EC3003 Exam 2

In a small open economy, when the government reduces national saving, the equilibrium real exchange rate: a. rises and net exports fall. b. rises and net exports rise. c. falls and net exports fall. d. falls and net exports rise.

a. rises and net exports fall.

If domestic spending exceeds output, we ______ the difference—net exports are ______. a. import; negative b. export; positive c. import; positive d. export; negative

a. import; negative

net exports equal gdp minus domestic spending on a. all goods and services b. all goods and services plus foreign spending on domestic goods and services c. domestic goods and services d. domestic goods and services minus foreign spending on domestic goods and services

a. all goods and services

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by: a. borrowing from abroad b. lending from abroad c. the domestic government d. the world bank

a. borrowing from abroad

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. a. downward-sloping; vertical b. upward-sloping; vertical c. downward-sloping; upward-sloping d. upward-sloping; downward-sloping

a. downward-sloping; vertical

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the: a. foreign inflation rate minus the domestic inflation rate. b. domestic inflation rate minus the foreign inflation rate. c. foreign exchange rate minus the domestic exchange rate. d. domestic interest rate minus the foreign interest rate.

a. foreign inflation rate minus the domestic inflation rate.

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate: a. will fall and its net exports will rise. b. will rise and its net exports will fall. c. and net exports will both fall. d. and exports will both rise.

a. will fall and its net exports will rise.

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: a. -$25 billion b. -$10 billion c. $10 billion d. $25 billion

b. -$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 goods per U.S. good. a. 0.5 b. 2.5 c. 5 d. 10

b. 2.5

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 ______. a. trade deficit; $100 billion b. balanced trade; $0 c. a trade surplus; $100 billion d. balanced trade; $100 billion

b. balanced trade; $0

In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out, and the expansion also causes a trade: a. surplus and a fall in the real exchange rate. b. deficit and a rise in the real exchange rate. c. surplus and a rise in the real exchange rate. d. deficit and a fall in the real exchange rate.

b. deficit and a rise in the real exchange rate.

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______. a. increases; appreciates b. increases; depreciates c. decreases; appreciates d. decreases; depreciates

b. increases; depreciates

The real exchange rate: a. measures how many Japanese yen one really gets for a U.S. dollar. b. is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level. c. is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level. d. is the price of a domestic car divided by the price of a foreign car.

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

If a country has a high rate of inflation relative to the United States, the dollar will buy: a. less of the foreign currency over time. b. more of the foreign currency over time. c. the same amount of the foreign currency over time. d. an amount of foreign currency determined by the real exchange rate.

b. more of the foreign currency over time.

The nominal exchange rate (indirect quote) between the U.S. dollar and the Japanese yen is the: a. number of yen you can get for lending one dollar in Japan for one year. b. number of yen you can get for one dollar. c. price of U.S. goods divided by the price of Japanese goods. d. price of Japanese goods divided by the price of U.S. goods.

b. number of yen you can get for one dollar.

In a small open economy, if the government adopts a policy that lowers imports, then that policy: a. raises the real exchange rate and increases net exports. b. raises the real exchange rate and does not change net exports. c. raises the real exchange rate and decreases net exports. d. lowers the real exchange rate.

b. raises the real exchange rate and does not change net exports.

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: a. dollar will appreciate by 3 percent against the yen. b. yen will appreciate by 3 percent against the dollar. c. yen will appreciate by 6 percent against the dollar. d. yen will appreciate by 9 percent against the dollar.

b. yen will appreciate by 3 percent against the dollar.

An increase in the trade surplus of a small open economy could be the result of: a. a domestic tax cut. b. an increase in government spending. c. an increase in the world interest rate. d. the implementation of an investment tax-credit provision.

c. an increase in the world interest rate.

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______. a. increase; appreciates b. increase; depreciates c. decrease; appreciates d. decrease; depreciates

c. decrease; appreciates

One consequence of high inflation is a(n): a. appreciating nominal exchange rate. b. appreciating real exchange rate. c. depreciating nominal exchange rate. d. depreciating real exchange rate.

c. depreciating nominal exchange rate.

