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112. A large and sudden movement of funds out of a country is called
a. arbitrage.
b. capital flight.
c. crowding out.
d. capital mobility.
113. Capital flight refers to
a. the movement of workers across international borders in response to exchange rate changes.
b. the movement of funds between financial intermediaries when interest rates change.
c. the ability of foreign direct investment to lift a country out of poverty.
d. a large and sudden movement of funds out of a country.
114. When Mexico suffered from capital flight in 1994, Mexico's net capital outflow
a. and net exports decreased.
b. and net exports increased.
c. increased while net exports decreased.
d. decreased while net exports increased.
115. When Mexico suffered from capital flight in 1994, Mexico's real interest rate
a. fell and the peso appreciated.
b. fell and the peso depreciated.
c. rose and the peso appreciated.
d. rose and the peso depreciated.
116. When Mexico suffered from capital flight in 1994, Mexico's net exports
a. decreased.
b. did not change.
c. increased.
d. decreased until the peso appreciated, then increased.
117. In the market for foreign-currency exchange, capital flight shifts
a. the demand curve right.
b. the demand curve left.
c. the supply curve right.
d. the supply curve left.
118. Which of the following happens in the market for loanable funds when there is capital flight?
a. the demand curve shifts right.
b. the demand curve shifts left.
c. the supply curve shifts right.
d. the supply curve shifts left.
119. Suppose a country experiences capital flight. Of the demand for loanable funds and the supply of
currency in the market for foreign-currency exchange, which shifts right?
a. only the demand for loanable funds
b. only the supply of its currency in the market for foreign-currency exchange
c. both curves shift right
d. neither curve shifts right
120. When a country experiences capital flight, its net capital outflow,
a. which is part of the demand for loanable funds, increases.
b. which is part of the supply of loanable funds, increases.
c. which is part of the demand for loanable funds, decreases.
d. which is part of the supply of loanable funds, decreases.
121. If there is capital flight from the United States, then the demand for loanable funds
a. and the supply of dollars in the foreign-exchange market shift right.
b. and the supply of dollars in the foreign-exchange market shift left.
c. shifts left while the supply of dollars in the foreign-exchange market shifts right.
d. shifts right while the supply of dollars in the foreign-exchange market shifts left.
122. When a country suffers from capital flight, the demand for loanable funds in that country shifts
a. right, which increases interest rates in that country.
b. right, which decreases interest rates in that country.
c. left, which increases interest rates in that country.
d. left, which decreases interest rates in that country.
123. If people decide that some country is now a more risky place to keep their saving, then at the
original interest rate in that country there is a
a. surplus of loanable funds, so the interest rate increases.
b. surplus of loanable funds, so the interest rate decreases.
c. shortage of loanable funds, so the interest rate increases.
d. shortage of loanable funds, so the interest rate decreases.
124. When a country suffers from capital flight, the exchange rate
a. depreciates, because demand in the market for foreign-currency exchange shifts left.
b. depreciates, because supply in the market for foreign-currency exchange shifts right.
c. appreciates, because demand in the market for foreign-currency exchange shifts right.
d. appreciates, because supply in the market for foreign-currency exchange shifts left.
125. If a country experiences capital flight, which curves shift right?
a. the demand for loanable funds and the demand for its currency in the market for foreign-
currency exchange
b. the demand for loanable funds and the supply of its currency in the market for foreign-
currency exchange
c. the supply of loanable funds and the demand for its currency in the market for foreign-
currency exchange
d. the supply of loanable funds and the supply of its currency in the market for foreign-currency
exchange
126. If a country experiences capital flight, which of the following curves shift right?
a. only the demand for loanable funds.
b. only the supply of dollars in the market for foreign-currency exchange.
c. only the net capital outflow curve and the supply of dollars in the market for foreign currency
exchange.
d. the demand for loanable funds, the net capital outflow curve, and the supply of dollars in the
market for foreign currency exchange.
127. When a country experiences capital flight, the interest rate
a. falls because the demand for loanable funds shifts left.
b. falls because the supply for loanable funds shifts right.
c. rises because the demand for loanable funds shifts right.
d. rises because the supply for loanable funds shifts left.
128. When a country experiences capital flight its
a. net capital outflow increases and its real exchange rate rises.
b. net capital outflow increases and its real exchange rate falls.
c. net capital outflow decreases and its real exchange rate rises.
d. net capital outflow decreases and its real exchange rate falls.
129. When a country experiences capital flight, which of the following rise?
a. its real interest rate and its real exchange rate
b. its real interest rate but not its real exchange rate
c. its real exchange rate but not its real interest rate
d. neither its real interest rate nor its foreign exchange rate
130. When a country experiences capital flight its currency
a. appreciates and net exports rise.
b. appreciates and net exports fall.
c. depreciates and net exports rise.
d. depreciates and net exports fall.
