A Macroeconomic Theory of the Open Economy 7827
8. In the open–economy macroeconomic model, which of the following increases net capital outflow?
a. a fall in the real exchange rate, but not a fall in the real interest rate
b. a fall in the real interest rate, but not a fall in the real exchange rate
c. both a fall in the real exchange rate and a fall in the real interest rate
d. neither a fall in the real exchange rate nor a fall in the real interest rate
9. In the open–economy macroeconomic model, net capital outflow rises if
a. either the exchange rate rises or the real interest rate falls.
b. either the exchange rate falls or the real interest rate rises.
c. the real interest rate rises. Net capital outflow does not depend on the exchange rate.
d. the real interest rate falls. Net capital outflow does not depend on the exchange rate.
10. Which of the following is correct concerning the open–economy macroeconomic model?
a. The net-capital-outflow curve slopes upward.
b. The key determinant of net capital outflow is the real exchange rate.
c. The supply of dollars in the market for foreign-currency exchange is vertical.
d. None of the above is correct.
7828 A Macroeconomic Theory of the Open Economy
11. If the exchange rate falls, U.S. residents pay
a. more dollars for foreign bonds and get more dollars from interest payments.
b. more dollars for foreign bonds but get fewer dollars from interest payments.
c. fewer dollars for foreign bonds and also get fewer dollars from interest payments.
d. fewer dollars for foreign bonds but get more dollars from interest payments.
12. If the exchange rate rises, which of the following falls in the open-economy macroeconomic
model?
a. desired net exports and desired net capital outflow
b. desired net exports but not desired net capital outflow
c. desired net capital outflow but not desired net exports
d. neither desired net exports nor desired net capital outflow
13. In the open-economy macroeconomic model, if a country’s interest rate rises, then its
a. net capital outflow and net exports rise.
b. net capital outflow rises and its net exports fall.
c. net capital outflow falls and its net exports rise.
d. net capital outflow and net exports fall.
A Macroeconomic Theory of the Open Economy 7829
14. In the open-economy macroeconomic model, if a country’s interest rate falls, then its
a. net capital outflow and its net exports rise.
b. net capital outflow rises and its net exports fall.
c. net capital outflow falls and its net exports rise.
d. net capital outflow and its net exports fall.
15. The variable that links the market for loanable funds and the market for foreign-currency
exchange is
a. net capital outflow.
b. national saving.
c. exports.
d. domestic investment.
16. Other things the same, if the Japanese real interest rate were to increase, Japanese net capital
outflow
a. and net capital outflow of other countries would rise.
b. and net capital outflow of other countries would fall.
c. would rise, while net capital outflow of other countries would fall.
d. would fall, while net capital outflow of other countries would rise.
7830 A Macroeconomic Theory of the Open Economy
17. U.S. net capital outflow
a. is a source of the supply of loanable funds, and the source of the supply of dollars in the foreign
exchange market.
b. is a source of the supply of loanable funds, and a source of the demand for dollars in the
foreign exchange market.
c. is a part of the demand for loanable funds, and the source of the supply of dollars in the foreign
exchange market.
d. is a part of the demand for loanable funds, and a source of the demand for dollars in the foreign
exchange market.
18. If a U.S. resident purchases a foreign bond, her transactions are included
a. in the U.S. supply of loanable funds and the supply of dollars in the market for foreign-
currency exchange.
b. in the U.S. supply of loanable funds and the demand for dollars in the market for foreign–
currency exchange.
c. in the U.S. demand for loanable funds and the supply of dollars in the market for foreign–
currency exchange.
d. in the U.S. demand for loanable funds and the demand for dollars in the market for foreign-
currency exchange.
A Macroeconomic Theory of the Open Economy 7831
19. The quantity of U.S. bonds foreigners want to buy is taken into account
a. in the U.S. supply of loanable funds and the supply of dollars in the market for foreign-
currency exchange.
b. in the U.S. supply of loanable funds and the demand for dollars in the market for foreign–
currency exchange.
c. in the U.S. demand for loanable funds and the supply of dollars in the market for foreign–
currency exchange.
d. in the U.S. demand for loanable funds and the demand for dollars in the market for foreign-
currency exchange.
