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A Macroeconomic Theory of the Open Economy
Multiple Choice – Section 00: Introduction
1. Over the past three decades, the United States has
a. generally had, or been very near to a trade balance.
b. had trade deficits in about as many years as it has trade surpluses.
c. persistently had a trade deficit.
d. persistently had a trade surplus.
2. Many U.S. business leaders argue that the current state of U.S. net exports is the result of
a. U.S. export subsidies.
b. free trade policies of foreign governments.
c. unproductive U.S. workers.
d. unfair foreign competition.
3. The open-economy macroeconomic model takes
a. GDP, but not the price level as given.
b. the price level, but not GDP as given.
c. both the price level and GDP as given.
d. the price level and GDP as variables to be determined by the model.
4. Because the open-economy macroeconomic model focuses on the long run, it is assumed that
a. GDP, but not the price level is given.
b. the price level, but not GDP is given.
c. both the price level and GDP are given.
d. the price level and GDP are variables to be determined by the model.
5. The open-economy macroeconomic model examines the determination of
a. the output growth rate and the real interest rate.
b. unemployment and the exchange rate.
c. the output growth rate and the inflation rate.
d. the trade balance and the exchange rate.
6. The open-economy macroeconomic model includes
a. only the market for loanable funds.
b. only the market for foreign-currency exchange.
c. both the market for loanable funds and the market for foreign-currency exchange.
d. neither the market for loanable funds nor the market for foreign-currency exchange.
Multiple Choice – Section 01: Supply and Demand for Loanable Funds and for Foreign-
Currency Exchange
1. In an open economy, national saving equals
a. domestic investment plus net capital outflow.
b. domestic investment minus net capital outflow.
c. domestic investment.
d. net capital outflow.
2. In the open-economy macroeconomic model, 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. In the open-economy macroeconomic model, the market for loanable funds equates national saving
with
a. domestic investment.
b. net capital outflow.
c. national consumption minus domestic investment.
d. None of the above is correct.
4. In the open-economy macroeconomic model, the market for loanable funds identity can be written
as
a. S = I
b. S = NCO
c. S = I + NCO
d. S + I = NCO
5. In the open-economy macroeconomic model, the supply of loanable funds comes from
a. national saving.
b. private saving.
c. domestic investment.
d. the sum of domestic investment and net capital outflow.
6. In the open-economy macroeconomic model, the supply of loanable funds comes from
a. the sum of domestic investment and net capital outflow.
b. the sum of national saving and net capital outflow.
c. national saving.
d. net exports
7. In the open-economy macroeconomic model, the supply of loanable funds comes from
a. the sum of domestic investment and net capital outflow.
b. net capital outflow alone.
c. domestic investment alone.
d. None of the above is correct.
8. In the open-economy macroeconomic model, the source of the supply of loanable funds is
a. personal saving
b. public saving
c. public saving + personal saving
d. public saving + personal saving + net capital outflows
9. Other things the same, a higher real interest rate raises the quantity of
a. domestic investment.
b. net capital outflow.
c. loanable funds demanded.
d. loanable funds supplied.
10. Other things the same, a lower real interest rate decreases the quantity of
a. loanable funds demanded.
b. loanable funds supplied.
c. domestic investment.
d. net capital outflow.
11. Other things the same, people in the U.S. would want to save more if the real interest rate in the
U.S.
a. fell. The increased saving would increase the quantity of loanable funds demanded.
b. fell. The increased saving would increase the quantity of loanable funds supplied.
c. rose. The increased saving would increase the quantity of loanable funds demanded.
d. rose. The increased saving would increase the quantity of loanable funds supplied.
12. Other things the same an increase in the interest rate
a. increases national saving, this is shown by moving along the demand for loanable funds curve.
b. increases national saving, this is shown by moving along the supply of loanable funds curve.
c. decreases national saving, this is shown by moving along the demand for loanable funds curve.
d. decreases national saving, this is shown by moving along the supply of loanable funds curve.
13. Other things the same, an increase in the U.S. interest rate causes the quantity of loanable funds
supplied to
a. rise because net capital outflow and domestic investment rise.
b. rise because national saving rises.
c. fall because net capital outflow and domestic investment rise.
d. fall because national saving falls.