131. When a country experiences capital flight its interest rate
a. and net capital outflow rise.
b. rises and net capital outflow falls.
c. falls and net capital outflow rises.
d. interest rate and net capital outflow fall.
132. If China experienced capital flight, the supply of Chinese yuan in the market for foreign-
currency exchange would shift
a. left, which would make the real exchange rate of the Chinese yuan appreciate.
b. left, which would make the real exchange rate of the Chinese yuan depreciate.
c. right, which would make the real exchange rate of the Chinese yuan appreciate.
d. right, which would make the real exchange rate of the Chinese yuan depreciate.
133. When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds
a. and U.S. net capital outflow rose.
b. and U.S. net capital outflow fell.
c. fell and U.S. net capital outflow rose.
d. rose and U.S. net capital outflow fell.
134. When Mexico suffered from capital flight in 1994, the U.S. real interest rate
a. rose and the real exchange rate of the dollar appreciated.
b. rose and the real exchange rate of the dollar depreciated.
c. fell and the real exchange rate of the dollar appreciated.
d. fell and the real exchange rate of the dollar depreciated.
135. In 2009 Greece’s budget deficit rose and people became worried about the ability of the Greek
government to continue to make payments on its debt. Which of these events raise a country’s
interest rates?
a. an increase in the budget deficit and increased concerns about the ability of the government to
pay back its debt
b. an increase in the budget deficit, but not increased concerns about the ability of the
government to pay back its debt
c. increased concerns about the ability of the government to pay back its debt, but not an
increase in the budget deficit
d. neither an increase in the budget deficit nor increased concerns about the ability of the
government to pay back its debt
136. In 2009 Greece’s budget deficit rose and people became worried about the ability of the Greek
government to make payments on its debt. Which of the these events reduces a country’s real
exchange rate?
a. an increase in the budget deficit, and increased concerns about the ability of the government to
pay back its debt
b. an increase in the budget deficit, but not increased concerns about the ability of the
government to pay back its debt
c. increased concerns about the ability of the government to pay back its debt, but not an
increase in the budget deficit
d. neither an increase in the budget deficit, nor increased concerns about the ability of the
government to pay back its debt
137. The country of Solidia is politically very stable and has a long tradition of respecting property
rights. If several other countries suddenly became politically unstable, we would expect Solidia’s
a. real interest rate to rise.
b. real exchange rate to rise.
c. net exports to rise.
d. None of the above is likely.
138. Which of the following is most likely to result if foreigners decide to withdraw the funds that they
have loaned to the United States?
a. U.S. net exports will fall
b. U.S. net capital outflow will rise
c. U.S. domestic investment will rise
d. the dollar will appreciate
139. A firm produces construction equipment, some of which it sells to domestic businesses and some
of which it exports. Which of the following effects of capital flight in the country where it
produces would likely increase the quantity of equipment it sells?
a. both what happens to the interest rate and what happens to the exchange rate
b. what happens to the interest rate but not what happens to the exchange rate
c. what happens to the exchange rate but not what happens to the interest rate
d. neither what happens to the interest rate nor what happens to the interest rate.
140. In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its
debt. During the day of this announcement, U.S. interest rates rose and the real exchange rate of
the U.S. dollar depreciated. Which of these changes is consistent with the results of the open-
economy macroeconomic model?
a. the increase in U.S. interest rates
b. the depreciation of the real exchange rate of the U.S. dollar
c. Both a and b are consistent.
d. Neither a nor b are consistent.
141. In 2002 it looked like the Argentinean government might default on its debt (which eventually it
did). The open- economy macroeconomic model predicts that this should have
a. raised Argentinean interest rates and caused the Argentinean currency to appreciate.
b. raised Argentinean interest rates and caused the Argentinean currency to depreciate.
c. lowered Argentinean interest rates and caused the Argentinean currency to appreciate.
d. lowered Argentinean interest rates and caused the Argentinean currency to depreciate.
142. In 1998 the Russian government defaulted on its bonds. According to the open-economy
macroeconomic model, this should have
a. increased Russian interest rates and net exports.
b. reduced Russian interest rates and net exports.
c. increased Russian interest rates and reduced Russian net exports.
d. reduced Russian interest rates and increased Russian net exports.
143. If the people thought that many banks in a certain country were at or near the point of
bankruptcy, then that country’s real exchange rate
a. and net exports would rise.
b. would rise and its net exports would fall.
c. would fall and its net exports would rise.
d. and its net exports would fall.
144. If people thought that many banks in a certain country were at or near the point of bankruptcy,
then that country’s interest rate
a. and net exports would rise.
b. would rise and its net exports would fall.
c. would fall and its net exports would rise.
d. and its net exports would fall.