20. A U.S. bank wants to buy euros in order to buy German bonds. In the open–economy
macroeconomic model, this transaction would be part of
a. the supply of currency in the foreign exchange market, and part of the supply of loanable funds.
b. the demand for currency in the foreign exchange market, and part of the supply of loanable
funds.
c. the supply of currency in the foreign exchange market, and part of the demand for loanable
funds.
d. the demand for currency in the foreign exchange market, and part of the demand for loanable
funds.
7832 A Macroeconomic Theory of the Open Economy
21. A German company wants to buy dollars to purchase U.S. bonds. In the open-economy
macroeconomic model of the U.S., this transaction would be accounted for in
a. the supply of currency in the foreign exchange market, and the supply of loanable funds.
b. the supply of currency in the foreign exchange market, and the demand for loanable funds.
c. the demand for currency in the foreign exchange market, and the supply of loanable funds.
d. the demand for currency in the foreign exchange market, and the demand for loanable funds.
22. In the open-economy macroeconomic model, if the U.S. interest rate rises, then U.S.
a. net capital outflow rises, so the supply of dollars in the market for foreign exchange shifts right.
b. net capital outflow rises, so the demand for dollars in the market for foreign exchange shifts
right.
c. net capital outflow falls, so the supply of dollars in the market for foreign exchange shifts left.
d. net capital outflow falls, so the demand for dollars in the market for foreign exchange shifts left.
A Macroeconomic Theory of the Open Economy 7833
23. In the open-economy macroeconomic model, if foreign interest rates rise and the U.S interest rate
stays the same then, U.S.
a. net capital outflow rises, so the supply of dollars in the market for foreign exchange shifts right.
b. net capital outflow rises, so the demand for dollars in the market for foreign exchange shifts
right.
c. net capital outflow falls, so the supply of dollars in the market for foreign exchange shifts left.
d. net capital outflow falls, so the demand for dollars in the market for foreign exchange shifts left.
24. In the open-economy macroeconomic model, a decrease in the domestic interest rate shifts
a. demand in the market for foreign-currency exchange to the right.
b. demand in the market for foreign-currency exchange to the left.
c. supply in the market for foreign-currency exchange to the right.
d. supply in the market for foreign-currency exchange to the left.
25. Other things the same, in the open-economy macroeconomic model, which of the following would
make China’s net capital outflow increase?
a. an increase in U.S. interest rates
b. an increase in Chinese interest rates
c. an appreciation of the Chinese yuan
d. None of the above is correct.
7834 A Macroeconomic Theory of the Open Economy
26. If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the
exchange rate
a. and the quantity of dollars traded rises.
b. rises and the quantity of dollars traded falls.
c. falls and the quantity of dollars traded rises.
d. and the quantity of dollars traded falls.
27. If U.S. residents want to buy more foreign bonds, then in the market for foreign-currency
exchange the exchange rate
a. and the quantity of dollars traded rises.
b. rises and the quantity of dollars traded falls.
c. falls and the quantity of dollars traded rises.
d. and the quantity of dollars traded falls.
28. In the open-economy macroeconomic model, if a country‘s interest rate rises, its net capital
outflow
a. rises and the real exchange rate rises.
b. falls and the real exchange rate falls.
c. rises and the real exchange rate falls.
d. falls and the real exchange rate rises.
A Macroeconomic Theory of the Open Economy 7835
29. In the open–economy macroeconomic model, if the supply of loanable funds shifts right, then
a. net capital outflow increases so the demand for dollars in the market for foreign–currency
exchange shifts right.
b. net capital outflow increases so the supply of dollars in the market for foreign-currency
exchange shifts right.
c. net capital outflow decreases so the demand for dollars in the market for foreign-currency
exchange shifts left.
d. net capital outflow decreases so the supply of dollars in the market for foreign-currency
exchange shifts right.
30. In the open–economy macroeconomic model, if the supply of loanable funds shifts right, then
a. the supply of dollars in the market for foreign-currency exchange shifts left.
b. the supply of dollars in the market for foreign-currency exchange shifts right.
c. the demand for dollars in the market for foreign-currency exchange shifts left.
d. the demand for dollars in the market for foreign-currency exchange shifts right.