14. Other things the same, an increase in the U.S. interest rate causes the quantity of loanable funds
supplied to
a. rise because national saving rises.
b. rise because domestic investment rises.
c. fall because national saving falls.
d. fall because domestic investment falls.
15. The explanation for the slope of
a. the supply of loanable funds curve is based on the logic that a higher real interest rate leads to
higher saving.
b. the demand for loanable funds curve is based on the logic that a higher interest rate leads to
higher saving.
c. the supply of loanable funds curve is based on the logic that a higher real interest rate leads to
lower saving.
d. the demand for loanable funds curve is based on the logic that a higher interest rate leads to
lower saving.
16. The slope of the supply of loanable funds is based on an increase in
a. only national saving when the interest rate rises.
b. both national saving and net capital outflow when the interest rate rises.
c. only national saving when the interest rate falls.
d. both national saving and net capital outflow when the interest rate falls.
17. A country has national saving of $50 billion, government expenditures of $30 billion, domestic
investment of $10 billion, and net capital outflow of $40 billion. What is its supply of loanable
funds?
a. $20 billion
b. $30 billion
c. $50 billion
d. $60 billion
18. A country has national saving of $80 billion, government expenditures of $40 billion, domestic
investment of $50 billion, and net capital outflow of $30 billion. What is its supply of loanable
funds?
a. $30 billion
b. $40 billion
c. $50 billion
d. $80 billion
19. A country has private saving of $100 billion, public saving of -$30 billion, domestic investment of
$50 billion, and net capital outflow of $20 billion. What is its supply of loanable funds?
a. $50 billion
b. $70 billion
c. $90 billion
d. $120 billion
20. A country has output of $600 billion, consumption of $350 billion, government expenditures of $90
billion and investment of $60 billion. What is its supply of loanable funds?
a. $160 billion
b. $150 billion
c. $60 billion
d. $30 billion
21. A country has output of $900 billion, consumption of $600 billion, government expenditures of $150
billion and investment of $120 billion. What is its supply of loanable funds?
a. $30 billion
b. $90 billion
c. $120 billion
d. $150 billion
22. In an open economy, the source for the demand for loanable funds is
a. national saving.
b. national saving + net capital outflow.
c. investment
d. investment + net capital outflow
23. In an open economy, the source of the demand for loanable funds is
a. national saving
b. national saving + net capital outflow
c. investment + the government budget deficit
d. investment + net capital outflow
24. In an open economy, the demand for loanable funds comes from
a. only those who want to buy domestic capital goods.
b. only those who want to buy foreign assets.
c. those who want to buy either domestic capital goods or foreign assets.
d. None of the above is correct.
25. Other things the same, a decrease in the real interest rate
a. decreases the quantity of loanable funds demanded.
b. increases the quantity of loanable funds demand
c. shifts the demand for loanable funds to the right.
d. shifts the demand for loanable funds to the left.
26. In the open-economy macroeconomic model, the supply of loanable funds equals
a. national saving. The demand for loanable funds comes from domestic investment + net capital
outflow.
b. national saving. The demand for loanable funds comes only from domestic investment.
c. private saving. The demand for loanable funds comes from domestic investment + net capital
outflow.
d. private saving. The demand for loanable funds comes only from domestic investment.
27. In the open-economy macroeconomic model, the supply of loanable funds comes from
a. national saving. Demand comes from only domestic investment.
b. national saving. Demand comes from domestic investment and net capital outflow.
c. Only net capital outflow. Demand for loanable funds comes from national saving.
d. domestic investment and net capital outflow. Demand for loanable funds comes from national
saving.
28. In the open-economy macroeconomic model, the purchase of a capital asset by domestic
residents adds to the demand for loanable funds
a. only if the asset is located at home.
b. only if the asset is located abroad.
c. whether the asset is located at home or abroad.
d. None of the above is correct.
29. If a country has a positive net capital outflow, then
a. on net it is purchasing assets from abroad. This adds to its demand for domestically generated
loanable funds.
b. on net it is purchasing assets from abroad. This subtracts from its demand for domestically
generated loanable funds.
c. on net other countries are purchasing assets from it. This adds to its demand for domestically
generated loanable funds.
d. on net other countries are purchasing assets from it. This subtracts from its demand for
domestically generated loanable funds.
