A Macroeconomic Theory of the Open Economy 7807
98. In the open-economy macroeconomic model, if net capital outflow increases then
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.
99. Which of the following would tend to shift the supply of dollars in the market for foreign–currency
exchange in the open–economy macroeconomic model to the right?
a. the exchange rate rises
b. the exchange rate falls
c. the expected rate of return on U.S. assets rises
d. the expected rate of return on U.S. assets falls
100. Other things the same, which of the following would shift the supply of dollars in the market for
foreign exchange to the right?
a. foreigners want to buy more U.S. bonds
b. foreigners want to buy fewer U.S. bonds
c. foreigners want to buy more U.S. goods and services.
d. foreigners want to buy fewer U.S. goods and services.
7808 A Macroeconomic Theory of the Open Economy
101. Which of the following would shift the supply of dollars in the market for foreign-currency
exchange of the open– economy macroeconomic model to the left?
a. the exchange rate rises
b. the exchange rate falls
c. the expected rate of return on U.S. assets rises
d. the expected rate of return on U.S. assets falls
102. Other things the same, if the expected return on U.S. assets increases, the
a. supply of dollars in the market for foreign-currency exchange shifts right.
b. supply of dollars in the market for foreign-currency exchange shifts left.
c. demand for dollars in the market for foreign-currency exchange shifts right
d. demand for dollars in the market for foreign-currency exchange shifts left.
103. At a given real exchange rate, which of the following, by itself, would increase the supply of
dollars in the market for foreign-currency exchange?
a. foreign citizens want to buy more U.S. bonds
b. U.S. citizens want to buy more foreign bonds
c. foreign citizens want to buy more U.S. goods
d. U.S. citizens want to buy more foreign goods
A Macroeconomic Theory of the Open Economy 7809
104. If at a given exchange rate foreign citizens want to buy fewer U.S bonds, then the
a. supply of dollars in the market for foreign-currency exchange shifts right.
b. supply of dollars in the market for foreign-currency exchange shifts left.
c. demand for dollars in the market for foreign-currency exchange shifts right.
d. demand for dollars in the market for foreign-currency exchange shifts left.
105. Which of the following is included in the demand for dollars in the market for foreign-currency
exchange in the open–economy macroeconomic model?
a. a company in Canada wants to buy oranges from the U.S
b. a Japanese banks want to buy bonds from the U.S. government
c. a U.S. citizen wants to buy stock a German company is selling
d. None of the above is correct.
106. The real exchange rate measures the
a. price of domestic currency relative to foreign currency.
b. price of domestic goods relative to the price of foreign goods.
c. rate of domestic and foreign interest.
d. None of the above is correct.
7810 A Macroeconomic Theory of the Open Economy
107. Which of the following make(s) demand for U.S. dollars in the market for foreign–currency
exchange higher than otherwise?
a. a U.S. airline wanting buy jets made in France and a Swedish hospital wanting to buy medical
equipment made in the U.S.
b. a U.S. airline wanting to buy jets made in France, but not a Swedish hospital wanting to buy
medical equipment made in the U.S.
c. a Swedish hospital wanting to buy medical equipment made in the U.S., but not a U.S. airline
wanting to buy jets made in France
d. neither a U.S. bank wanting to lend money to a Canadian company nor a U.S. firm wanting to
buy computers made in South Korea
108. When the real exchange rate for the dollar appreciates, U.S. goods become
a. less expensive relative to foreign goods, which makes exports rise and imports fall.
b. less expensive relative to foreign goods, which makes exports fall and imports rise.
c. more expensive relative to foreign goods, which makes exports rise and imports fall.
d. more expensive relative to foreign goods, which makes exports fall and imports rise.
A Macroeconomic Theory of the Open Economy 7811
109. When the real exchange rate for the dollar depreciates, U.S. goods become
a. less expensive relative to foreign goods, which makes exports rise and imports fall.
b. less expensive relative to foreign goods, which makes exports fall and imports rise.
c. more expensive relative to foreign goods, which makes exports rise and imports fall.
d. more expensive relative to foreign goods, which makes exports fall and imports rise.
110. When the U.S. real exchange rate appreciates, U.S. goods become
a. more attractive to consumers in the U.S. and abroad.
b. more attractive to consumers in the U.S. and less attractive to consumers abroad.
c. less attractive to consumers in the U.S. and abroad.
d. less attractive to consumers in the U.S. and more attractive to consumers abroad.