7836 A Macroeconomic Theory of the Open Economy
31. In the open-economy macroeconomic model, if a country’s supply of loanable funds shifts right,
then
a. net capital outflow rises, so the exchange rate rises.
b. net capital outflow rises, so the exchange rate falls.
c. net capital outflow falls, so the exchange rate rises.
d. net capital outflow falls, so the exchange rate falls.
32. In the open-economy macroeconomic model, if the supply of loanable funds increases, then the
interest rate
a. and the real exchange rate increase.
b. and the real exchange rate decrease.
c. increases and the real exchange rate decreases.
d. decreases and the real exchange rate increases.
33. In the open-economy macroeconomic model, if the supply of loanable funds increases, net capital
outflow
a. and the real exchange rate increase.
b. and the real exchange rate decrease.
c. increases and the real exchange rate decreases.
d. decreases and the real exchange rate increases.
A Macroeconomic Theory of the Open Economy 7837
34. In the open–economy macroeconomic model, if the supply of loanable funds shifts right
a. the interest rate rises and the demand for dollars in the market for foreign currency exchange
shifts right.
b. the interest rate rises and the demand for dollars in the market for foreign currency exchange
shifts left.
c. the interest rate falls and the supply of dollars in the market for foreign-currency exchange
shifts right.
d. the interest rate falls and the supply of dollars in the market for foreign currency exchange
shifts left.
35. In the open–economy macroeconomic model, if the supply of loanable funds shifts left
a. the interest rate rises and the supply of dollars in the market for foreign currency exchange
shifts right.
b. the interest rate rises and the supply of dollars in the market for foreign currency exchange
shifts left.
c. the interest rate falls and the demand for dollars in the market for foreign currency exchange
shifts right.
d. the interest rate falls and the demand for dollars in the market for foreign currency exchange
shifts left.
7838 A Macroeconomic Theory of the Open Economy
36. In the open-economy macroeconomic model, if investment demand decreases, then
a. the supply of dollars in the market for foreign-currency exchange shifts left.
b. the supply of dollars in the market for foreign-currency exchange shifts right.
c. the demand for dollars in the market for foreign-currency exchange shifts left.
d. the demand for dollars in the market for foreign-currency exchange shifts right.
37. In the open-economy macroeconomic model, if investment demand increases, then
a. net exports and the real exchange rate rise.
b. net exports rise and the real exchange rate falls.
c. net exports fall and the real exchange rate rises.
d. net exports and the real exchange rate fall.
38. If the demand for net exports rises, which of the following happens in the open-economy
macroeconomic model?
a. the exchange rate rises
b. the interest rate falls
c. net capital outflow rises
d. All of the above are correct.
A Macroeconomic Theory of the Open Economy 7839
39. In the open-economy macroeconomic model, other things the same, which of the following both
make the exchange rate fall?
a. U.S. investment demand falls and foreign demand for U.S. goods falls
b. U.S. investment demand falls and foreign demand for U.S. goods rises
c. U.S. investment demand rises and foreign demand for U.S. goods falls
d. U.S. investment demand rises and foreign demand for U.S. goods rises
7840 A Macroeconomic Theory of the Open Economy
Figure 32–3
Refer to this diagram of the open-economy macroeconomic model to answer the questions below.
40. Refer to Figure 32-3. National saving is represented by the
a. demand curve in panel a.
b. demand curve in panel c.
c. supply curve in panel a.
d. supply curve in panel c.
A Macroeconomic Theory of the Open Economy 7841
41. Refer to Figure 32-3. Domestic investment plus net capital outflow is represented by the
a. demand curve in panel a.
b. demand curve in panel c.
c. supply curve in panel a.
d. None of the above is correct.
42. Refer to Figure 32-3. At an interest rate of 4 percent, the diagram indicates that
a. there is a surplus in the market for foreign-currency exchange.
b. national saving equals domestic investment.
c. net capital outflow + domestic investment = national saving.
d. in the market for foreign-currency exchange the quantity of dollars supplied equals the quantity
of dollars demanded.
43. Refer to Figure 32-3. The curve in panel b shows that as the interest rate rises,
a. domestic investment declines.
b. net capital outflow declines.
c. net capital outflow and domestic investment decline.
d. None of the above is correct.