145. If the risk of holding assets in foreign countries rises relative to the risk of holding U.S assets,
then
a. U.S. net capital outflow rises which increases the U.S. exchange rate.
b. U.S. net capital outflow rises which decreases the U.S. exchange rate.
c. U.S. net capital outflow falls which increases the U.S. exchange rate.
d. U.S. net capital outflow falls which decreases the U.S. exchange rate.
146. When fear of default on bonds issued by U.S. corporations decline, then
a. net capital outflow and the exchange rate both rise.
b. net capital outflow rises and the exchange rate falls.
c. net capital outflow falls and the exchange rate rises.
d. net capital outflow and the exchange rate both fall.
147. If the risk of buying U.S. assets rises because it is discovered that lending institutions had not
carefully evaluated borrowers prior to lending them funds, then
a. net capital outflow and the real exchange rate will rise.
b. net capital outflow will rise and the real exchange rate will fall.
c. net capital outflow will fall and the real exchange rate will rise.
d. net capital outflow and the exchange rate will fall.
148. If the risk of buying U.S. assets rises because it is discovered that lending institutions had not
carefully evaluated borrowers prior to lending them funds, then
a. the real exchange rate and the interest rate will rise.
b. the real exchange rate will rise and the interest rate will fall.
c. the real exchange rate will fall and the interest rate will rise.
d. the real exchange rate and the interest rate will fall.
149. If after a country experiences capital flight, people become more confident about the safety of
its assets, then in that country
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.
Figure 32-7
Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to
answer the questions below.
150. Refer to Figure 32-7. Suppose that the Mexican economy starts at r2 and e3. Which of the
following is consistent with the effects of capital flight?
a. a shift from D2 to D1 in Panel A
b. a shift from NCO1 to NCO2 in Panel B
c. a shift from D2 to D1 in Panel C
d. All of the above shifts are consistent with the effects of capital flight.
151. Refer to Figure 32-7. Suppose the Mexican economy starts at r2 and e2. Which of the
following new equilibrium is consistent with capital flight?
a. r2 and e3
b. r3 and e2
c. r3 and e1
d. None of the above is correct.
152. In which case(s) does(do) a country’s demand for loanable funds shift right?
a. both an increase in the budget deficit and capital flight
b. an increase in the budget deficit, but not capital flight
c. capital flight, but not an increase in the budget deficit
d. neither an increase in the budget deficit nor capital flight
153. In which case(s) does(do) a country’s demand for loanable funds shift left?
a. both an increase in the budget deficit and capital flight
b. an increase in the budget deficit, but not capital flight
c. capital flight, but not an increase in the budget deficit
d. neither an increase in the budget deficit nor capital flight
154. In which case(s) does(do) a country’s supply of loanable funds shift right?
a. both an increase in the budget deficit and capital flight
b. an increase in the budget deficit, but not capital flight
c. capital flight, but not an increase in the budget deficit
d. neither an increase in the budget deficit nor capital flight
155. In which case(s) does(do) a country’s supply of loanable funds shift left?
a. both an increase in the budget deficit and capital flight
b. an increase in the budget deficit, but not capital flight
c. capital flight, but not an increase in the budget deficit
d. neither an increase in the budget deficit nor capital flight
156. Which of the following would cause the real exchange rate of the U.S. dollar to depreciate?
a. the U.S. government budget deficit decreases
b. capital flight from foreign countries
c. the U.S. imposes import quotas
d. None of the above is correct.
157. Which of the following would cause the real exchange rate of the U.S. dollar to appreciate?
a. the U.S. government budget deficit decreases
b. capital flight from the U.S.
c. the U.S. imposes import quotas
d. None of the above is correct.
158. Which of the following would both raise the U.S. exchange rate?
a. capital flight from other countries to the U.S. occurs and the U.S. moves from budget surplus
to budget deficit
b. capital flight from other countries to the U.S. occurs and the U.S. moves from budget deficit
to budget surplus
c. capital flight from the U.S. to other countries occurs, the U.S. moves from budget surplus to
budget deficit
d. capital flight from U.S. to other countries occurs, the U.S. moves from budget deficit to
budget surplus
159. Which of the following will not change the U.S. real interest rate?
a. capital flight from the United States
b. the government budget deficit increases
c. the U.S. imposes import quotas
d. None of the above is correct.
160. Which of the following would both make a country’s real exchange rate rise?
a. its budget deficit increases and bonds issued in the country become riskier
b. bonds issued in that country become riskier and it imposes an import quota
c. it imposes an import quota and the budget deficit increases
d. None of the above are correct.
161. Which of the following can explain a decrease in the U.S. real exchange rate?
a. the U.S. government budget deficit falls
b. the U.S. impose import quotas
c. the default risk of U.S. assets falls
d. All of the above are correct.