111. In the open-economy macroeconomic model, as the exchange rate rises,
a. desired net exports fall, so the quantity of dollars supplied rise.
b. desired net exports fall, so the quantity of dollars demanded falls.
c. desired net exports rise ,so the quantity of dollars supplied falls.
d. desired net exports rise, so the quantity of dollars demanded rises.
7812 A Macroeconomic Theory of the Open Economy
112. Other things the same, if the U.S. real exchange rate depreciated, then U.S. net exports would
a. fall and the quantity of dollars demanded in the market for foreign-currency exchange would
fall.
b. fall and the quantity of dollars demanded in the market for foreign-currency exchange would
rise.
c. rise and the quantity of dollars demanded in the market for foreign–currency exchange would
fall.
d. rise and the quantity of dollars demanded in the market for foreign-currency exchange would
rise.
113. The theory of purchasing-power parity implies that the demand curve for foreign-currency
exchange is
a. downward sloping.
b. upward sloping.
c. horizontal.
d. vertical.
A Macroeconomic Theory of the Open Economy 7813
114. In the open-economy macroeconomic model, if for some reason foreign citizens want to
purchase more U.S. goods and services at each exchange rate, then
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.
115. Which of the following would shift the demand for dollars in the market for foreign currency
exchange to the right?
a. foreign citizens want to buy more U.S. goods and services at a given exchange rate
b. foreign citizens want to buy fewer U.S. goods and services at a given exchange rate
c. foreign citizens want to buy more U.S. bonds
d. foreign citizens want to by fewer U.S. bonds
116. In the open-economy macroeconomic model, the demand for dollars shifts right if at any given
exchange rate
a. foreign residents want to buy more U.S. goods and services.
b. U.S. residents want to buy fewer foreign goods and services.
c. Both A and B are correct.
d. None of the above is correct.
7814 A Macroeconomic Theory of the Open Economy
117. In the open economy macroeconomic model, the amount of dollars demanded in the market for
foreign-currency exchange at a given real exchange rate increases if
a. either U.S. imports or exports increase.
b. either U.S. imports or exports decrease.
c. either U.S. imports increase or U.S. exports decrease.
d. either U.S. imports decrease or U.S. exports increase.
118. In the open-economy macroeconomic model, the quantity of dollars demanded in the market for
foreign-currency exchange
a. depends on the real exchange rate. The quantity of dollars supplied in the foreign-exchange
market depends on the real interest rate.
b. depends on the real interest rate. The quantity of dollars supplied in the foreign-exchange
market depends on the real exchange rate.
c. and the quantity of dollars supplied in the market for foreign-currency exchange depend on
the real exchange rate.
d. and the quantity of dollars supplied in the market for foreign-currency exchange depend on
the real interest rate.
A Macroeconomic Theory of the Open Economy 7815
119. In the open-economy macroeconomic model, a higher U.S. real exchange rate makes
a. U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars
supplied.
b. U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars
demanded.
c. foreign goods more expensive relative to U.S. goods and reduces the quantity of dollars
supplied.
d. foreign goods more expensive relative to U.S. goods and reduces the quantity of dollars
demanded.
120. In the open–economy macroeconomic model, equilibrium in the market for foreign–currency
exchange is determined by the equality between the supply of dollars which comes from
a. U.S. national saving and the demand for dollars for U.S. net exports.
b. U.S. net capital outflow and the demand for dollars for U.S. net exports.
c. domestic investment and the demand for U.S. net exports.
d. foreign demand for U.S. goods and services and U.S. demand for foreign goods and services.
7816 A Macroeconomic Theory of the Open Economy
121. In the open economy macroeconomic model, the price that balances supply and demand in the
market for foreign- currency exchange model is the
a. nominal exchange rate.
b. nominal interest rate.
c. real exchange rate.
d. real interest rate.
122. Other things the same, in the open-economy macroeconomic model, if the exchange rate rises,
a. the demand for dollars shifts left.
b. the demand for dollars shifts right.
c. the quantity of dollars demanded falls.
d. the quantity of dollars demanded rises.
