of purchasing-power parity, what is the shape of the demand curve for foreign-currency exchange?

Accepted Answer

A)   downward sloping
B)   upward sloping
C)   horizontal
D)   vertical

Question 18

If the government of Barbados implemented a policy that reduced national saving, which statement would best predict the consequences?

Accepted Answer

A)   Its real exchange rate would depreciate, and Barbadian net exports would rise.
B)   Its real exchange rate would depreciate, and Barbadian net exports would fall.
C)   Its real exchange rate would appreciate, and Barbadian net exports would rise.
D)   Its real exchange rate would appreciate, and Barbadian net exports would fall.

Question 19

Why do higher real interest rates lead to lower net capital outflow?

Accepted Answer

Higher Canadian interest rates make Canadian assets look more attractive than foreign assets. Investors in Canada and other countries are likely to move funds into Canada, reducing Canadian net capital outflow.

Question 20

In the open-economy macroeconomic model, other things the same, when a Canadian resident imports a foreign good, our model treats this as a decrease in the demand for dollars in the foreign-currency exchange market.

Accepted Answer

A) True 
 B)False

Exam 13: A Macroeconomic Theory of the Small Open Economy

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.

Correct Answer
verified

If a government increases its budget deficit, which statement would best predict the effects?

Correct Answer
verified

What are the main elements of our open-economy macroeconomic model?

Correct Answer
verified

Fill in the table below with the direction of the variables that change in response to the events in the first column.

Correct Answer
verified

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

Correct Answer
verified

What does a lower real interest rate decrease the quantity of?

Correct Answer
verified

The People's Republic of China has had a large trade surplus in recent years. What is the most likely explanation of this surplus?

Correct Answer
verified

Figure 13-2 -Refer to Figure 13-2. Suppose that these diagrams refer to Canada. Which shift shows the effect of a voluntary export restriction by the Swiss government?

Correct Answer
verified

Figure 13-1 -Refer to Figure 13-1. In the figure shown, if the real interest rate is 3 percent, what is the quantity of loanable funds demanded?

Correct Answer
verified

If the quantity of loanable funds supplied is greater than the quantity demanded, which statement best describes the difference?

Correct Answer
verified

Correct Answer
verified
a. A country's NCO must be equal to the ...
View Answer

A drop in the Costa Rican real interest rate reduces Costa Rican net capital outflow.

Correct Answer
verified
False

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

Correct Answer
verified

If a government started with a deficit and moved to a surplus, which statement would best describe the effects of these changes?

Correct Answer
verified
C

Which of the following is an effect of capital flight in a small economy such as Panama?

Correct Answer
verified

What is the effect of an increase in the Canadian real interest rate above the world interest rate?

Correct Answer
verified

According to the theory of purchasing-power parity, what is the shape of the demand curve for foreign-currency exchange?

Correct Answer
verified

If the government of Barbados implemented a policy that reduced national saving, which statement would best predict the consequences?

Correct Answer
verified

Why do higher real interest rates lead to lower net capital outflow?

Correct Answer
verified
Higher Canadian interest rates make Canadian assets look more attractive than foreign assets. Investors in Canada and other countries are likely to move funds into Canada, reducing Canadian net capital outflow.

In the open-economy macroeconomic model, other things the same, when a Canadian resident imports a foreign good, our model treats this as a decrease in the demand for dollars in the foreign-currency exchange market.

Correct Answer
verified

Exam 13: A Macroeconomic Theory of the Small Open Economy

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.

Correct AnswerverifiedShow Answer

If a government increases its budget deficit, which statement would best predict the effects?

Correct AnswerverifiedShow Answer

What are the main elements of our open-economy macroeconomic model?

Correct AnswerverifiedShow Answer

Fill in the table below with the direction of the variables that change in response to the events in the first column.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What does a lower real interest rate decrease the quantity of?

Correct AnswerverifiedShow Answer

The People's Republic of China has had a large trade surplus in recent years. What is the most likely explanation of this surplus?

Correct AnswerverifiedShow Answer

Figure 13-2 -Refer to Figure 13-2. Suppose that these diagrams refer to Canada. Which shift shows the effect of a voluntary export restriction by the Swiss government?

Correct AnswerverifiedShow Answer

Figure 13-1 -Refer to Figure 13-1. In the figure shown, if the real interest rate is 3 percent, what is the quantity of loanable funds demanded?

Correct AnswerverifiedShow Answer

If the quantity of loanable funds supplied is greater than the quantity demanded, which statement best describes the difference?

Correct AnswerverifiedShow Answer

Correct Answerverifieda. A country's NCO must be equal to the ...View AnswerShow Answer

A drop in the Costa Rican real interest rate reduces Costa Rican net capital outflow.

Correct AnswerverifiedFalse

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

Correct AnswerverifiedShow Answer

If a government started with a deficit and moved to a surplus, which statement would best describe the effects of these changes?

Correct AnswerverifiedC

Which of the following is an effect of capital flight in a small economy such as Panama?

Correct AnswerverifiedShow Answer

What is the effect of an increase in the Canadian real interest rate above the world interest rate?

Correct AnswerverifiedShow Answer

According to the theory of purchasing-power parity, what is the shape of the demand curve for foreign-currency exchange?

Correct AnswerverifiedShow Answer

If the government of Barbados implemented a policy that reduced national saving, which statement would best predict the consequences?

Correct AnswerverifiedShow Answer

Why do higher real interest rates lead to lower net capital outflow?

Correct AnswerverifiedHigher Canadian interest rates make Canadian assets look more attractive than foreign assets. Investors in Canada and other countries are likely to move funds into Canada, reducing Canadian net capital outflow.

In the open-economy macroeconomic model, other things the same, when a Canadian resident imports a foreign good, our model treats this as a decrease in the demand for dollars in the foreign-currency exchange market.

Correct AnswerverifiedShow Answer

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a. A country's NCO must be equal to the ...
View Answer

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False

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C

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Higher Canadian interest rates make Canadian assets look more attractive than foreign assets. Investors in Canada and other countries are likely to move funds into Canada, reducing Canadian net capital outflow.

Correct Answer
verified