A Macroeconomic Theory of the Open Economy 7907
162. Which of the following will decrease U.S. net capital outflow?
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.
163. Which of the following is correct?
a. capital flight from the United States decreases net capital outflow
b. an increase in the government budget deficit creates no change in net capital outflow
c. if the U.S. imposes a restriction on imports, net capital outflow increases
d. None of the above is correct.
164. Which of the following is most likely to increase U.S. exports?
a. The government gives subsidies to U.S. firms that export goods or services.
b. The government reduces the size of the budget surplus.
c. The United States unilaterally reduces its restrictions on foreign imports.
d. Taxes on domestic saving rise.
7908 A Macroeconomic Theory of the Open Economy
165. Which of the following is most likely to increase the exports of a country?
a. The government gives subsidies to firms that export goods or services.
b. The government reduces the size of the budget surplus.
c. Political instability within the country increases modestly.
d. None of the above will increase exports.
166. Which of the following leads to an increase in net exports in the long run?
a. either a decrease in the budget deficit or imposing an import quota
b. a decrease in the budget deficit but not imposing an import quota
c. imposing an import quota but not a decrease in the budget deficit
d. neither a decrease in the budget deficit nor imposing an import quota
167. Which of the following is most likely to increase exports?
a. a reduction in domestic political instability
b. ending investment tax credits
c. a reduction in the size of the government‘s budget surplus
d. None of the above will increase exports.
A Macroeconomic Theory of the Open Economy 7909
168. Which of the following would do the most to reduce a trade deficit?
a. increase domestic saving
b. increase domestic political stability and respect of property rights
c. other countries reduce their trade restrictions
d. raise tariffs
169. If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate
a. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow
increases.
b. decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow
decreases.
c. increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow
decreases.
d. increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow
increases.
170. If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment
a. increases, and U.S. net capital outflow increases.
b. increases, and U.S. net capital outflow decreases.
c. decreases, and U.S. net capital outflow increases.
d. decreases, and U.S. net capital outflow decreases.
7910 A Macroeconomic Theory of the Open Economy
171. If government policy encouraged households to save more at each interest rate, then
a. the real exchange rate and net exports would rise.
b. the real exchange rate and net exports would fall.
c. the real exchange rate would rise and net exports would fall.
d. the real exchange rate would fall and net exports would rise.
172. If the government of India implemented a policy that decreased national saving, its real exchange
rate would
a. depreciate and Indian net exports would rise.
b. depreciate and Indian net exports would fall.
c. appreciate and Indian net exports would rise.
d. appreciate and Indian net exports would fall.
173. If a country repeals an investment tax credit,
a. net capital outflow and the real exchange rate rise.
b. net capital outflow rises and the real exchange rate falls.
c. net capital outflow falls and the real exchange rate rises.
d. net capital outflow and the real exchange rate fall.
A Macroeconomic Theory of the Open Economy 7911
174. During the financial crisis it was proposed that firms be provided with a tax credit for investment
projects. Such a tax credit would
a. shift both the demand for loanable funds and the supply of dollars in the market for foreign-
currency exchange right.
b. shift the demand for loanable funds right and shift the supply of dollars in the market for
foreign-currency exchange left.
c. shift the demand for loanable funds left and shift the supply of dollars in the market for
foreign-currency exchange right.
d. shift both the demand for loanable funds and the supply of dollars in the market for foreign–
currency exchange left.
175. During the financial crisis it was proposed that firms be provided with a tax credit for investment
projects. Such a tax credit would
a. raise both the interest rate and the real exchange rate.
b. raise the interest rate and reduce the real exchange rate.
c. reduce the interest rate and raise the real exchange rate.
d. reduce both the interest rate and the real exchange rate.
7912 A Macroeconomic Theory of the Open Economy
176. If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real
interest rate
a. increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow
decreases.
b. increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow
increases.
c. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow
decreases.
d. decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow
increases.
177. If the government of Venezuela made policy changes that increased national saving, the real
exchange rate of the peso would
a. depreciate and Venezuelan net exports would rise.
b. depreciate and Venezuelan net exports would fall.
c. appreciate and Venezuelan net exports would rise.
d. appreciate and Venezuelan net exports would fall.
A Macroeconomic Theory of the Open Economy 7913
178. If a country had capital flight, then the real exchange rate would
a. fall. To offset this fall the government could increase the budget deficit.
b. fall. To offset this fall the government could decrease the budget deficit.
c. rise. To offset this rise the government could increase the budget deficit.
d. rise. To offset this rise the government could decrease the budget deficit.
