Mock Quiz #10

Chapter 32 – A Macroeconomic Theory of the Open Economy

Multiple Choice

1. The open-economy macroeconomic model takes

a. GDP, but not the price level as given.
b. the price level, but not GDP as given.
c. both the price level and GDP as given.
d. the price level and GDP as variables to be determined by the model.

2. Other things the same, a higher real interest rate raises the quantity of
a. domestic investment.
b. net capital outflow.
c. loanable funds demanded.
d. loanable funds supplied.

3. Other things the same, a lower real interest rate decreases the quantity of
a. loanable funds demanded.
b. loanable funds supplied.
c. domestic investment.
d. net capital outflow.

4. Other things the same an increase in the interest rate

a. increases national saving, this is shown by moving along the demand for loanable funds curve.
b. increases national saving, this is shown by moving along the supply of loanable funds curve.
c. decreases national saving, this is shown by moving along the demand for loanable funds curve.
d. decreases national saving, this is shown by moving along the supply of loanable funds curve.

5. The slope of the supply of loanable funds is based on an increase in

a. only national saving when the interest rate rises.
b. both national saving and net capital outflow when the interest rate rises.
c. only national saving when the interest rate falls.
d. both national saving and net capital outflow when the interest rate falls.

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Open-Economy Macroeconomics: Basic Concepts

6. In an open economy, the source of the demand for loanable funds is

a. national saving
b. national saving + net capital outflow
c. investment + the government budget deficit
d. investment + net capital outflow

7. If a country has a positive net capital outflow, then

a. on net it is purchasing assets from abroad. This adds to its demand for domestically generated
loanable funds.
b. on net it is purchasing assets from abroad. This subtracts from its demand for domestically
generated loanable funds.
c. on net other countries are purchasing assets from it. This adds to its demand for domestically
generated loanable funds.
d. on net other countries are purchasing assets from it. This subtracts from its demand for
domestically generated loanable funds.

8. A U.S. grocery chain borrows money to buy a warehouse in Ohio and another in Italy. Borrowing for
which warehouse(s) is included in the demand for loanable funds in the U.S.?
a. both the one in Ohio and the one in Italy
b. only the one in Ohio
c. only the one in Italy
d. neither the one in Ohio nor the one in Italy

9. A country has national saving of $100 billion, government expenditures of $30 billion, domestic
investment of $80 billion, and net capital outflow of $20 billion. What is its demand for loanable
funds?
a. $60 billion
b. $70 billion
c. $100 billion
d. $120 billion

10. A country has GDP of $700 billion, consumption of $450 billion, government expenditures of $100
billion, and domestic investment of $200 billion. What is its supply of loanable funds?
a. $350 billion
b. $250 billion
c. $200 billion
d. $150 billion

11. Other things the same, an increase in the U.S. real interest rate induces
a. Americans to buy more foreign assets, which increases U.S. net capital outflow.

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Open-Economy Macroeconomics: Basic Concepts

b. Americans to buy more foreign assets, which reduces U.S. net capital outflow.
c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.
d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.

12. Other things the same, a decrease in the interest rate

a. reduces domestic investment which reduces the quantity of loanable funds supplied.
b. reduces domestic investment which reduces the quantity of loan funds demanded.
c. raises domestic investment which raises the quantity of loanable funds supplied.
d. raises domestic investment which raises the quantity of loanable funds demanded.

13. Which of the following is the most likely response to an increase in the U.S. real interest rate?
a. a London bank purchases a U.S. bond instead of a Japanese bond it had considered purchasing
b. U.S. firms decide to buy more capital goods
c. a U.S. citizen decides to put less money in his savings account than he had planned.
d. All of the above are consistent.

14. If there is a surplus in the market for loanable funds, then the interest rate
a. rises, so national saving rises.
b. rises, so national saving falls.
c. falls, so national saving rises.
d. falls, so national saving falls.

15. If the quantity of loanable funds supplied is less than the quantity demanded, then there is a
a. shortage of loanable funds and the interest rate will fall.
b. shortage of loanable funds and the interest rate will rise.
c. surplus of loanable funds and the interest rate will fall.
d. surplus of loanable funds and the interest rate will rise.

16. If at a given real interest rate desired national saving is $60 billion, domestic investment is $30 billion,
and net capital outflow is $20 billion, then at that real interest rate in the loanable funds market there is
a
a. surplus. The real interest rate will rise.
b. surplus. The real interest rate will fall.
c. shortage. The real interest rate will rise.
d. shortage. The real interest rate will fall.