A Macroeconomic Theory of the Open Economy 7817
123. In the open-economy macroeconomic model, the
a. exchange rate adjusts to equate private saving with the sum of investment, net exports, and net
capital outflow.
b. exchange rate adjusts to equate national saving with the sum of investment and net capital
outflow.
c. interest rate adjusts to equate private saving with the sum of investment, net exports, and net
capital outflow.
d. interest rate adjusts to equate national saving with the sum of investment and net capital
outflow.
124. Suppose the real exchange rate is such that the market for foreign-currency exchange has a
surplus. This surplus will lead to
a. an appreciation of the dollar, an increase in U.S. net exports, and so an increase in the quantity
of dollars demanded in the foreign exchange market.
b. an appreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity
of dollars demanded in the foreign exchange market.
c. a depreciation of the dollar, an increase in U.S. net exports, and so an increase in the quantity
of dollars demanded in the foreign exchange market.
d. a depreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity
of dollars demanded in the foreign exchange market.
7818 A Macroeconomic Theory of the Open Economy
125. If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars
supplied in the market for foreign-currency exchange is
a. greater than the quantity demanded and the dollar will appreciate.
b. greater than the quantity demanded and the dollar will depreciate.
c. less than the quantity demanded and the dollar will appreciate.
d. less than the quantity demanded and the dollar will depreciate.
126. If the real exchange rate for the dollar is below the equilibrium level, the quantity of dollars
supplied in the market for foreign-currency exchange is
a. less than the quantity demanded and the dollar will appreciate.
b. less than the quantity demanded and the dollar will depreciate.
c. greater than the quantity demanded and the dollar will appreciate.
d. greater than the quantity demanded and the dollar will depreciate.
127. In the open-economy macroeconomic model, if there is a surplus in the market for foreign-
currency exchange, which of the following will move the market to equilibrium?
a. the real exchange rate depreciates and net exports fall.
b. the real exchange rate depreciates and net exports rise.
c. the real exchange rate appreciates and net exports fall.
d. the real exchange rate appreciates and net exports rise.
A Macroeconomic Theory of the Open Economy 7819
128. Which of the following is consistent with moving from a shortage to equilibrium in the market for
foreign currency exchange?
a. the exchange rate falls so foreign residents want to buy more U.S. goods and services
b. the exchange rate falls so foreign residents want to buy fewer U.S. goods and services
c. the exchange rate rises so foreign residents want to buy more U.S. goods and services
d. the exchange rate rises so foreign residents want to buy fewer U.S. goods and services
129. Which of the following is consistent with moving from a surplus to equilibrium in the market for
foreign currency exchange?
a. the exchange rate falls causing U.S. residents to import more
b. the exchange rate falls causing U.S. residents to import less
c. the exchange rate rises causing U.S. residents to import more
d. the exchange rate rises causing U.S. residents to import less
130. Which of the following is consistent with moving from a surplus to equilibrium in the market for
foreign–currency exchange?
a. the exchange rate appreciates making domestic goods relatively more expensive.
b. the exchange rate appreciates making domestic goods relatively less expensive.
c. the exchange rate depreciates making domestic goods relatively more expensive.
d. the exchange rate depreciates making domestic goods relatively less expensive.
7820 A Macroeconomic Theory of the Open Economy
Figure 32-2
131. Refer to Figure 32-2. What are the equilibrium values of the real exchange rate and net
exports?
a. 1, 300
b. .8, 400
c. .6, 500
d. None of the above are correct.
132. Refer to Figure 32-2. If the real exchange rate is 1, then there is a
a. surplus of 100 so the real exchange rate will fall.
b. surplus of 100 so the real exchange rate will rise.
c. shortage of 100 so the real exchange rate will fall.
d. shortage of 100 so the real exchange rate will rise.
A Macroeconomic Theory of the Open Economy 7821
133. Refer to Figure 32-2. At what real exchange rate is the quantity of dollars demanded equal to
500?
a. 1
b. .8
c. .6
d. None of the above are correct.
134. If the demand for dollars in the market for foreign-currency exchange shifts left, then the
exchange rate
a. rises and the quantity of dollars exchanged rises.
b. rises and the quantity of dollars exchanged does not change.
c. falls and the quantity of dollars exchanged falls.
d. falls and the quantity of dollars exchanged does not change.
