Econ 102 Chapter 6

In an open economy:

a trade deficit may be good or bad

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______

decrease ; decrease

In a small open economy with perfect capital mobility, the real interest rate will always be:

equal the world interest rate

Two reasons why capital may not flow to poor countries are that the poorer countries may:

have inferior production capabilities and not enforce property rights

If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______.

positive ; positive

Holding other factors constant, legislation to cut taxes in an open economy will:

reduce national saving and lead to a trade deficit

In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:

rises and net exports fall

In the small open economy in equilibrium:

saving is fixed, and investment is determined by the investment function and the world interest rate

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals

-$10 billion

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good

2.5

A country's exports may be written as equal to

GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.

If the purchasing-power parity theory is true, then:

all changes in nominal exchange rate result from changes in the price level

Net exports equal GDP minus domestic spending on

all goods and services

An appreciation of the real exchange rate in a small open economy could be the result of:

an increase in government spending

If the number of dollars per yen rises, this is called a(n):

appreciation of the yen

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is ______ and net capital outflow equals ______

balanced ; $0

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which:

capital is relatively scarce

A shrinking U.S. budget deficit in the 1990s coincided with a ______ U.S. trade deficit.

continuing

Net capital outflow in a large country:

declines as the domestic interest rate rises

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______

decreases ; appreciates

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow

deficit ; negative

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow

deficit ; negative

In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out; the expansion also causes a trade

deficit and a rise in the real exchange rate

One consequence of high inflation is a(n):

depreciation nominal exchange rate

Protectionist policies in a small open economy do not alter the trade balance because the:

exchange rate appreciates to offset the increase in net exports

When the real exchange rate rises:

exports will decrease and imports will increase

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the

foreign inflation rate minus the domestic inflation rate

Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports

may increase or decrease

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow

surplus ; positive

A depreciation of the real exchange rate in a small open economy could be the result of:

the expiration of an investment tax-credit provision

If net capital outflow is positive then

the trade balance must be positive

An "open" economy is one in which

there is trade in goods and services with the rest of the world

If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 lire now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then

traveling in chile is more expensive now than it was ten years ago

The adoption of an investment tax credit in a small open economy is likely to lead to:

An increase in domestic investment but no change in domestic saving in a small open economy

If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost

20 pesos

Which of the following would decrease the real exchange rate in a small open economy in the long run?

a reduction in government spending

(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r3, then the economy has

a trade deficit

(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r1, then the economy has:

a trade surplus

An increase in the trade deficit of a small open economy could be the result of:

an increase in government spending

In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net exports

and the real exchange rate remain unchanged

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to ______, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to ______

appreciate ; depreciate

The law of one price is enforced by:

arbitrageurs

If the real exchange rate is high, foreign goods:

are relatively cheap and domestic goods relatively expensive

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

borrowing from abroad

A trade deficit can be financed in all of the following ways except by:

borrowing from domestic lenders

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase

exports by the small open economy

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate

falls and net exports rise

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate

falls and net exports rises

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

falls, while the real exchange rate rises and net exports rise

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a

horizontal line at the world interest rate

A statement that is generally true about capital in a large open economy is that it is:

not perfectly mobile, but the country influences world financial markets

If the real exchange rate decreases, then net exports will _____.

increase

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______ and U.S. imports ______

increase ; decrease

In a small open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant

increase ; decrease

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____

increase ; decrease

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______

increase ; depreciates

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______

increase ; increase

the real exchange rate

is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level

Building an economic model based on the assumption of a small open economy is useful because:

this underlying assumption can assist our understanding and intuition of open economy macroeconomics

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a

vertical line at 0

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was ______ than the expansionary shift in the U.S. investment function, resulting in a trade ______

weaker ; deficit

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate

will fall and its net exports will rise

Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment

will remain unchanged and small country investment will fall

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the

yen will appreciate by 3 percent against the dollar

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in household saving?

(A) i.e. the image where S-I moves right

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies at home?

(A) i.e. the image where S-I moves right

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies abroad?

(B) i.e. the image where S-I(r) moves left

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in investment demand?

(C) i.e. the image where S-I moves left

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of protectionist trade policies?

(D) i.e. image where NX moves right/up

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall

12 percent

An increase in the trade surplus of a small open economy could be the result of:

an increase in the world interest rate

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate

and net exports will both fall

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow.

decreases ; decreases

In a small open economy, if the government adopts a policy that lowers imports, then the quantity of exports:

decreases by exactly the same amount as the quantity of imports decreases

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______

do not change ; do not change

A "small" economy is one in which the

domestic interest rate equals the world interest rate

When exports exceed imports, all of the following are true except:

domestic investment exceeds domestic saving

In a large open economy, the interest rate adjusts so that domestic saving equals:

domestic investment plus net capital outflow

Net capital outflow is equal to the amount that

domestic investors lend abroad minus the amount that foreign investors lend here

In a small, open economy, if net exports are negative then

domestic spending is greater than output

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment

downward-sloping ; vertical

If domestic spending exceeds output, we ______ the difference—net exports are ______.

import ; negative

In a small open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange rate will _____, holding all else constant

increase ; increase

In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment

increase and is financed through an inflow of foreign capital

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

increase by 4 percent

An effective policy to reduce a trade deficit in a small open economy would be to:

increase taxes

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.

increases ; increases

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

increasing taxes

In a small open economy, policies that increase:

investment cause a trade deficit

the world interest rate

is the interest rate prevailing in world financial markets

A small open economy with perfect capital mobility is characterized by all of the following except that:

its domestic interest rate will always exceed the world interest rate

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports

less ; greater

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

make loans to foreigners

If a country has a high rate of inflation relative to the United States, the dollar will buy:

more of the foreign currency over time

Net capital outflows is equal to

national saving minus domestic investment

In a large open economy, the real interest rate is determined by:

national saving, the net domestic investment function, and the net capital outflow function

If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are ______.

negative ; negative

In a large open economy, the exchange rate adjusts so that net exports equal:

net capital outflow

The real exchange rate is determined by the equality of:

net capital outflow and the demand for net exports

In a large open economy, if an import quota is adopted, then:

net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate.

not change

Protectionist policies implemented in a small open economy with a trade deficit have the effect of ______ the trade deficit and ______ the quantity of imports and exports

not changing ; decreasing

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

number of yen you can get for one dollar

The doctrine of purchasing-power parity:

provides a reason to expect that movements in the real exchange rate will typically be small or temporary

The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called

purchasing power parity

In a small open economy, if the government adopts a policy that lowers imports, then that policy:

raises the real exchange rate and does not change net exports

In a small open economy, if consumers shift their preference toward Japanese cars, then net exports:

remain unchanged but the real exchange rate falls

According to purchasing-power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will ___ oil in New York and _____ oil in London to drive _____ the price of oil in New York

sell ; buy ; down

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow

surplus ; positive

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade ______ and ______ net capital outflow

surplus ; positive

the value of net exports is also the value of

the excess of national saving over domestic investment