Principles of Macroeconomics (ECO1104)

Assignment 4

Note: We suppose that United States is the domestic country

1. In an open economy, national saving equals

a. net capital outflow.
b. domestic investment minus net capital outflow.
c. domestic investment.
d. domestic investment plus net capital outflow.

2. A country has domestic investment of $260 billion. Its citizens purchase $605 billion of foreign assets and foreign citizens
purchase $315 billion of its assets. What is national saving?
a. $550 billion
b. $260 billion
c. $865 billion
d. $1180 billion

3. Other things the same, a decrease in the U.K. real interest rate induces
a. foreigners to buy more U.K. assets, which reduces U.K.'s net capital outflow.
b. foreigners to buy fewer U.K. assets, which increases U.K.'s net capital outflow.
c. British people to buy fewer foreign assets, which increases U.K.'s net capital outflow.
d. British people to buy more foreign assets, which reduces U.K.'s net capital outflow.

Figure 1
4. Refer to Figure 1. If the real exchange rate is 1, then there is
a. surplus of 100 so the real exchange rate will fall.
b. surplus of 100 so the real exchange rate will rise.
c. shortage of 100 so the real exchange rate will fall.
d. shortage of 100 so the real exchange rate will rise.

5. In the open-economy macroeconomic model, the key determinant of net capital outflow is the
a. real exchange rate. When the real exchange rate rises, net capital outflow rises.
b. real exchange rate. When the real exchange rate rises, net capital outflow falls.
c. real interest rate. When the real interest rate rises, net capital outflow rises.
d. real interest rate. When the real interest rate rises, net capital outflow falls.

Figure 2
Refer to the following diagram of the open-economy macroeconomic model to answer the questions that follow.

Graph (a) Graph (b)

Graph (c)
6. Refer to Figure 2. Suppose that U.S. firms desire to purchase more equipment and build more factories and stores
in the United States. The effects of this are illustrated by
a. shifting the demand curve in panel a to the right and the demand curve in graph (c) to the left.
b. shifting the demand curve in panel a to the right and the supply curve in graph (c) to the left.
c. shifting the supply curve in panel a to the right and the demand curve in graph (c) to the left.
d. shifting the supply curve in panel a to the right and the supply curve in graph (c) to the right.

7. Which curve is determined by net capital outflow only?

a. The demand curve in graph (a)
b. The demand curve in graph (c).
c. The supply curve in graph (a).
d. The supply curve in graph (c).

Figure 3
Refer to the following diagram of the open-economy macroeconomic model to answer the questions that follow.

Graph (a) Graph (b)

Graph (c)
8. Refer to Figure 3. 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.

9. If the United States raised its tariff on tires, then at the original exchange rate there would be a

a. surplus in the market for foreign-currency exchange, so the real exchange rate would appreciate.
b. surplus in the market for foreign-currency exchange, so the real exchange rate would depreciate.
c. shortage in the market for foreign-currency exchange, so the real exchange rate would appreciate.
d. shortage in the market for foreign-currency exchange, so the real exchange rate would appreciate.

10. An increase in household saving causes consumption to

a. rise and aggregate demand to increase.
b. rise and aggregate demand to decrease.
c. fall and aggregate demand to increase.
d. fall and aggregate demand to decrease.

Scenario 1
Suppose that political instability in other countries makes people fear for the value of their assets in these countries so
that they desire to purchase more U.S assets.

11. Refer to Scenario 1. What would happen to the dollar?

a. It would appreciate in foreign exchange markets making U.S. goods more expensive compared to foreign
goods.
b. It would appreciate in foreign exchange markets making U.S. goods less expensive compared to foreign
goods.
c. It would depreciate in foreign exchange markets making U.S. goods more expensive compared to foreign
goods.
d. It would depreciate in foreign exchange markets making U.S. goods less expensive compared to foreign
goods.

12. The effect of an increase in the price level on the aggregate-demand curve is represented by a
a. shift to the right of the aggregate-demand curve.
b. shift to the left of the aggregate-demand curve.
c. movement to the left along a given aggregate-demand curve.
d. movement to the right along a given aggregate-demand curve.

13. The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while
firms were expecting it to rise by 2%, then some firms with high menu costs will have
a. higher than desired prices, which leads to an increase in the aggregate quantity of goods and services
supplied.
b. higher than desired prices, which leads to a decrease in the aggregate quantity of goods and services
supplied.
c. lower than desired prices, which leads to an increase in the aggregate quantity of goods and services
supplied.
d. lower than desired prices, which leads to a decrease in the aggregate quantity of goods and services
supplied.
Figure 4

14. Refer to Figure 4. A decrease in taxes would move the economy from U to
a. T in the short run and the long run.
b. V in the short run and the long run.
c. T in the short run and S in the long run.
d. V in the short run and U in the long run.

Figure 5

15. Refer to Figure 5. The natural level of output occurs at

a. Y1.
b. Y2.
c. Y3.
d. both Y1 and Y3.