A "small" economy is one in which the: a. level of output is fixed. b. price level is fixed. c. domestic interest rate equals the world interest rate. d. domestic saving is less than domestic investment.

c. domestic interest rate equals the world interest rate.

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase: a. investment in the small open economy. b. saving in the small open economy. c. exports by the small open economy. d. imports by the small open economy.

c. 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: a. rises and net exports fall. b. and net exports both rise. c. falls and net exports rise. d. and net exports both fall.

c. falls and net exports rise.

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: a. decrease by 8 percent. b. decrease by 4 percent. c. increase by 4 percent. d. increase by 5 percent.

c. increase by 4 percent.

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: a. will certainly decrease. b. will certainly increase. c. may increase or decrease. d. will remain the same.

c. may increase or decrease.

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. a. surplus; negative b. deficit; positive c. surplus; positive d. deficit; negative

c. surplus; positive

Building an economic model based on the assumption of a small open economy is useful because: a. it accurately describes the U.S. economy. b. it is more complicated and realistic than a model based on the assumption of a large open economy. c. this simplifying assumption can assist our understanding and intuition of open economy macroeconomics. d. it is not possible to build models of large open economies.

c. this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.

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: a. 0 percent. b. 8 percent. c. 10 percent. d. 12 percent.

d. 12 percent.

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: a. 2 pesos. b. 5 pesos. c. 10 pesos. d. 20 pesos.

d. 20 pesos.

If the real exchange rate is high, foreign goods: a. and domestic goods are both relatively expensive. b. and domestic goods are both relatively cheap. c.are relatively expensive and domestic goods are relatively cheap. d. are relatively cheap and domestic goods are relatively expensive.

d. are relatively cheap and domestic goods are relatively expensive.

The currencies of countries with high inflation rates relative to the United States have tended to ______, and the currencies of countries with low inflation rates relative to the United States have tended to ______. a. appreciate; appreciate b. appreciate; depreciate c. depreciate; depreciate d. depreciate; appreciate

d. depreciate; appreciate

When the real exchange rate rises: a. exports will decrease but imports will be unaffected. b. imports will decrease but exports will be unaffected. c. exports will increase and imports will decrease. d. exports will decrease and imports will increase.

d. exports will decrease and imports will increase.

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate: a. rises and net exports fall. b. rises and net exports rise. c. falls and net exports fall. d. falls and net exports rise.

d. falls and net exports rise.

An effective policy to reduce a trade deficit in a small open economy would be to: a. increase tariffs on imports. b. impose stricter quotas on imported goods. c. increase government spending. d. increase taxes.

d. increase taxes.

The world interest rate: a. is equal to the domestic interest rate. b. makes domestic saving equal to domestic investment. c. is the interest rate charged on loans by the World Bank. d. is the interest rate prevailing in world financial markets.

d. is the interest rate prevailing in world financial markets.

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: a. the theory of the real exchange rate. b. equal currency conversion. c. international monetary exchange. d. purchasing-power parity.

d. purchasing-power parity.

Holding other factors constant, legislation to cut taxes in an open economy will: a. increase national saving and lead to a trade surplus. b. increase national saving and lead to a trade deficit. c. reduce national saving and lead to a trade surplus. d. reduce national saving and lead to a trade deficit.

d. reduce national saving and lead to a trade deficit.

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. a. buy; sell; up b. buy; sell; down c. sell; buy; up d. sell; buy; down

d. sell; buy; down

an "open economy" is one in which a. the level of output is fixed. b. government spending exceeds revenues. c. the national interest rate equals the world interest rate. d. there is trade in goods and services with the rest of the world.

d. 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 pesos now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then: a. the purchasing-power parity theory is correct. b. traveling in Chile today costs about the same as it did ten years ago. c. traveling in Chile is cheaper now than it was ten years ago. d. traveling in Chile is more expensive now than it was ten years ago.

d. traveling in Chile is more expensive now than it was ten years ago.