17. If the demand for loanable funds shifts right, then

a. the real interest rate and the equilibrium quantity of loanable funds both fall.
b. the real interest rate falls and the equilibrium quantity of loanable funds rises.

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Open-Economy Macroeconomics: Basic Concepts

c. the real interest rate and the equilibrium quantity of loanable funds both rise.
d. the real interest rate rises and the equilibrium quantify of loanable funds falls.

18. Suppose the PHILIPPINE supply of loanable funds shifts left. This will
a. increase PHILIPPINE net capital outflow and increase the quantity of loanable funds demanded.
b. increase PHILIPPINE net capital outflow and decrease the quantity of loanable funds demanded.
c. decrease PHILIPPINE net capital outflow and increase the quantity of loanable funds demanded.
d. decrease PHILIPPINE net capital outflow and decrease the quantity of loanable funds demanded.

19. The value of net exports equals the value of

a. national saving.
b. public saving.
c. national saving - net capital outflow.
d. national saving - domestic investment.

20. If U.S. net exports are negative, then net capital outflow is
a. positive, so foreign assets bought by Americans are greater than American assets bought by
foreigners.
b. positive, so American assets bought by foreigners are greater than foreign assets bought by
Americans.
c. negative, so foreign assets bought by Americans are greater than American assets bought by
foreigners.
d. negative, so American assets bought by foreigners are greater than foreign assets bought by
Americans.

21. Which of the following would tend to shift the supply of dollars in the market for foreign-currency
exchange in the open-economy macroeconomic model to the right?
a. the exchange rate rises
b. the exchange rate falls
c. the expected rate of return on U.S. assets rises
d. the expected rate of return on U.S. assets falls

22. At a given real exchange rate, which of the following, by itself, would increase the supply of dollars in
the market for foreign-currency exchange?
a. foreign citizens want to buy more U.S. bonds
b. U.S. citizens want to buy more foreign bonds
c. foreign citizens want to buy more U.S. goods
d. U.S. citizens want to buy more foreign goods

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Open-Economy Macroeconomics: Basic Concepts

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

24. In the open-economy macroeconomic model, as the exchange rate rises,

a. desired net exports fall, so the quantity of dollars supplied rise.
b. desired net exports fall, so the quantity of dollars demanded falls.
c. desired net exports rise ,so the quantity of dollars supplied falls.
d. desired net exports rise, so the quantity of dollars demanded rises.

25. The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is
a. downward sloping.
b. upward sloping.
c. horizontal.
d. vertical.

26. In the open-economy macroeconomic model, the demand for dollars shifts right if at any given
exchange rate
a. foreign residents want to buy more U.S. goods and services.
b. U.S. residents want to buy fewer foreign goods and services.
c. Both A and B are correct.
d. None of the above is correct.

27. In the open-economy macroeconomic model, the quantity of dollars demanded in the market for
foreign-currency exchange
a. depends on the real exchange rate. The quantity of dollars supplied in the foreign-exchange market
depends on the real interest rate.
b. depends on the real interest rate. The quantity of dollars supplied in the foreign-exchange market
depends on the real exchange rate.
c. and the quantity of dollars supplied in the market for foreign-currency exchange depend on the real
exchange rate.
d. and the quantity of dollars supplied in the market for foreign-currency exchange depend on the real
interest rate.

28. Suppose the real exchange rate is such that the market for foreign-currency exchange has a surplus.
This surplus will lead to
a. an appreciation of the dollar, an increase in U.S. net exports, and so an increase in the quantity of
dollars demanded in the foreign exchange market.

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Open-Economy Macroeconomics: Basic Concepts

b. an appreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity of
dollars demanded in the foreign exchange market.
c. a depreciation of the dollar, an increase in U.S. net exports, and so an increase in the quantity of
dollars demanded in the foreign exchange market.
d. a depreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity of
dollars demanded in the foreign exchange market.

29. If at a given exchange rate U.S. citizens wanted to buy more foreign bonds
a. the demand for dollars in the market for foreign-currency exchange would shift right.
b. the demand for dollars in the market for foreign-currency exchange would shift left.
c. the supply of dollars in the market for foreign-currency exchange shifts right.
d. the supply of dollars in the market for foreign-currency exchange shifts left.

30. If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign
residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion euros,
what is the quantity of euros demanded in the market for foreign-currency exchange?
a. 1,100 billion euros
b. 600 billion euros
c. 500 billion euros
d. 200 billion euros

31. If the exchange rate rises, which of the following falls in the open-economy macroeconomic model?
a. desired net exports and desired net capital outflow
b. desired net exports but not desired net capital outflow
c. desired net capital outflow but not desired net exports
d. neither desired net exports nor desired net capital outflow

32. In the open-economy macroeconomic model, if the supply of loanable funds increases, then the
interest rate
a. and the real exchange rate increase.
b. and the real exchange rate decrease.
c. increases and the real exchange rate decreases.
d. decreases and the real exchange rate increases.

