Econ Exam 3 ch 6

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

An appreciation of the real exchange rate in a small open economy could be the result of: A) an increase in government spending. B) an increase in taxes. C) a decrease in the world interest rate. D) the expiration of an investment tax-credit provision.

A) an increase in government spending

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: A) and net exports will both fall. B) will fall and net exports will rise. C) will rise and net exports will fall. D) and net exports will both rise.

A) and net exports will both fall

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which: A) capital is relatively scarce. B) capital is relatively abundant. C) technological production capabilities are inferior. D) labor is relatively scarce.

A) capital is relatively scarce

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases

A) decreases; decreases

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. A) deficit; negative B) surplus; positive C) deficit; positive D) surplus; negative

A) deficit; negative

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

If the number of dollars per yen rises, this is called a(n): A) appreciation of the dollar. B) appreciation of the yen. C) increase in the terms of trade. D) decrease in the terms of trade.

B) 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 ______. A) a trade deficit; $100 billion B) balanced trade; $0 C) a trade surplus; $100 billion D) balanced trade; $100 billion

B) balanced trade; $0

Net capital outflow in a large country: A) rises as the real domestic interest rate rises. B) declines as the domestic interest rate rises. C) depends on the foreign interest rate. D) depends only on domestic saving.

B) declines as the domestic interest rate rises

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: 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

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate. A) does not change; increases B) increases; increases C) increases; decreases D) decreases; increases

B) increases; increases

In a small open economy, policies that increase: A) investment tend to cause a trade surplus. B) investment tend to cause a trade deficit. C) saving do not affect the trade balance. D) saving tend to cause a trade deficit.

B) investment tend to cause a trade deficit

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

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to: A) make loans to the domestic government. B) make loans to foreigners. C) repay the national debt. D) repay loans to the Federal Reserve.

B) make loans to foreigners

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 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

If the purchasing-power parity theory is true, then: A) the net exports schedule is very steep. B) all changes in the real exchange rate result from changes in price levels. C) all changes in the nominal exchange rate result from changes in price levels. D) changes in saving or investment influence only the real exchange rate.

C) all changes in

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) decrease in the price of goods measured in terms of money. C) depreciating nominal exchange rate. D) decrease in the price of foreign currencies measured in terms of the domestic currency.

C) depreciating nominal exchange rate

In a small open economy with perfect capital mobility, the real interest rate will always be: A) above the world real interest rate. B) below the world real interest rate. C) equal to the world real interest rate. D) equal to the world nominal interest rate.

C) equal to the world real interest rate

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

In a large open economy, the exchange rate adjusts so that net exports equal: A) domestic saving. B) domestic investment. C) net capital outflow. D) domestic investment plus net capital outflow.

C) net capital outflow

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate. A) increase B) decrease C) not change D) either increase or decrease

C) not change

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

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

Two reasons why capital may not flow to poor countries are that the poorer countries may: A) have economies unlike those described by a Cobb-Douglas production function and not be subject to diminishing returns to capital. B) have already accumulated high levels of capital relative to labor and may already have access to advanced technologies. C) legally prevent the inflow of foreign capital and provide strong legal protection of private property. D) have inferior production capabilities and not enforce property rights.

D) have inferior production capabilities and not enforce property rights

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. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

D) increase; increase

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

A depreciation of the real exchange rate in a small open economy could be the result of: A) a domestic tax cut. B) an increase in government spending. C) a decrease in the world interest rate. D) the expiration of an investment tax-credit provision.

D) the expiration of an investment tax-credit provision

1. 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

Why is the domestic output not equal to domestic spending in an open economy? Explain.

In an open economy, domestic output could be exported while foreign output could be imported through international trade. This results in the difference between the domestic spending and domestic output

What is the difference between the strengthening and weakening of domestic currency? Explain.

Strengthening of currency is when domestic currency buys more of foreign currency. Weakening of currency is when domestic currency buys less of foreign currency

Major improvements in computer information technology and communications in the late 1990s fueled an increase in investment demand in the United States, which is a large open economy. What is the predicted impact of this increased investment demand in the United States on the U.S. interest rate, the U.S. exchange rate, and U.S. net exports, holding other factors constant? Illustrate your answer graphically and explain in words.