True/False and Short Answer
1. Over the past two decades, the U.S. has persistently exported more goods and services than it has
imported.
a. True
b. False
2. Over the past two decades the U.S. has persistently had trade deficits.
a. True
b. False
7914 A Macroeconomic Theory of the Open Economy
3. The primary focus of the open-economy macroeconomic model is the determination of GDP and
the price level.
a. True
b. False
4. In an open economy, the supply of loanable funds comes from national saving.
a. True
b. False
5. In the open economy model, the supply of loanable funds comes from national saving and net
capital outflow.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7915
6. In an open economy, the demand for loanable funds comes from both domestic investment and net
capital outflow.
a. True
b. False
7. Other things the same, if foreigners desire to purchase more U.S. bonds, then the demand for
loanable funds shifts left.
a. True
b. False
8. The purchase of a capital asset adds to the demand for loanable funds only if that asset is a
domestic one.
a. True
b. False
7916 A Macroeconomic Theory of the Open Economy
9. An increase in a country’s real interest rate reduces that country’s net capital outflow.
a. True
b. False
10. In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that
people (including government) want to save exactly balances desired domestic investment.
a. True
b. False
11. In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that
people (including government) want to save equals desired quantities of domestic investment and
net capital outflow.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7917
12. In the open-economy macroeconomic model, a higher domestic interest rate reduces the quantity
of loanable funds demanded
a. True
b. False
13. If the real interest rate were above the equilibrium rate, there would be a shortage of loanable
funds.
a. True
b. False
14. Net capital outflow represents the quantity of dollars supplied in the foreign-currency exchange
market.
a. True
b. False
7918 A Macroeconomic Theory of the Open Economy
15. In the open-economy macroeconomic model, net exports equal the quantity of dollars demanded
in the market for foreign currency exchange.
a. True
b. False
16. Other things the same, when the real exchange rate of the dollar appreciates, U.S. goods become
more desirable to U.S. residents, but less desirable to foreign residents.
a. True
b. False
17. Other things the same, a higher real exchange rate raises net exports.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7919
18. In the open-economy macroeconomic model, the supply of dollars in the market for foreign-
currency exchange is upward sloping.
a. True
b. False
19. Because depreciation of the real exchange rate of the dollar increases U.S. net exports, the
demand curve for dollars in the foreign-currency exchange market is downward sloping.
a. True
b. False
20. In the open-economy macroeconomic model, the supply curve of currency is vertical because the
quantity of currency supplied does not depend on the real exchange rate.
a. True
b. False
7920 A Macroeconomic Theory of the Open Economy
21. In the open-economy macroeconomic model, if there were a surplus in the market for foreign-
currency exchange, the real exchange rate would appreciate.
a. True
b. False
22. In the open-economy macroeconomic model, if there is currently a surplus in the foreign
exchange market, the quantity of desired net exports will increase as the market moves to
equilibrium.
a. True
b. False
23. In the open-economy macroeconomic model, other things the same, when a U.S. resident imports
a foreign good, the demand for dollars in the foreign-currency exchange market decreases.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7921
24. If C+I+G>Y, then net exports and net capital outflow are both greater than zero.
a. True
b. False
25. The key determinant of net capital outflow is the real interest rate.
a. True
b. False
26. An increase in the U.S. interest rate discourages Americans from buying foreign assets and
encourages foreigners to buy U.S. assets.
a. True
b. False
7922 A Macroeconomic Theory of the Open Economy
27. As the interest rate rises, it is possible that net capital outflow could move from a positive to a
negative value.
a. True
b. False
28. In the open-economy macroeconomic model, net capital outflow links the markets for loanable
funds and foreign- currency exchange.
a. True
b. False
29. In the open-economy macroeconomic model, the real exchange rate does not affect net capital
outflow.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7923
30. In the open-economy macroeconomic model, other things the same, an increase in the exchange
rate raises the quantity of dollars supplied in the market for foreign–currency exchange.
a. True
b. False
31. Other things the same, when a Canadian company imports bicycles from the U.S., the open-
economy macroeconomic model treats this transaction as part of the demand for dollars in the
U.S. foreign-currency exchange market.
a. True
b. False
32. When the government budget deficit increases, national saving decreases.
a. True
b. False
7924 A Macroeconomic Theory of the Open Economy
33. An increase in the government budget deficit shifts the demand for loanable funds to the right.
a. True
b. False
34. An increase in the government budget deficit shifts the supply of loanable funds to the left.
a. True
b. False
35. According to the open-economy macroeconomic model, if the U.S. government budget deficit
increases, then both U.S. domestic investment and U.S. net capital outflow decrease.
a. True
b. False
A Macroeconomic Theory of the Open Economy 7925
36. According to the open-economy macroeconomic model, if the U.S. government budget deficit
decreases, then both U.S. domestic investment and net capital outflow increase.
a. True
b. False
37. According to the open-economy macroeconomic model, a decrease in the U.S. government
budget deficit increases U.S. net capital outflow, causes the real exchange rate of the dollar to
depreciate, and increases U.S. net exports.
a. True
b. False
38. According to the open-economy macroeconomic model, if the United States moved from a
government budget deficit to a government budget surplus, U.S. real interest rates would increase
and the real exchange rate of the U.S. dollar would appreciate.
a. True
b. False
7926 A Macroeconomic Theory of the Open Economy
39. In the 1980s, both the U.S. government budget and U.S. trade deficits increased.
a. True
b. False
40. When a country imposes a trade restriction, the real exchange rate of that country’s currency
appreciates.
a. True
b. False
41. In the long run, import quotas increase net exports.
a. True
b. False