135. If the demand for dollars in the market for foreign-currency exchange shifts right, then the
exchange rate
a. rises and the quantity of dollars exchanged rises.
b. rises and the quantity of dollars exchanged does not change.
c. falls and the quantity of dollars exchanged falls.
d. falls and the quantity of dollars exchanged does not change.
7822 A Macroeconomic Theory of the Open Economy
136. If the supply of dollars in the market for foreign-currency exchange shifts left, then the
exchange rate
a. rises and the quantity of dollars exchanged falls.
b. rises and the quantity of dollars exchanged does not change.
c. rises and the quantity of dollars exchanged rises.
d. falls and the quantity of dollars exchanged does not change.
137. If the supply of dollars in the market for foreign-currency exchange shifts right, then the
exchange rate
a. rises and the quantity of dollars exchanged falls.
b. rises and the quantity of dollars exchanged does not change.
c. falls and the quantity of dollars exchanged rises.
d. falls and the quantity of dollars exchanged does not change.
A Macroeconomic Theory of the Open Economy 7823
138. If for some reason Americans desired to increase their purchases of foreign assets, then other
things the same
a. both the real exchange rate and the quantity of dollars exchanged in the market for foreign-
currency exchange would fall.
b. both the real exchange rate and the quantity of dollars exchanged in the market for foreign–
currency would rise.
c. the real exchange rate would rise and the quantity of dollars exchanged in the market for
foreign-currency would fall.
d. the real exchange rate would fall and the quantity of dollars exchanged in the market for
foreign-currency would rise.
139. If for some reason Americans desired to decrease their purchases of foreign assets, then other
things the same
a. both the real exchange rate and the quantity of dollars exchanged in the market for foreign-
currency exchange would fall.
b. both the real exchange rate and the quantity of dollars exchanged in the market for foreign–
currency would rise.
c. the real exchange rate would rise and the quantity of dollars exchanged in the market for
foreign-currency would fall.
d. the real exchange rate would fall and the quantity of dollars exchanged in the market for
foreign-currency would rise.
7824 A Macroeconomic Theory of the Open Economy
140. If at a given exchange rate U.S. citizens wanted to buy more foreign bonds
a. the demand for dollars in the market for foreign-currency exchange would shift right.
b. the demand for dollars in the market for foreign-currency exchange would shift 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.
Multiple Choice – Section 02: Equilibrium in the Open Economy
1. Which of the following is always correct in an open economy?
a. S = I
b. S = NX + NCO
c. S = NCO
d. S = I + NCO
A Macroeconomic Theory of the Open Economy 7825
2. If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign
residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion
euros, what is the quantity of euros demanded in the market for foreign-currency exchange?
a. 1,100 billion euros
b. 600 billion euros
c. 500 billion euros
d. 200 billion euros
3. In the open-economy macroeconomic model, the key determinant of net capital outflow is the
a. nominal exchange rate.
b. nominal interest rate.
c. real exchange rate.
d. real interest rate.
4. When the U.S. real interest rate falls, purchasing U.S. assets becomes
a. more attractive to both U.S. and foreign residents.
b. more attractive to U.S. residents and less attractive to foreign residents.
c. less attractive to U.S. residents and more attractive to foreign residents.
d. less attractive to both U.S. residents and foreign residents.
7826 A Macroeconomic Theory of the Open Economy
5. When the U.S. real interest rate falls
a. U.S. purchases of foreign assets and foreign purchases of U.S. assets rise
b. U.S. purchases of foreign assets rise and foreign purchases of U.S. assets fall
c. U.S. purchases of foreign assets fall and foreign purchases of U.S. assets rise
d. U.S. purchases of foreign assets and foreign purchases of U.S. assets fall
6. When the U.S. real interest rate falls, purchasing U.S. assets becomes
a. less attractive and so U.S. net capital outflow rises.
b. less attractive and so U.S. net capital outflow falls.
c. more attractive and so U.S. net capital outflow rises.
d. more attractive and so U.S. net capital outflow falls.
7. In the open–economy macroeconomic model, the key determinant of net capital outflow is
a. the real exchange rate. When the real exchange rate rises, net capital outflow rises.
b. the real exchange rate. When the real exchange rate rises, net capital outflow falls.
c. the real interest rate. When the real interest rate rises, net capital outflow rises.
d. the real interest rate. When the real interest rate rises, net capital outflow falls.