30. If a country has a negative net capital outflow, then
a. on net it is purchasing assets from abroad. This adds to its demand for domestically generated
loanable funds.
b. on net it is purchasing assets from abroad. This subtracts from its demand for domestically
generated loanable funds.
c. on net other countries are purchasing assets from it. This adds to its demand for domestically
generated loanable funds.
d. on net other countries are purchasing assets from it. This subtracts from its demand for
domestically generated loanable funds.
31. A U.S. grocery chain borrows money to buy a warehouse in Ohio and another in Italy. Borrowing
for which warehouse(s) is included in the demand for loanable funds in the U.S.?
a. both the one in Ohio and the one in Italy
b. only the one in Ohio
c. only the one in Italy
d. neither the one in Ohio nor the one in Italy
32. U.S. corporation Wright Air Conditions borrows funds to build a factory in the U.S. and a factory
in Mexico. Borrowing for factories in which location(s) is included in the U.S. demand for
loanable funds?
a. only the U.S.
b. only Mexico
c. Mexico and the U.S.
d. neither Mexico nor the U.S.
33. A country has national saving of $100 billion, government expenditures of $30 billion, domestic
investment of $80 billion, and net capital outflow of $20 billion. What is its demand for loanable
funds?
a. $60 billion
b. $70 billion
c. $100 billion
d. $120 billion
34. A country has national saving of $90 billion, government expenditures of $30 billion, domestic
investment of $50 billion, and net capital outflow of $40 billion. What is its demand for loanable
funds?
a. $40 billion
b. $60 billion
c. $90 billion
d. $130 billion
35. A country has domestic investment of $200 billion. Its citizens purchase $600 of foreign assets
and foreign citizens purchase $300 of its assets. What is national saving?
a. $400 billion
b. $500 billion
c. $600 billion
d. $800 billion
36. A country has private saving of $500 billion, public saving of -$100 billion, domestic investment of
$150 billion, and net capital outflow of $250 billion. What is its supply of loanable funds?
a. $650 billion
b. $600 billion
c. $400 billion
d. $350 billion
37. A country has GDP of $700 billion, consumption of $450 billion, government expenditures of $100
billion, and domestic investment of $200 billion. What is its supply of loanable funds?
a. $350 billion
b. $250 billion
c. $200 billion
d. $150 billion
38. Other things the same, 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.
39. A country has I = $200 billion, S = $400 billion, and purchased $600 billion of foreign assets, how
many of its assets did foreigners purchase?
a. $0
b. $200 billion
c. $400 billion
d. $800 billion
40. Other things the same, a decrease in the interest rate
a. reduces domestic investment which reduces the quantity of loanable funds supplied.
b. reduces domestic investment which reduces the quantity of loan funds demanded.
c. raises domestic investment which raises the quantity of loanable funds supplied.
d. raises domestic investment which raises the quantity of loanable funds demanded.
41. Other things the same, a decrease 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.
42. Other things the same, as the real interest rate rises
a. domestic investment and net capital outflow both rise.
b. domestic investment and net capital outflow both fall.
c. domestic investment rises and net capital outflow falls.
d. domestic investment falls and net capital outflow rises.
43. Other things the same, as the real interest rate falls
a. domestic investment and net capital outflow both rise.
b. domestic investment and net capital outflow both fall.
c. domestic investment rises and net capital outflow falls.
d. domestic investment falls and net capital outflow rises.
44. Other things the same, a decrease in the real interest rate raises the quantity of
a. domestic investment and net capital outflow.
b. domestic investment but not net capital outflow.
c. net capital outflow but not domestic investment.
d. neither domestic investment nor net capital outflow.
45. Other things the same, if the interest rate falls, then
a. firms will want to borrow more, which increases the quantity of loanable funds demanded.
b. firms will want to borrow less, which decreases the quantity of loanable funds demanded.
c. firms will want to borrow more, which increase the quantity of loanable funds supplied.
d. firms will want to borrow less, which decreases the quantity of loanable funds supplied.
46. Other things the same, an increase in the U.S. interest rate
a. raises net capital outflow which decreases the quantity of loanable funds demanded.
b. raises net capital outflow which increases the quantity of loanable funds demanded.
c. lowers net capital outflow which decreases the quantity of loanable funds demanded.
d. lowers net capital outflow which increases the quantity of loanable funds demanded.
