Question 1

Refer to Shoe Quota. As a result of the quota, is there initially a surplus or a shortage in the market for foreign- currency exchange? Carefully explain how people's response to this surplus or shortage and the resulting changes in their behavior leads to a new equilibrium exchange rate.

Accepted Answer

Since the demand for dollars increases, ...

Question 2

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

A) True 
 B)False

Question 3

If a government increases its budget deficit, then domestic interest rates

Accepted Answer

A)   and net exports rise.
B)   rise and net exports fall.
C)   fall and net exports rise.
D)   and net exports fall.E) A) and B)
F) None of the above

Question 4

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

A) True 
 B)False

Question 5

Imposing an import quota causes the domestic real exchange rate to

Accepted Answer

A)   appreciate, which increases foreign demand for domestic goods.
B)   appreciate, which decreases foreign demand for domestic goods.
C)   depreciate, which increases foreign demand for domestic goods.
D)   depreciate, which decreases foreign demand for domestic goods.E) B) and D)
F) A) and C)

Question 6

If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars supplied in the market for foreign-currency exchange is

Accepted Answer

A)   greater than the quantity demanded and the dollar will appreciate.
B)   greater than the quantity demanded and the dollar will depreciate.
C)   less than the quantity demanded and the dollar will appreciate.
D)   less than the quantity demanded and the dollar will depreciate.E) A) and D)
F) None of the above

Question 7

Figure 32-1 
-Refer to Figure 32-1. If the real interest rate is 2 percent, there will be a

Accepted Answer

A)   surplus of $20 billion.
B)   surplus of $40 billion.
C)   shortage of $20 billion.
D)   shortage of $40 billion.E) None of the above
F) A) and C)

Question 8

If a country's budget deficit decreases, then the exchange rate

Accepted Answer

A)   rises, which raises net exports.
B)   rises, which reduces net exports.
C)   falls, which raises net exports.
D)   falls, which reduces net exports.E) B) and D)
F) B) and C)

Question 9

Capital flight increases a country's interest rate. This increase in the interest rate makes net capital outflow lower than it would be had the interest rate stayed the same.

Accepted Answer

A) True 
 B)False

Question 10

When Mexico suffered from capital flight in 1994, Mexico's real interest rate

Accepted Answer

A)   fell and the peso appreciated.
B)   fell and the peso depreciated.
C)   rose and the peso appreciated.
D)   rose and the peso depreciated.E) A) and B)
F) B) and C)

Question 11

A country reduces its government budget deficit and also makes political reforms that lead people to believe this country's assets are less risky. Given the combination of a reduced deficit and lower asset risk, what happens to the interest rate?

Accepted Answer

The intere...

Question 12

When a country's government budget deficit decreases,

Accepted Answer

A)   the real exchange rate of its currency and its net exports increase.
B)   the real exchange rate of its currency and its net exports decrease.
C)   the real exchange rate of its currency increases and its net exports decrease.
D)   the real exchange rate of its currency decreases and its net exports increase.E) A) and B)
F) All of the above

Question 13

If after a country experiences capital flight, people become more confident about the safety of its assets, then in that country

Accepted Answer

A)   the real exchange rate and the real interest rate will rise.
B)   the real exchange rate will rise and the real interest rate will fall.
C)   the real exchange rate will fall and the real interest rate will rise.
D)   the real exchange rate and the real interest rate will fall.E) B) and C)
F) A) and D)

Question 14

The real exchange rate measures the

Accepted Answer

A)   price of domestic currency relative to foreign currency.
B)   price of domestic goods relative to the price of foreign goods.
C)   rate of domestic and foreign interest.
D)   None of the above is correct.E) A) and B)
F) B) and D)

Question 15

Other things the same, a decrease in the interest rate

Accepted Answer

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.E) None of the above
F) All of the above

Question 16

If a country makes political reforms so that people now believe this country's assets are less risky, what happens to its interest rate, its exchange rate, and its net exports?

Accepted Answer

Its interest rate fa...

Question 17

Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

Accepted Answer

The supply of loanable funds increases, ...

Question 18

When a country's government budget deficit increases,

Accepted Answer

A)   the real exchange rate of its currency and its net exports increase.
B)   the real exchange rate of its currency and its net exports decrease.
C)   the real exchange rate of its currency increases and its net exports decrease.
D)   the real exchange rate of its currency decreases and its net exports increase.E) B) and D)
F) B) and C)

Question 19

Other things the same, people in the U.S. would want to save more if the real interest rate in the U.S.

Accepted Answer

A)   fell. The increased saving would increase the quantity of loanable funds demanded.
B)   fell. The increased saving would increase the quantity of loanable funds supplied.
C)   rose. The increased saving would increase the quantity of loanable funds demanded.
D)   rose. The increased saving would increase the quantity of loanable funds supplied.E) A) and B)
F) A) and D)

Question 20

If at a given exchange rate foreign citizens want to buy fewer U.S bonds, then the

Accepted Answer

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

Exam 32: A Macroeconomic Theory of the Open Economy

If a country's budget deficit decreases, then the exchange rate

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When Mexico suffered from capital flight in 1994, Mexico's real interest rate

Correct AnswerverifiedShow Answer

When a country's government budget deficit increases,

Correct AnswerverifiedShow Answer

When a country's government budget deficit decreases,

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Imposing an import quota causes the domestic real exchange rate to

Correct AnswerverifiedShow Answer

Refer to Shoe Quota. As a result of the quota, is there initially a surplus or a shortage in the market for foreign- currency exchange? Carefully explain how people's response to this surplus or shortage and the resulting changes in their behavior leads to a new equilibrium exchange rate.

Correct AnswerverifiedSince the demand for dollars increases, ...View AnswerShow Answer

The real exchange rate measures the

Correct AnswerverifiedShow Answer

Other things the same, people in the U.S. would want to save more if the real interest rate in the U.S.

Correct AnswerverifiedShow Answer

Capital flight increases a country's interest rate. This increase in the interest rate makes net capital outflow lower than it would be had the interest rate stayed the same.

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Figure 32-1 -Refer to Figure 32-1. If the real interest rate is 2 percent, there will be a

Correct AnswerverifiedShow Answer

If a country makes political reforms so that people now believe this country's assets are less risky, what happens to its interest rate, its exchange rate, and its net exports?

Correct AnswerverifiedIts interest rate fa...View AnswerShow Answer

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.

Correct AnswerverifiedShow Answer

If after a country experiences capital flight, people become more confident about the safety of its assets, then in that country

Correct AnswerverifiedShow Answer

Other things the same, a decrease in the interest rate

Correct AnswerverifiedShow Answer

If at a given exchange rate foreign citizens want to buy fewer U.S bonds, then the

Correct AnswerverifiedShow Answer

If a government increases its budget deficit, then domestic interest rates

Correct AnswerverifiedShow Answer

If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars supplied in the market for foreign-currency exchange is

Correct AnswerverifiedShow Answer

A country reduces its government budget deficit and also makes political reforms that lead people to believe this country's assets are less risky. Given the combination of a reduced deficit and lower asset risk, what happens to the interest rate?

Correct AnswerverifiedThe intere...View AnswerShow Answer

Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

Correct AnswerverifiedThe supply of loanable funds increases, ...View AnswerShow Answer

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Since the demand for dollars increases, ...
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Its interest rate fa...
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The intere...
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The supply of loanable funds increases, ...
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