Question 1

In an open economy, the supply of loanable funds comes from national saving.

Accepted Answer

True

Question 2

In the open economy model, the supply of loanable funds comes from national saving and net capital outflow.

Accepted Answer

False

Question 3

In an open economy, the demand for loanable funds comes from both domestic investment and net capital outflow.

Accepted Answer

True

Question 4

An increase in a country's real interest rate reduces that country's net capital outflow.

Accepted Answer

True

Question 5

In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that people (including government) want to save exactly balances desired domestic investment.

Accepted Answer

False

Question 6

In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that people (including government) want to save equals desired quantities of domestic investment and net capital outflow.

Accepted Answer

True

Question 7

In the open-economy macroeconomic model, a higher domestic interest rate reduces the quantity of loanable funds demanded.

Accepted Answer

True

Question 8

Net capital outflow represents the quantity of dollars supplied in the foreign-currency exchange market.

Accepted Answer

True

Question 9

In the open-economy macroeconomic model, net exports equal the quantity of dollars demanded in the market for foreign currency exchange.

Accepted Answer

True

Question 10

Other things the same, a higher real exchange rate raises net exports.

Accepted Answer

False

Question 11

In the open-economy macroeconomic model, the supply of dollars in the market for foreign currency exchange is upward sloping.

Accepted Answer

False

Question 12

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

True

Question 13

In the open-economy macroeconomic model, the supply curve of currency is vertical because the quantity of currency supplied does not depend on the real exchange rate.

Accepted Answer

True

Question 14

An increase in the U.S. interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S. assets.

Accepted Answer

True

Question 15

As the interest rate rises, it is possible that net capital outflow could move from a positive to a negative value.

Accepted Answer

True

Question 16

In the open-economy macroeconomic model, net capital outflow links the markets for loanable funds and foreign- currency exchange.

Accepted Answer

True

Question 17

In the open-economy macroeconomic model, the real exchange rate does not affect net capital outflow.

Accepted Answer

True

Question 18

In the open-economy macroeconomic model, other things the same, an increase in the exchange rate raises the quantity of dollars supplied in the market for foreign-currency exchange.

Accepted Answer

False

Question 19

When the government budget deficit increases, national saving decreases.

Accepted Answer

True

Question 20

An increase in the government budget deficit shifts the demand for loanable funds to the right.

Accepted Answer

False

Question 21

According to the open-economy macroeconomic model, if the U.S. government budget deficit decreases, then both U.S. domestic investment and net capital outflow increase.

Accepted Answer

True

Question 22

According to the open-economy macroeconomic model, a decrease in the U.S. government budget deficit increases U.S. net capital outflow, causes the real exchange rate of the dollar to depreciate, and increases U.S. net exports.

Accepted Answer

True

Question 23

According to the open-economy macroeconomic model, if the United States moved from a government budget deficit to a government budget surplus, U.S. real interest rates would increase and the real exchange rate of the U.S. dollar would appreciate.

Accepted Answer

False

Question 24

When a country imposes a trade restriction, the real exchange rate of that country's currency appreciates.

Accepted Answer

True

Question 25

If policymakers impose import restrictions on clothing, the U.S. trade deficit will shrink.

Accepted Answer

False

Question 26

Capital flight raises a country's interest rate.

Accepted Answer

True

Question 27

Capital flight shifts the NCO curve to the left.

Accepted Answer

False

Question 28

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

True

Question 29

Capital flight raises a country's real exchange rate.

Accepted Answer

False

Question 30

If Argentina suffers from capital flight, Argentinean domestic investment and Argentinean net exports will both decline.

Accepted Answer

False

Question 31

THREE DIAGRAM MODEL

Accepted Answer

REVIEW SLIDES

Question 32

Open‐Economy Loanable Funds Market Equation

Accepted Answer

S = I +NCOS = Supply of Loanable Funds, National SavingI = Domestic Demand: Domestic InvestmentNCO = Demand for Loanable Funds, Demand from Abroad: the outflow of capital used for foreign investment

Question 33

Open‐Economy Loanable Funds Market: Shifts of the SUPPLY Curve

Accepted Answer

a. Government Spending (G)b. Income Tax (T)c. Saving Incentive 1: Capital gain tax exemptiond. Saving Incentive 2: Possibility of social security systembankruptcy

Question 34

Income Tax (T)

Accepted Answer

‐ Changes both SP and SG, but the change in SG is larger.‐ An increase in T raises NS, so supply curve shifts to the right.

Question 35

Saving Incentive 1: Capital Gain Tax

Accepted Answer

‐ Capital gain tax: taxes on income from asset purchases (stocks, bonds, etc)

Question 36

Saving Incentive 2: Possibility of social security systembankruptcy

Accepted Answer

People believe that social security system might go bankrupt, so they start saving more.

Question 37

Open‐Economy Loanable Funds Market: Shifts of the DEMAND Curve

Accepted Answer

a. Anything that changes Investment i. Investment Tax Credit ii. Optimism/pessimism about the future business environmentb. Anything that changes Net capital outflow i. Perceived risks of holding assets ii. Government restriction on asset holdings by foreigners iii. Foreign interest rates

Question 38

Investment Tax Credit

Accepted Answer

A tax credit given to firms that make large investment

Question 39

Optimism/pessimism about the future business environment

Accepted Answer

Expectation of higher (lower) future sales encourages(discourages) investment

Question 40

Domestic real interest rate influences...

Accepted Answer

both Investment and NCO. But it will cause a movement along the curve, not a shift

Macroeconomics Exam 3: Chapter 19

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