7842 A Macroeconomic Theory of the Open Economy
44. Refer to Figure 32-3. Which curve is determined by net capital outflow only?
a. the demand curve in panel a.
b. the demand curve in panel c.
c. the supply curve in panel a.
d. the supply curve in panel c.
45. Refer to Figure 32-3. Which curve shows the relation between the exchange rate and net
exports?
a. the demand curve in panel a.
b. the demand curve in panel c.
c. the supply curve in panel a.
d. the supply curve in panel c.
46. If U.S. residents chose to travel overseas less due to concerns about the safety of foreign travel,
then in the open– economy macroeconomic model
a. the demand for dollars in the market for foreign-currency exchange shifts right.
b. the demand for dollars in the market for foreign–currency exchange shifts left.
c. the supply of dollars in the market for foreign-currency exchange shifts right.
d. the supply of dollars in the market for foreign-currency exchange shifts left.
A Macroeconomic Theory of the Open Economy 7843
Multiple Choice – Section 03: How Policies and Events Affect an Open Economy
1. If a country raises its budget deficit, then its
a. net capital outflow and net exports rise.
b. net capital outflow rises and net exports fall.
c. net capital outflow falls and net exports rise.
d. net capital outflow and net exports fall.
2. Because a government budget deficit represents
a. negative public saving, it increases national saving.
b. negative public saving, it decreases national saving.
c. positive public saving, it increases national saving.
d. positive public saving, it decreases national saving.
3. If a government has a budget surplus, then public saving
a. is positive and increases national saving.
b. is positive but decreases national saving.
c. is negative and decreases national saving.
d. is negative but increases national saving.
7844 A Macroeconomic Theory of the Open Economy
4. When a government increases its budget deficit, then that country’s
a. supply of loanable funds shifts right.
b. supply of loanable funds shifts left.
c. demand for loanable funds shifts right.
d. demand for loanable funds shifts left.
5. If a country raises its budget deficit then
a. both its supply of and demand for loanable funds shift.
b. its supply of but not its demand for loanable funds shifts.
c. its demand for but not its supply of loanable funds shifts.
d. neither its supply nor its demand for loanable funds shift.
6. A rise in the budget deficit
a. shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars
in the market for foreign-currency exchange right.
b. shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars
in the market for foreign-currency exchange left.
c. shifts both the demand for loanable funds in the market for loanable funds and the demand for
dollars in the market for foreign-currency exchange right.
d. shifts both the demand for loanable funds in the market for loanable funds and the demand for
dollars in the market for foreign-currency exchange left.
A Macroeconomic Theory of the Open Economy 7845
7. Suppose that India has a government budget surplus, and then goes into deficit. This change would
a. increase India’s national saving and shift its supply of loanable funds left.
b. increase India’s national saving and shift its demand for loanable funds right.
c. decrease India’s national saving and shift its supply of loanable funds left.
d. decrease India’s national saving and shift its demand for loanable funds right.
8. An increase in the budget deficit makes domestic interest rates
a. rise because the supply of loanable funds shifts left.
b. fall because the supply of loanable funds shifts left.
c. rise because the demand for loanable funds shifts right.
d. fall because the demand for loanable funds shifts right.
9. If a country went from a government budget deficit to a surplus, national saving would
a. increase, shifting the supply of loanable funds right.
b. increase, shifting the supply of loanable funds left.
c. decrease, shifting the demand for loanable funds right.
d. decrease, shifting the demand for loanable funds left.
7846 A Macroeconomic Theory of the Open Economy
10. An increase in the U.S. government budget deficit shifts the
a. demand for loanable funds right and decreases investment spending.
b. supply of loanable funds right and increases investment spending.
c. supply of loanable funds left and decreases investment spending.
d. None of the above is correct.
11. An increase in a country’s budget surplus shifts its
a. demand for loanable funds right and decreases investment spending.
b. supply of loanable funds right and increases investment spending.
c. supply of loanable funds left and decreases investment spending.
d. None of the above is correct.
12. An increase in the budget deficit causes domestic interest rates
a. and investment to rise.
b. to rise and investment to fall.
c. to fall and investment to rise.
d. and investment to fall.