The increase in domestic investment demand will increase the US interest rate. The higher domestic interest rate will reduce net capital outflows. The reduced supply of dollars in the foreign exchange market will increase the US exchange rate. The higher real exchange rate makes US exports less competitive and imports more attractive, reducing US net exports

In times of great economic uncertainty and potential job loss, many consumers may increase their saving as a precautionary measure. What is the predicted impact of an increase in national saving on the domestic interest rate and exchange rate in a large open economy, holding other factors constant? Illustrate your answer graphically and explain in words.

The increase in national saving will decrease the domestic interest rate. The lower interest rate will increase the amount of net capital outflows, which will decrease the domestic exchange rate as the supply of the domestic currency in the foreign exchange market increases

Assume that in a small open economy where full employment always prevails, national saving is 300. a. If domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed? b. If the economy is open and the world interest rate is 10 percent, what will investment be? c. What will the current account surplus or deficit be? What will net capital outflow be?

a. 5 percent b. 200 c. the trade surplus will be 100

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100, does investment change? What is the level of investment after the change? b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much? c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much? d. Will the real exchange rate rise, fall, or remain constant as a result of the change in G?

a. no. 200 b. yes. it decreases by 100 c. yes. it decreases by 100 d. it will rise

Assume that the following equations characterize a large open economy: (1) Y = 5,000 (2) Y = C + I + G + NX (3) C = 1/2(Y - T) (4) I = 2,000 - 100r (5) NX = 500 - 500ε (6) CF = -100r (7) CF = NX (8) G = 1,500 (9) T = 1,000. Where NX is net exports, CF is net capital outflow, and ∈ is the real exchange rate. Solve these equations for the equilibrium values of C, I, NX, CF, r, and ε. (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and ε. Check your work by seeing that all of these equations balance given your answers.)

c=2000; I=1,750; NX=-250; CF=-250; r=2.5 percent

Suppose a new technology is developed that increases investment demand in both a closed economy and in a small open economy that are in other ways identical. Holding other factors constant, will the quantity of investment spending increase more in the closed economy or in the small open economy? Explain. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

investment spending will not change in the closed economy, but will increase in the small open economy. In the closed economy, there is no change in domestic saving, so the domestic interest rate must rise to keep the investment spending equal to the unchanged domestic saving. In the small open economy, the increase in investment demand is financed by net capital inflows at the unchanged world interest rate. The decrease in net capital outflows raises the real exchange rate and reduces net exports in the small open economy

Why is purchasing power parity called "the law of one price"? Explain.

purchasing power parity signifies that if there is any change in the price level of a good in different countries, then it will be leveled out through international arbitrage. Thus, the currency has the same purchasing power in different countries at the same time

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

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 ______. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) increase; increase

If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______. A) positive; positive B) positive; negative C) negative; negative D) negative; positive

A) positive; positive

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

In the small open economy in equilibrium: A) saving is fixed, and investment is determined by the investment function and the world interest rate. B) investment is fixed, and saving is determined by the saving function and the world interest rate. C) saving is fixed, and investment is determined by the trade balance. D) investment is fixed, and saving is determined by the trade balance.

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

If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and the United States dollar? Explain.

According to the quantity theory, the faster growth rate of money will result in a higher rate of inflation in Mexico than in the US. If there is purchasing-power parity, then the percentage change in nominal exchange rate equals the percentage change in the real exchange rate plus the difference in the inflation rates. The higher Mexican inflation will increase the nominal exchange rate, holding other factors constant

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 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.

B) 8 percent

A country's exports may be written as equal to: A) GDP minus consumption minus investment minus government spending. B) GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services. C) imports. D) GDP minus imports.

B) GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services

Which of the following would decrease the real exchange rate in a small open economy in the long run? A) a personal income tax cut B) a reduction in government spending C) a tariff on imports D) an increase in investment

B) a reduction in government spending

An increase in the trade deficit of a small open economy could be the result of: A) an increase in taxes. B) an increase in government spending. C) an increase in the world interest rate. D) the expiration of an investment tax-credit provision.k

B) an increase in government spending

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 _____. A) increase; increase B) increase; decrease C) increase, not change D) decrease; increase

B) increase; decrease

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

Protectionist policies in a small open economy do not alter the trade balance because the: A) quantity of imports and exports is fixed. B) interest rate adjusts to offset any reductions in imports. C) exchange rate appreciates to offset the increase in net exports. D) level of net capital outflow is fixed by the world interest rate.

C) exchange rate appreciates to offset the increase in net exports

If the real exchange rate decreases, then net exports will _____. A) be positive. B) be negative. C) increase. D) decrease.

C) increase

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

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. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

C) increase; decrease

In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment: A) increases and is financed through an increase in national saving. B) increases and is financed through an increase in exports. C) increases and is financed through an inflow of foreign capital. D) does not increase; the interest rate rises instead.

C) increases and is financed through an inflow of foreign capital

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports. A) more; greater B) more; smaller C) less; greater D) less; smaller

C) less; greater

The real exchange rate is determined by the equality of: A) saving and the demand for net exports. B) investment and the demand for net exports. C) net capital outflow and the demand for net exports. D) the negative value of net capital outflow and the demand for net exports.

C) net capital outflow and demand for net exports

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

If net capital outflow is positive, then: A) exports must be positive. B) exports must be negative. C) the trade balance must be positive. D) the trade balance must be negative.

C) the trade balance must be positive

Net capital outflow is equal to: A) national saving minus the trade balance. B) domestic investment plus the trade balance. C) domestic investment minus national saving. D) national saving minus domestic investment.

D) national saving minus domestic investment

The adoption of an investment tax credit in a small open economy is likely to lead to: A) no change in either domestic investment or domestic saving in the small open economy. B) an increase in both domestic investment and domestic saving in the small open economy. C) an increase in domestic saving but no change in domestic investment in the small open economy. D) an increase in domestic investment but no change in domestic saving in the small open economy.

D) an increase in domestic investment but no change in domestic saving in the small open economy

The law of one price is enforced by: A) governments. B) producers. C) consumers. D) arbitrageurs.

D) arbitrageurs

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

A trade deficit can be financed in all of the following ways except by: A) borrowing from foreigners. B) selling domestic assets to foreigners. C) selling foreign assets owned by domestic residents to foreigners. D) borrowing from domestic lenders.

D) borrowing from domestic lenders

In a large open economy, the interest rate adjusts so that domestic saving equals: A) domestic investment. B) net exports. C) net capital outflow. D) domestic investment plus net capital outflow.

D) domestic investment plus net capital outflow

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

A statement that is generally true about capital in a large open economy is that it is: A) perfectly mobile, and the country does not influence world financial markets. B) perfectly mobile, and the country influences world financial markets. C) not perfectly mobile, but the country does not influence world financial markets. D) not perfectly mobile, but the country influences world financial markets.

D) not perfectly mobile, but the country influences 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

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow. A) deficit; negative B) surplus; negative C) deficit; positive D) surplus; positive

D) surplus; positive

The value of net exports is also the value of: A) net investment. B) net saving. C) national saving. D) the excess of national saving over domestic investment.

D) the excess of national saving over domestic investment

What is the difference between trade surplus and trade deficit? Explain.

When a country is a net exporter of goods and capital, it has a trade surplus. If it is a net importer of goods and borrower of capital it has a trade deficit.

In the 2008 global financial crisis, many investors considered the U.S. economy a safe place to move their assets. What is the predicted impact of this inflow of financial capital to the United States, which is a large open economy, on the U.S. interest rate and the U.S. exchange rate, holding other factors constant? Illustrate your answer graphically and explain in words.

The reduction in net capital outflows reduces the demand for loanable funds, which reduces the domestic interest rate. The lower domestic interest rate partially offsets some of the initial decrease in net capital outflows from the US, but there is an overall decrease in the net capital outflows. The reduction in net capital inflows reduces the supply of dollars in the foreign exchange market and increases the real exchange rate