Subjective Short Answer
1. What is the source of the supply of loanable funds in the open-economy macroeconomic model?
2. What happens to the quantity of loanable funds supplied when the interest rate rises? Explain why this change happens.
3. What is the source of the demand for loanable funds in the open-economy macroeconomic model ?
4. What are the sources of the demand for loanable funds? What happens to the quantity of loanable funds demanded
when the interest rate rises?
5. Define net capital outflow.
6. What happens to net capital outflow as the real interest rate falls? Explain your answer.
7. What happens to domestic investment as the real interest rate rises? Explain your answer.
8. An economy recently had 800 billion euros of saving and 600 billion euros of net capital outflow. What was its
investment? What was its quantity of loanable funds supplied?
9. A country recently had 500 billion euros of national saving and –200 billion euros of net capital outflow. What was its
domestic investment? What was its quantity of loanable funds supplied?
10. A country recently had 500 billion euros of national saving and 200 billion euros of domestic investment. What was
its net capital outflow? What was its quantity of loanable funds demanded?
11. Other things the same, which of the following would a rise in the real interest rate raise:
desired investment spending, desired national saving, desired net capital outflow?
12. What is the source of the supply of dollars in the market for foreign-currency exchange?
13. What is the source of the demand for dollars in the market for foreign-currency exchange?
14. If there is a shortage in the market for foreign-currency exchange, what happens to the exchange rate and to net
exports?
15. If the exchange rate rises, foreign residents want to purchase ______ domestic goods and domestic residents want to
purchase _____ foreign goods. In the market for foreign-currency exchange, these changes are shown as a _______ in the
quantity of dollars ______.
16. In the market for foreign-currency exchange, the source of the supply of dollars is _________. The supply curve is
_________ because _____________.
17. If the exchange rate rises, domestic goods become relatively ______ expensive. This change in the affordability of
domestic goods makes domestic goods _____ attractive to foreigners. So, _______ ______.
18. If the exchange rate falls, domestic goods become relatively ______ expensive. This change in the affordability of
domestic goods makes domestic goods _____ attractive to domestic residents. So, _______ ______.
19. If a country’s exchange rate rises, what happens to its exports and what happens to its imports?
20. Other things the same, if the U.S. interest rate rises, what happens to the net capital outflow of other countries?
21. Other things the same, if the U.S. interest rate rises, U.S. assets become ____ attractive. So, desired net capital outflow
_____. This change in net capital outflow, shifts the __________ curve in the market for foreign-currency exchange to the
______.
22. If a country’s government moves from a budget deficit to a budget surplus, which curve in the market for loanable
funds shifts and which direction does it shift? What happens to the interest rate?
23. If the government budget deficit rises, what happens to the interest rate? What does this change in the interest rate do
to net capital outflow? Provide a detailed explanation of why this change in the interest rate changes net capital outflow.
24. Other things the same, which curve in the market for foreign-currency exchange shifts and which direction does it
shift if net capital outflow rises?
25. Which curve in the market for foreign-currency exchange shifts and which direction does it shift if the government
budget deficit increases? Explain why an increase in the budget deficit shifts this curve.
26. If for some reason U.S. residents increase their purchases of foreign assets, then all else constant which curve in the
market for foreign-currency exchange shifts and which direction does it shift? What happens to the exchange rate?
27. What happens to each of the following if the supply of loanable funds shifts right?
A. the interest rate
B. net capital outflow
C. the exchange rate
28. What happens to each of the following if the supply of loanable funds shifts left?
A. the interest rate
B. net capital outflow
C. the exchange rate
29. What happens to each of the following if investment becomes more desirable at each interest rate?
A. the interest rate
B. net capital outflow
C. the exchange rate
30. What happens to each of the following if investment becomes less desirable at each interest rate?
A. the interest rate
B. net capital outflow
C. the exchange rate
Budget in Recession
During a recession government revenues from the income tax fall and government transfers rise as the reduction in
income and the rise in unemployment raise the number of people who qualify for benefits.
31. Refer to Budget in Recession. In the market for loanable funds which curve(s) does this change in the deficit shift?
Which direction does it shift?
Since the budget deficit rises, the supply of loanable funds shifts left.
32. Refer to Budget in Recession. What does this change in the budget deficit do to the equilibrium values of the interest
rate and the quantity of loanable funds?
Since the supply of loanable funds shifts left, the interest rate rises and the equilibrium
quantity of loanable funds falls.
33. Refer to Budget in Recession. What does this change in the deficit do to net capital outflows? Defend your answer.
34. Refer to Budget in Recession. This change in the deficit causes net capital outflow to change. How is this change in
net capital outflow shown in the market for foreign-currency exchange? What happens to the exchange rate?
35. Refer to Budget in Recession. This change in the deficit causes the exchange rate to change. What does the change in
the exchange rate do to net exports?
