Question 1

Which of the following would cause the real exchange rate of the U.S. dollar to depreciate?

Accepted Answer

A)   the U.S. government budget deficit decreases
B)   capital flight from foreign countries
C)   the U.S. imposes import quotas
D)   None of the above is correct.

Question 2

When a country experiences capital flight its interest rate

Accepted Answer

A)   and net capital outflow rise.
B)   rises and net capital outflow falls.
C)   falls and net capital outflow rises.
D)   interest rate and net capital outflow fall.

Question 3

In the open-economy macroeconomic model, if investment demand decreases, then

Accepted Answer

A)   the supply of dollars in the market for foreign-currency exchange shifts left.
B)   the supply of dollars in the market for foreign-currency exchange shifts right.
C)   the demand for dollars in the market for foreign-currency exchange shifts left.
D)   the demand for dollars in the market for foreign-currency exchange shifts right.

Question 4

In the long run import quotas do not affect the size of net exports.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

What happens to domestic investment as the real interest rate rises? Explain your answer.

Accepted Answer

As the real interest rate rise...

Question 7

If a country raises its budget deficit, then its

Accepted Answer

A)   net capital outflow and net exports rise.
B)   net capital outflow rises and net exports fall.
C)   net capital outflow falls and net exports rise.
D)   net capital outflow and net exports fall.

Question 8

If there is a shortage in the market for foreign-currency exchange, what happens to the exchange rate and to net exports?

Accepted Answer

The exchange rate ri...

Question 9

Figure 32-7
Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below. 
-Refer to Figure 32-7. Suppose the Mexican economy starts at r2 and e2. Which of the following new equilibrium is consistent with capital flight?

Accepted Answer

A)   r2 and e3
B)   r3 and e2
C)   r3 and e1
D)   None of the above is correct.

Question 10

If a government of a country with a zero trade balance increases its budget deficit, then the real exchange rate

Accepted Answer

A)   appreciates and there is a trade surplus.
B)   appreciates and there is a trade deficit.
C)   depreciates and there is a trade surplus.
D)   depreciates and there is a trade deficit.

Question 11

What effect do protectionist policies have on the trade deficit?

Accepted Answer

Protectionist policies increase the dema...

Question 12

When the U.S. real exchange rate appreciates, U.S. goods become

Accepted Answer

A)   more attractive to consumers in the U.S. and abroad.
B)   more attractive to consumers in the U.S. and less attractive to consumers abroad.
C)   less attractive to consumers in the U.S. and abroad.
D)   less attractive to consumers in the U.S. and more attractive to consumers abroad.

Question 13

A large and sudden movement of funds out of a country is called

Accepted Answer

A)   arbitrage.
B)   capital flight.
C)   crowding out.
D)   capital mobility.

Question 14

If the U.S. were to impose import quotas

Accepted Answer

A)   the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange would both increase.
B)   nether the demand for loanable funds nor the demand for dollars in the market for foreign-currency exchange would increase.
C)   the demand for loanable funds would increase, but the demand for dollars in the market for foreign-currency exchange would not.
D)   the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not.

Question 15

If there is a shortage of loanable funds, then

Accepted Answer

A)   the demand for loanable funds will shift right so the real interest rate rises.
B)   the supply of loanable funds will shift left so the real interest rate falls.
C)   there will be no shifts of the curves, but the real interest rate rises.
D)   there will be no shifts of the curves, but the real interest rate falls.

Question 16

If the exchange rate falls, U.S. residents pay

Accepted Answer

A)   more dollars for foreign bonds and get more dollars from interest payments.
B)   more dollars for foreign bonds but get fewer dollars from interest payments.
C)   fewer dollars for foreign bonds and also get fewer dollars from interest payments.
D)   fewer dollars for foreign bonds but get more dollars from interest payments.

Question 17

If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate

Accepted Answer

A)   increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases.
B)   increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.
C)   decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow decreases.
D)   decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow increases.

Question 18

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

Accepted Answer

A)   only the demand for loanable funds.
B)   only the supply of dollars in the market for foreign-currency exchange.
C)   only the net capital outflow curve and the supply of dollars in the market for foreign currency exchange.
D)   the demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

Question 19

If a country raises its budget deficit, then in the market for foreign-currency exchange

Accepted Answer

A)   supply shifts left.
B)   supply shifts right.
C)   demand shifts left.
D)   supply shifts right.

Question 20

When the U.S. real interest rate falls

Accepted Answer

A)   U.S. purchases of foreign assets and foreign purchases of U.S. assets rise
B)   U.S. purchases of foreign assets rise and foreign purchases of U.S. assets fall
C)   U.S. purchases of foreign assets fall and foreign purchases of U.S. assets rise
D)   U.S. purchases of foreign assets and foreign purchases of U.S. assets fall

Exam 32: A Macroeconomic Theory of the Open Economy

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

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In the long run import quotas do not affect the size of net exports.

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A large and sudden movement of funds out of a country is called

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In the open-economy macroeconomic model, if investment demand decreases, then

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If a country raises its budget deficit, then its

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If a country raises its budget deficit, then in the market for foreign-currency exchange

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When the U.S. real exchange rate appreciates, U.S. goods become

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If there is a shortage of loanable funds, then

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

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If the exchange rate falls, U.S. residents pay

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Figure 32-7 Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below. -Refer to Figure 32-7. Suppose the Mexican economy starts at r2 and e2. Which of the following new equilibrium is consistent with capital flight?

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If a government of a country with a zero trade balance increases its budget deficit, then the real exchange rate

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What happens to domestic investment as the real interest rate rises? Explain your answer.

Correct AnswerverifiedAs the real interest rate rise...View AnswerShow Answer

If there is a shortage in the market for foreign-currency exchange, what happens to the exchange rate and to net exports?

Correct AnswerverifiedThe exchange rate ri...View AnswerShow Answer

Which of the following would cause the real exchange rate of the U.S. dollar to depreciate?

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When the U.S. real interest rate falls

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What effect do protectionist policies have on the trade deficit?

Correct AnswerverifiedProtectionist policies increase the dema...View AnswerShow Answer

If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate

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If the U.S. were to impose import quotas

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When a country experiences capital flight its interest rate

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As the real interest rate rise...
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The exchange rate ri...
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Protectionist policies increase the dema...
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