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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?
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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?
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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.
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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
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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?
7946 A Macroeconomic Theory of the Open Economy
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?
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?
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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?
Budget Reform
Due to concerns about a rising level of debt relative to GDP, Congress and the President cut
expenditures and raise taxes.
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?
7948 A Macroeconomic Theory of the Open Economy
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?
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Shoe Quota
Concerns raised about the declining U.S. shoe industry and unfair labor practices in foreign shoe
factories lead the Congress and President to impose a quota on shoe imports.
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.
7950 A Macroeconomic Theory of the Open Economy
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?
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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?
7952 A Macroeconomic Theory of the Open Economy
50. Refer to Depositors Move Funds Out of Greek Banks. What happened to domestic
investment? Why?
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?
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?
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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?
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?
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?