33. In the open-economy macroeconomic model, other things the same, which of the following both make
the exchange rate fall?
a. U.S. investment demand falls and foreign demand for U.S. goods falls
b. U.S. investment demand falls and foreign demand for U.S. goods rises
c. U.S. investment demand rises and foreign demand for U.S. goods falls
d. U.S. investment demand rises and foreign demand for U.S. goods rises

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Open-Economy Macroeconomics: Basic Concepts

ANSWER: a

Figure 32-3
Refer to this diagram of the open-economy macroeconomic model to answer the questions below.

34. Refer to Figure 32-3. At an interest rate of 4 percent, the diagram indicates that
a. there is a surplus in the market for foreign-currency exchange.
b. national saving equals domestic investment.
c. net capital outflow + domestic investment = national saving.
d. in the market for foreign-currency exchange the quantity of dollars supplied equals the quantity of
dollars demanded.

35. Refer to Figure 32-3. The curve in panel b shows that as the interest rate rises,
a. domestic investment declines.
b. net capital outflow declines.

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Open-Economy Macroeconomics: Basic Concepts

c. net capital outflow and domestic investment decline.

d. None of the above is correct.

36. Refer to Figure 32-3. Which curve is determined by net capital outflow only?
a. the demand curve in panel a.
b. the demand curve in panel c.
c. the supply curve in panel a.
d. the supply curve in panel c.

37. Refer to Figure 32-3. Which curve shows the relation between the exchange rate and net exports?
a. the demand curve in panel a.
b. the demand curve in panel c.
c. the supply curve in panel a.
d. the supply curve in panel c.

38. If U.S. residents chose to travel overseas less due to concerns about the safety of foreign travel, then in
the open- economy macroeconomic model
a. the demand for dollars in the market for foreign-currency exchange shifts right.
b. the demand for dollars in the market for foreign-currency exchange shifts left.
c. the supply of dollars in the market for foreign-currency exchange shifts right.
d. the supply of dollars in the market for foreign-currency exchange shifts left.

39. An increase in the budget deficit causes domestic interest rates

a. and net capital outflow to rise.
b. to rise and net capital outflow to fall.
c. to fall and net capital outflow to rise.
d. and net capital outflow to fall.

40. A firm produces construction equipment, some of which it exports. Which of the following effects of
an increase in the government budget deficit would likely reduce the quantity of equipment it sells?
a. the change in the interest rate and the change in the exchange rate
b. the change in the interest rate but not the change in the exchange rate
c. the change in the exchange rate but not the change in the interest rate
d. neither the change in the interest rate nor the change in the exchange rate

41. Which of the following is the most likely result from an increase in a country’s government budget
surplus?
a. higher interest rates
b. lower imports

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Open-Economy Macroeconomics: Basic Concepts

c. lower net capital outflows

d. lower domestic investment

42. Which of the following contains a list only of things that increase when the budget deficit of the U.S.
increases?
a. U.S. supply of loanable funds, U.S. interest rates, U.S. domestic investment
b. U.S. imports, U.S. interest rates, the real exchange rate of the dollar
c. U.S. interest rates, the real exchange rate of the dollar, U.S. domestic investment
d. the real exchange rate of the dollar, U.S. net capital outflow, U.S. net exports

43. From 1980 to 1987, U.S. net capital outflows decreased. According to the open-economy
macroeconomic model, which of the following could have caused this?
a. an increase in the demand for U.S. currency in the market for foreign-currency exchange
b. a decrease in the demand for U.S. currency in the market for foreign-currency exchange
c. an increase in the supply of loanable funds
d. a decrease in the supply of loanable funds

44. In the 1980s, the U.S. government budget deficit rose. At the same time the U.S. trade deficit grew
larger, the real exchange rate of the dollar appreciated, and U.S. net capital outflow decreased. Which
of these events is contrary to what the open-economy macroeconomic model predicts concerning the
effects of an increase in the budget deficit?
a. the U.S. trade deficit grew
b. the real exchange rate of the dollar appreciated
c. U.S. net capital outflow fell
d. None of the above is contrary to the predictions of the model.

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Open-Economy Macroeconomics: Basic Concepts

Figure 32-4
Refer to this diagram of the open-economy macroeconomic model to answer the questions below.