36. Refer to Budget Reform. In the market for loanable funds which curve(s) does this policy change shift? Which
direction does it shift?
37. Refer to Budget Reform. What does this policy change do to the equilibrium values of the interest rate and the
quantity of loanable funds?
38. Refer to Budget Reform. What does this policy change do to net capital outflows? Defend your answer.
39. Refer to Budget Reform. This policy change causes net capital outflow to change. How is this change in net capital
outflow shown in the market for foreign-currency exchange? What happens to the exchange rate?
40. Refer to Budget Reform. This policy change causes the exchange rate to change. What does the change in the
exchange rate to do to net exports?
41. Refer to Shoe Quota. What is a quota? What is a tariff?
42. Refer to Shoe Quota. At a given exchange rate what does a quota do to desired net exports? As a result of this change
which curve in the open-economy model shifts and which direction does it shift?
43. 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.
44. Refer to Shoe Quota. Overall as a result of this change in policy, what happens to exports, imports, and net exports?
45. Political events convince people that the assets of country x are now riskier. As a result of this change which curves in
the open-economy macroeconomic model shift and which direction do they shift for country x?
46. 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?
Depositors Move Funds out of Greek Banks.
In 2011 Greek citizens were concerned about the size of government debt. Fearful that the government might be unable to
fulfill its promise to insure depositors in Greek banks against losses created by bank failures, depositors moved funds out
of Greek banks.
47. Refer to Depositors Move Funds Out of Greek Banks. Because of depositors reactions what happened to net capital
outflow?
48. Refer to Depositors Move Funds Out of Greek Banks. Which curve in the domestic loanable funds market shifted
and which direction did it shift?
49. Refer to Depositors Move Funds Out of Greek Banks. What happened to the domestic equilibrium interest rate and
quantity of loanable funds supplied?
50. Refer to Depositors Move Funds Out of Greek Banks. What happened to domestic investment? Why?
Domestic investment fell because the interest rate rose.
U.S. Investment Tax Credit
Suppose that Congress and the President enact legislation that provides a tax rebate to businesses that purchase capital
goods. Assume other countries make no policy changes.
51. Refer to U.S. Investment Tax Credit. In the market for loanable funds which curve shifts and which direction does it
shift?
The demand for loanable funds shifts right.
52. Refer to U.S. Investment Tax Credit. What happens to the interest rate, U.S. net capital outflow, and the net capital
outflow of foreign countries?
The interest rate rises. U.S. net capital outflow falls. Foreign net capital outflow rises.
53. Refer to U.S. Investment Tax Credit. What happens to the exchange rate, U.S. net exports, and the net exports of
foreign countries?
The exchange rate rises, U.S. net exports fall, net exports of foreign countries rise.
54. If a country removes an import quota, what happens to its exchange rate, its exports, and its net exports?
55. If people in the U.S. choose to save a smaller percentage of income, what will happen to the interest rate, net capital
outflow, the exchange rate, and net exports?
exports will fall.
56. 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?
57. Why do higher real interest rates lead to lower net capital outflow?
both of which reduce net capital outflow.
58. State what, if anything, each of the following does to the supply or demand of loanable funds.
a.
net capital outflow increases at each interest rate
b.
domestic investment increases at each interest rate
c.
the government deficit increases
d.
private saving increases
the demand for loanable funds increases
b.
the demand for loanable funds increases
the supply of loanable funds decreases
d.
the supply of loanable funds increases
59. Suppose that U.S. savers decide that holding Brazilian assets has become riskier. What happens to U.S. net capital
outflow? What happens to the U.S. real interest rate?
demand for loanable funds, which decreases U.S. interest rates.
60. Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand
for foreign-currency exchange curve.
62. Explain how a decrease in the demand for capital goods in the U.S. can lead to a change in the U.S. exchange rate.
63. 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?
64. Suppose that the U.S. government budget deficit decreases. What curves in the open-economy macroeconomic model
shift? Explain why each curve shifts the direction it does.
65. Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will
stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this candidate’s
promise.
66. What effect do protectionist policies have on the trade deficit?
67. Suppose the U.S. government institutes a “Buy American” campaign, in order to encourage spending on domestic
goods. What effect will this have on the U.S. trade balance?
68. What do trade policies do to the standard of living?
69. If a county becomes less likely to default on its bonds, what happens to that country’s interest rate and exchange rate?
Explain.
70. Fill in the table below with the direction of the variables that change in response to the events in the first column.
U.S. real
interest rate
U.S. domestic
investment
U.S. net
capital
outflow
U.S. real
exchange rate
of domestic
currency
U.S. trade
balance
U.S. government
budget deficit
increases
U.S. imposes
import quotas
capital flight
from the United
States
U.S. real
U.S. domestic
capital
U.S. real
exchange rate
currency
U.S. trade
U.S. government
budget deficit
increases
U.S. imposes
import quotas
States
