Macro Economics Practice Chapter

Holding other things constant, an appreciation of a nation's currency causes a. exports to rise and imports to fall. b. exports to fall and imports to rise. c. both exports and imports to rise. d. both exports and imports to fall.

B. exports to fall and imports to rise. When a currency appreciates in value in the market for foreign-currency exchange, domestic goods become more expensive relative to foreign goods. This appreciation encourages imports and discourages exports.

If business leaders in Great Britain become more confident in their economy, their optimism will induce them to increase investment, causing the British pound to ________ and pushing the British trade balance toward ________. a. appreciate, deficit b. appreciate, surplus c. depreciate, deficit d. depreciate, surplus

A. appreciate, deficit An increase in investment means increased demand for loanable funds, which increases the interest rate. A higher interest rate will decrease net capital outflow and increase demand for the British pound, causing it to appreciate. As the currency appreciates, imports become cheaper and British exports become more expensive to foreigners, so the trade balance moves toward deficit.

The nation of Ectenia has long banned the export of its highly prized puka shells. A newly elected president, however, removes the export ban. This change in policy will cause the nation's currency to ________, making the goods Ectenia imports ________ expensive. a. appreciate, less b. appreciate, more c. depreciate, less d. depreciate, more

A. appreciate, less Removing a ban on exports will increase the quantity of goods exported at any real exchange rate, causing net exports to rise as well. Net exports are the source of the demand for a nations currency; therefore, there is an increase in the demand for the nation's currency, which causes the currency to appreciate. A stronger currency makes it less expensive to import goods from other countries.

The government in an open economy cuts spending to reduce the budget deficit. As a result, the interest rate ________, leading to a capital ________ and a real exchange rate ________. a. falls, outflow, appreciation b. falls, outflow, depreciation c. falls, inflow, appreciation d. rises, inflow, appreciation

B. falls, outflow, depreciation A reduction in government spending increases national saving, which, in turn, causes the interest rate to fall. Lower interest rates decrease the incentive to buy domestic assets (relative to foreign assets), which leads to a capital outflow. This increases the amount of currency a country supplies in foreign currency markets, causing a real exchange rate depreciation.

Japan generally runs a significant trade surplus. Which of the following is likely responsible for this? a. Structural barriers against imports into Japan b. High foreign demand for Japanese goods c. A high Japanese saving rate relative to Japanese investment d. Low Japanese demand for foreign goods

C. A high Japanese saving rate relative to Japanese investment Japan generally runs a trade surplus because the Japanese savings rate is high relative to Japanese domestic investment. The result is high net capital outflow, which is matched by high net exports, resulting in a trade surplus. The other possibilities (high foreign demand for Japanese goods, low Japanese demand for foreign goods, and structural barriers against imports into Japan) would affect the real exchange rate, but not the trade surplus.

Holding other things constant, an increase in a nation's interest rate reduces a. national saving and domestic investment. b. national saving and the net capital outflow. c. domestic investment and the net capital outflow. d. national saving only.

C. domestic investment and the net capital outflow. A higher interest rate makes borrowing to finance capital projects more costly; thus, it discourages domestic investment. It also makes that nation's domestic bonds and other interest-yielding assets more attractive, which discourages investing abroad, and encourages foreigners to buy more of the nation's assets as well. This decreases net capital outflow.

A civil war abroad causes foreign investors to seek a safe haven for their funds in the United States, leading to ________U.S. interest rates and a ________ U.S. dollar. a. higher, weaker b. higher, stronger c. lower, weaker d. lower, stronger

D. lower, stronger When foreign investors increase the amount of U.S. assets they purchase, this decreases capital outflow, which, in turn, decreases the demand for loanable funds and leads to lower U.S. interest rates. As foreigners demand more U.S. assets, they also must demand more dollars to buy those assets, which causes the dollar to appreciate (grow stronger).