45. Refer to Figure 32-4. Suppose that U.S. firms desire to purchase more capital in the U.S. The effects of
this could be illustrated by
a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left.
b. shifting the demand curve in panel a to the right and the supply curve in panel c to the left.
c. shifting the supply curve in panel a to the right and the demand curve in panel c to the left.
d. shifting the supply curve in panel a to the right and the supply curve in panel c to the right.

46. Refer to Figure 32-4. Suppose that the government goes from a budget surplus to a budget deficit. The
effects of the change could be illustrated by
a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left.
b. shifting the demand curve in panel a to the left and the supply curve in panel c to the left.
c. shifting the supply curve in panel a to the right and the demand curve in panel c to the right.

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Open-Economy Macroeconomics: Basic Concepts

d. shifting the supply curve in panel a to the left and the supply curve in panel c to the left.

47. If the U.S. were to impose import quotas

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.

48. At the original exchange rate an import quota

a. creates a surplus in the market for foreign-currency exchange, so the exchange rate rises.
b. creates a surplus in the market for foreign-currency exchange, so the exchange rate falls.
c. creates a shortage in the market for foreign-currency exchange, so the exchange rate rises.
d. creates a shortage in the market for foreign-currency exchange, so the exchange rate falls.

49. Which of the following is the correct way to show the effects of a newly imposed import quota?
a. shift the demand for loanable funds left, the supply of dollars in the market for foreign- currency
exchange left, and the demand for dollars in the market for foreign-currency exchange right
b. shift the demand for loanable funds left, the supply of dollars in the market for foreign- currency
exchange right, and the demand for dollars in the market for foreign-currency exchange left
c. shift the demand for dollars in the market for foreign-currency exchange to the right
d. shift the supply of dollars in the market for foreign-currency exchange to the left

50. In 2002, the United States imposed restrictions on the importation of steel into the United States. The
open- economy macroeconomic model shows that such a policy would
a. lower the real exchange rate and increase net exports.
b. lower the real exchange rate and have no effect on net exports.
c. raise the real exchange rate and decrease net exports.
d. raise the real exchange rate and have no effect on net exports.

51. A country produces two goods, soda and chips. It currently exports soda and imports chips. If it were
to impose a tariff on chips,
a. both imports of chips and exports of sodas would rise.
b. imports of chips would rise, but exports of sodas would fall.
c. imports of chips would fall, but exports of sodas would rise.
d. both imports of chips and exports of sodas would fall.

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Open-Economy Macroeconomics: Basic Concepts

52. If the U.S. imposes a quota on cotton, then

a. both exports and imports of other goods will rise.
b. exports of other goods will rise and imports of other goods will fall.
c. exports of other goods will fall and imports of other goods will rise.
d. both imports and exports of other goods will fall.

Figure 32-6
Refer to this diagram of the open-economy macroeconomic model to answer the questions below.

53. Refer to Figure 32-6. Which of the following shifts show the effects of an import quota?
a. shifting the middle supply curve in panel c to the one to its left.
b. shifting the demand curve from the right to the left in panel c.
c. shifting the demand curve from the left to the right in panel c.
d. None of the above is correct.

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Open-Economy Macroeconomics: Basic Concepts

54. Refer to Figure 32-6. If the interest rate were initially at r2 and an import quota were imposed, the
interest rate would
a. stay at r2.
b. decrease because supply would shift right.
c. increase because supply would shift left.
d. decrease because demand would shift left.

55. Refer to Figure 32-6. If the economy were initially in equilibrium at r1 and e3 and the government
removes import quotas, the exchange rate moves to
a. e5
b. e4
c. e2
d. e1

56. Refer to Figure 32-6. If equilibrium were at point j and the government imposed import quotas the
equilibrium moves to
a. g
b. h
c. i
d. None of the above is correct.

57. Refer to Figure 32-6. If the economy were originally in equilibrium at a and g and the government
removed import quotas on autos the economy would move to
a. b and k.
b. c and j.
c. d and i.
d. None of the above is correct.

58. Capital flight refers to

a. the movement of workers across international borders in response to exchange rate changes.
b. the movement of funds between financial intermediaries when interest rates change.
c. the ability of foreign direct investment to lift a country out of poverty.
d. a large and sudden movement of funds out of a country.

