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| Chapter 32: A Macroeconomic Theory of the Open Economy |
1. Households make
their savings available to borrowers through
a. resource markets.
b. the loanable funds market.
c. the labor market.
d. taxes.
2. The supply of
funds curve is upward sloping because a rise in the interest rate
a. decreases the opportunity cost of firms’ investment
spending.
b. increases the opportunity cost of firms’ investment
spending.
c. decreases the opportunity cost to households of
consuming.
d. increases the opportunity cost to households of
consuming.
3. Market clearing in
the loanable funds market
a. guarantees that total spending will be just sufficient to
purchase whatever output is produced.
b. means that the interest rate will never change.
c. guarantees that total spending will equal the quantity of
loanable funds demanded.
d. requires that the government run a budget deficit.
4. Which of the
following changes would cause a movement along the U.S. demand curve for a
foreign currency?
a. an increase in U.S. real GDP
b. a decrease in U.S. real GDP
c. an increase in the U.S. interest rate
d. a change in the real exchange rate
5. As the U.S.
interest rate falls relative to the British interest rate,
a. the U.S. demand curve for pounds will not change.
b. the U.S. demand curve for pounds will shift to the left.
c. the U.S. demand curve for pounds will shift to the right.
d. there will be a move down the existing U.S. demand curve
for pounds.
6. The supply of
foreign exchange is
a. determined by the real exchange rate.
b. independent of the real exchange rate.
c. determined by central bankers.
d. determined by the President.
7. Which of the
following could increase the supply of dollars in the foreign exchange market?
a. lower inflation in foreign countries than in the United
States
b. lower interest rates in foreign countries than in the
United States
c. higher prices in the United States
d. a depreciation of other currencies
8. Which of the
following could decrease the supply of dollars in the foreign exchange market?
a. a higher inflation rate in foreign countries
b. lower interest rates in foreign countries
c. lower prices in the United States
d. an appreciation of other currencies
9. Equilibrium in an
open economy is characterized by
a. net exports = net capital outflow.
b. net exports + net capital outflow = savings.
c. domestic investment + net capital outflow = savings.
d. Both a and c are correct.
10. The link between
the loanable funds market and the foreign exchange market is
a. the governments of the countries involved.
b. the International Monetary Fund.
c. net capital outflow.
d. purchasing power parity.
11. After
reunification, Germany experienced a tremendous increase in the demand for
loanable funds as many rebuilding projects were initiated. As a result, interest
rates
a. rose, there was a decrease in net capital outflow, there
was a decrease in the supply of marks, and the real exchange rate fell.
b. rose, there was a decrease in net capital outflow, there
was a decrease in the supply of marks, and the real exchange rate rose.
c. fell, there was an increase in net capital outflow, there
was a decrease in the supply of marks, and the real exchange rate rose.
d. fell, there was an increase in net capital outflow, there
was an increase in the supply of marks, and the real exchange rate fell.
12. Japan has
historically had a high savings rate relative to other countries. This means
that the
a. supply of loanable funds is larger, interest rates are
lower, and net capital outflow is higher.
b. supply of loanable funds is smaller, interest rates are
lower, and net capital outflow is higher.
c. demand for loanable funds is larger, interest rates are
lower, and net capital outflow is higher.
d. government must subsidize production in order to
encourage international trade.
13. Foreign
investment in the U.S. causes the
a. balance on current account to become positive.
b. sum of the capital and current accounts to be positive.
c. balance of trade to become negative.
d. value of the dollar to increase.
14. The “twin deficits”
refer to
a. the U.S. and Canadian trade deficits.
b. the U.S. trade deficit and the U.S. federal government
budget deficit.
c. the current account and capital account deficits.
d. trade deficits that match one another when two countries
trade.
15. If the United
States government wants to eliminate a trade deficit, it could
a. reduce tariffs.
b. encourage imports.
c. reduce quotas on imports.
d. depreciate the dollar.
16. Which of the
following would not be an appropriate response to a trade deficit for the
United States?
a. increase tariffs
b. appreciate the dollar
c. subsidize exports
d. impose import quotas
17. Currently, the
U.S. government is running a budget deficit. This means that the
a. supply of loanable funds has increased.
b. supply of loanable funds has decreased.
c. real interest rate has fallen.
d. real exchange rate has fallen.
18. Crowding out
caused by government budget deficits will lead to
a. an increase in the real exchange rate.
b. a decrease in the real exchange rate.
c. no change in the real exchange rate.
d. a devaluation in a nation’s currency.
19. Surprisingly,
government trade policies
a. can eliminate a trade imbalance.
b. often increase a trade deficit.
c. have no real affect on the trade balance.
d. can lower a deficit on current account but not on the
capital account.
20. A tariff is a
a. tax on goods produced domestically.
b. tax on exported goods.
c. tax on imported goods.
d. limit placed on the quantity of goods that a country can
import.
21. A import quota is
a
a. tax on goods
produced domestically.
b. tax on exported goods.
c. tax on imported goods.
d. limit placed on the quantity of goods that a country can
import.
22. Consider this
diagram of the market for foreign exchange. If the U.S. government decides to
increase import tariffs on imported steel, we could expect the
a. demand for dollars to shift from D1 to D2.
b. demand for dollars to shift from D2 to D1.
c. supply of dollars to increase.
d. supply of dollars to decrease.
23. In response to an
import quota
a. exports increase by more than imports.
b. imports increase by more than exports.
c. imports and exports are unaffected, but the government
collects revenues.
d. imports and exports are both reduced but net exports are
unchanged.
24. A large and
sudden movement of capital out of a country is called
a. a capital inflow.
b. capital flight.
c. a trade deficit.
d. a trade surplus.
25. The first step to
analyzing capital flight is to expect a(n)
a. increase in net capital outflow for the country experiencing
the flight.
b. decrease in net capital outflow for the country
experiencing the flight.
c. decrease in the supply of domestic currency for the
country experiencing the flight.
d. decrease in the demand for loanable funds for the country
experiencing the flight.
26. Capital flight is
often caused by
a. political stability.
b. shifts away from the industrial sector and towards the
service sector.
c. political instability.
d. policies of the International Monetary Fund.
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