Chapter 32: A Macroeconomic Theory of The Open Economy
Section A (MCQ)
1. A country has $100 million of net exports and $170 million of saving. Net capital
outflow is
a. $70 million and domestic investment is $170 million.
b. $70 million and domestic investment is $270 million.
c. $100 million and domestic investment is $70 million.
d. None of the above is correct.
2. In an open economy, the market for loanable funds equates national saving with
a. domestic investment.
b. net capital outflow.
c. the sum of national consumption and government spending.
d. the sum of domestic investment and net capital outflow.
3. Other things the same, a higher real interest rate raise the quantity of
a. domestic investment.
b. net capital outflow.
c. loanable funds demanded.
d. loanable funds supplied.
4. An increase in the U.S. real interest rate induces
a. Americans to buy more foreign assets, which increases U.S. net capital
outflow.
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.
5. When a French vineyard establishes a distribution center in the U.S., U.S. net
capital outflow
a. increases because the foreign company makes a portfolio investment in the
U.S.
b. declines because the foreign company makes a portfolio investment in the
U.S.
c. increases because the foreign company makes a direct investment in capital
in the U.S.
d. declines because the foreign company makes a direct investment in capital
in the U.S.
6. Which of the following equations is always correct in an open economy?
a. I=Y-C
b. I=S
c. I = S - NCO
d. I = S + NX
7. If interest rates rose more in France than in the U.S., then other things the same
a. U.S. citizens would buy more French bonds and French citizens would buy
more U.S. bonds.
b. U.S. citizens would buy more French bonds and French citizens would buy
fewer U.S. bonds.
c. U.S. citizens would buy fewer French bonds and French citizens would buy
more U.S. bonds.
d. U.S. citizens would buy fewer French bonds and French citizens would buy
fewer U.S. bonds.
8. How much is the saving of a country with a $50 million of domestic investment
and net capital outflow of $15 million?
a. -$35 million.
b. $35 million.
c. -$65 million.
d. $65 million.
9. Which of the following increases when the real interest rate decreases, ceteris
paribus?
a. Domestic investment.
b. Net capital outflow.
c. Loanable funds supplied.
d. Loanable funds demanded.
10. The amount of dollars demanded in the market for foreign-currency exchange at a
given real exchange rate increase if
a. either U.S. imports decrease or U.S. exports increase.
b. either U.S. imports increase or U.S. exports decrease.
c. either U.S. imports or exports decrease.
d. either U.S. imports or exports increase.
Section B (Short answer question)
1. Describe the supply and demand in the market for loanable funds and the
market for foreign currency exchange. How are these markets linked?
The supply of loanable funds comes from national saving. The demand for loanable
funds comes from domestic investment and net capital outflow. The supply in the
market for foreign-currency exchange comes from net capital outflow. The demand in
the market for foreign-currency exchange comes from net exports.
Section C (Essay question)
1. Why are budget deficits and trade deficits sometimes called the twin
deficits?
Budget deficits and trade deficits are sometimes called the twin deficits
because they are closely related and often occur simultaneously in an
economy.
A budget deficit occurs when a government's expenditures exceed its revenues
in a given period, leading to government borrowing to finance the shortfall.
This can result in increased government debt.
On the other hand, a trade deficit occurs when a country's imports exceed its
exports, leading to a shortfall in the balance of trade. This means that the
country is spending more on foreign goods and services than it is earning from
exports.
The twin deficits phenomenon arises when a country experiences both a
budget deficit and a trade deficit at the same time. The relationship between
the two deficits is often interlinked, as the budget deficit can lead to increased
government borrowing, which in turn can put pressure on the trade deficit.
Additionally, a trade deficit can impact the overall economy, affecting factors
such as exchange rates and interest rates, which can further influence the
budget deficit.
The twin deficits can have implications for the economy, such as putting
pressure on the country's currency, increasing government debt, and affecting
overall economic stability.
2. Suppose that the government is considering an investment tax credit,
which subsidies domestic [Link] does this policy affect national
saving, domestic saving, domestic investment, net capital outflow, the
interest rate, the exchange rate and the trade balance.
The introduction of an investment tax credit to subsidize domestic investment
is anticipated to increase national and domestic saving rates, stimulate
domestic investment, and potentially impact net capital outflow, the interest
rate, exchange rate appreciation, and the trade balance. While the policy aims
to incentivize businesses to invest domestically, its effects on the economy
will depend on factors such as the attractiveness of domestic investment
opportunities compared to foreign ones, and the overall response of investors
and consumers to the policy incentives.