A Macroeconomic Theory of the Open Economy 7927
42. In the long run import quotas do not affect the size of net exports.
a. True
b. False
43. An import quota imposed by the U.S. would reduce U.S. imports, but have no impact on U.S.
exports.
a. True
b. False
44. Although trade policies do not affect a country’s overall trade balance, they do affect specific
firms and industries.
a. True
b. False
7928 A Macroeconomic Theory of the Open Economy
45. If policymakers impose import restrictions on clothing, the U.S. trade deficit will shrink.
a. True
b. False
46. Capital flight raises a country’s interest rate.
a. True
b. False
47. Capital flight shifts the NCO curve to the left.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7929
48. 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.
a. True
b. False
49. Capital flight raises a country’s real exchange rate.
a. True
b. False
50. If Argentina suffers from capital flight, Argentinean domestic investment and Argentinean net
exports will both decline.
a. True
b. False
7930 A Macroeconomic Theory of the Open Economy
51. A tax credit for purchases of capital goods causes the interest rate to increase and the exchange
rate to appreciate.
a. True
b. False
52. Why do higher real interest rates lead to lower net capital outflow?
53. 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
A Macroeconomic Theory of the Open Economy 7931
54. 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?
55. Explain how the relation between the real exchange rate and net exports explains the downward
slope of the demand for foreign-currency exchange curve.
7932 A Macroeconomic Theory of the Open Economy
56. How are the identities S = NCO + I and NCO = NX related to the foreign currency exchange
market and the loanable funds market?
57. 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.
58. 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?
A Macroeconomic Theory of the Open Economy 7933
59. 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.
60. 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.
7934 A Macroeconomic Theory of the Open Economy
61. What effect do protectionist policies have on the trade deficit?
62. 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?
A Macroeconomic Theory of the Open Economy 7935
63. What do trade policies do to the standard of living?
64. If a county becomes less likely to default on its bonds, what happens to that country’s interest
rate and exchange rate? Explain.
7936 A Macroeconomic Theory of the Open Economy
65. 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. net
capital
outflow
U.S. trade
balance
U.S.
government
budget deficit
U.S. imposes
import quotas
capital flight
from the United
States
A Macroeconomic Theory of the Open Economy 7937
Problems
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?
7938 A Macroeconomic Theory of the Open Economy
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.
A Macroeconomic Theory of the Open Economy 7939
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?
7940 A Macroeconomic Theory of the Open Economy
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 ______.