59. If a country experiences capital flight, which curves shift right?

a. the demand for loanable funds and the demand for its currency in the market for foreign-currency
exchange
b. the demand for loanable funds and the supply of its currency in the market for foreign-currency
exchange

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Open-Economy Macroeconomics: Basic Concepts

c. the supply of loanable funds and the demand for its currency in the market for foreign-currency
exchange
d. the supply of loanable funds and the supply of its currency in the market for foreign-currency
exchange

60. The country of Solidia is politically very stable and has a long tradition of respecting property rights. If
several other countries suddenly became politically unstable, we would expect Solidia’s
a. real interest rate to rise.
b. real exchange rate to rise.
c. net exports to rise.
d. None of the above is likely.

61. Which of the following is most likely to result if foreigners decide to withdraw the funds that they
have loaned to the United States?
a. U.S. net exports will fall
b. U.S. net capital outflow will rise
c. U.S. domestic investment will rise
d. the dollar will appreciate

62. A firm produces construction equipment, some of which it sells to domestic businesses and some of
which it exports. Which of the following effects of capital flight in the country where it produces
would likely increase the quantity of equipment it sells?
a. both what happens to the interest rate and what happens to the exchange rate
b. what happens to the interest rate but not what happens to the exchange rate
c. what happens to the exchange rate but not what happens to the interest rate
d. neither what happens to the interest rate nor what happens to the interest rate.

63. In 1998 the Russian government defaulted on its bonds. According to the open-economy
macroeconomic model, this should have
a. increased Russian interest rates and net exports.
b. reduced Russian interest rates and net exports.
c. increased Russian interest rates and reduced Russian net exports.
d. reduced Russian interest rates and increased Russian net exports.

64. In which case(s) does(do) a country’s demand for loanable funds shift right?
a. both an increase in the budget deficit and capital flight
b. an increase in the budget deficit, but not capital flight
c. capital flight, but not an increase in the budget deficit
d. neither an increase in the budget deficit nor capital flight

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Open-Economy Macroeconomics: Basic Concepts

65. In which case(s) does(do) a country’s supply of loanable funds shift right?
a. both an increase in the budget deficit and capital flight
b. an increase in the budget deficit, but not capital flight
c. capital flight, but not an increase in the budget deficit
d. neither an increase in the budget deficit nor capital flight

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

67. Which of the following would both raise the U.S. exchange rate?
a. capital flight from other countries to the U.S. occurs and the U.S. moves from budget surplus to
budget deficit
b. capital flight from other countries to the U.S. occurs and the U.S. moves from budget deficit to
budget surplus
c. capital flight from the U.S. to other countries occurs, the U.S. moves from budget surplus to
budget deficit
d. capital flight from U.S. to other countries occurs, the U.S. moves from budget deficit to budget
surplus

68. Which of the following is most likely to increase the exports of a country?
a. The government gives subsidies to firms that export goods or services.
b. The government reduces the size of the budget surplus.
c. Political instability within the country increases modestly.
d. None of the above will increase exports.

69. Which of the following is most likely to increase exports?

a. a reduction in domestic political instability
b. ending investment tax credits
c. a reduction in the size of the government's budget surplus
d. None of the above will increase exports.

70. If the government of India implemented a policy that decreased national saving, its real exchange rate
would
a. depreciate and Indian net exports would rise.
b. depreciate and Indian net exports would fall.
c. appreciate and Indian net exports would rise.

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Open-Economy Macroeconomics: Basic Concepts

d. appreciate and Indian net exports would fall.

71. If a country repeals an investment tax credit,

a. net capital outflow and the real exchange rate rise.
b. net capital outflow rises and the real exchange rate falls.
c. net capital outflow falls and the real exchange rate rises.
d. net capital outflow and the real exchange rate fall.

72. During the financial crisis it was proposed that firms be provided with a tax credit for investment
projects. Such a tax credit would
a. shift both the demand for loanable funds and the supply of dollars in the market for foreign-
currency exchange right.
b. shift the demand for loanable funds right and shift the supply of dollars in the market for foreign-
currency exchange left.
c. shift the demand for loanable funds left and shift the supply of dollars in the market for foreign-
currency exchange right.
d. shift both the demand for loanable funds and the supply of dollars in the market for foreign-
currency exchange left.

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

74. If the government of Venezuela made policy changes that increased national saving, the real exchange
rate of the peso would
a. depreciate and Venezuelan net exports would rise.
b. depreciate and Venezuelan net exports would fall.
c. appreciate and Venezuelan net exports would rise.
d. appreciate and Venezuelan net exports would fall.

75. If a country had capital flight, then the real exchange rate would
a. fall. To offset this fall the government could increase the budget deficit.
b. fall. To offset this fall the government could decrease the budget deficit.
c. rise. To offset this rise the government could increase the budget deficit.
d. rise. To offset this rise the government could decrease the budget deficit.

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