Question 1

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

Accepted Answer

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.E) All of the above
F) B) and C)

Question 2

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

Accepted Answer

A)   fall and the real exchange rate falls.
B)   fall but the real exchange rate remains unchanged.
C)   remain unchanged but the real exchange rate falls.
D)   and the real exchange rate remains unchanged.E) A) and C)
F) B) and D)

Question 3

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

Accepted Answer

A)   domestic spending is greater than output.
B)   saving is greater than investment.
C)   net capital outflows are positive.
D)   imports are less than exports.E) A) and B)
F) B) and C)

Question 4

What determines the real exchange rate and what determines the nominal exchange rate in a small open economy with perfect capital mobility, fully employed factors of production, and flexible prices?

Accepted Answer

The real exchange rate adjusts to bring ...

Question 5

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:

Accepted Answer

A)   -$25 billion.
B)   -$10 billion.
C)   $10 billion.
D)   $25 billion.E) A) and D)
F) None of the above

Question 6

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

Accepted Answer

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.E) B) and C)
F) All of the above

Question 7

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.

Accepted Answer

A)   buy; sell; up
B)   buy; sell; down
C)   sell; buy; up
D)   sell; buy; downE) A) and D)
F) All of the above

Question 8

The world interest rate:

Accepted Answer

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.E) B) and C)
F) B) and D)

Question 9

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

Accepted Answer

A)   a personal income tax cut
B)   a reduction in government spending
C)   a tariff on imports
D)   an increase in investmentE) A) and D)
F) None of the above

Question 10

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

Accepted Answer

A)   deficit; negative
B)   surplus; negative
C)   deficit; positive
D)   surplus; positiveE) A) and B)
F) A) and C)

Question 11

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

Accepted Answer

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.E) None of the above
F) B) and C)

Question 12

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:

Accepted Answer

A)   will rise and small country investment will fall.
B)   will rise and small country investment will remain unchanged.
C)   will remain unchanged and small country investment will fall.
D)   and small country investment will both remain unchanged.E) A) and B)
F) B) and C)

Question 13

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 ______.

Accepted Answer

A)   increase; increase
B)   increase; decrease
C)   decrease; increase
D)   decrease; decreaseE) A) and B)
F) A) and C)

Question 14

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

Accepted Answer

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.E) None of the above
F) C) and D)

Question 15

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:

Accepted Answer

A)   0 percent.
B)   8 percent.
C)   10 percent.
D)   12 percent.E) A) and B)
F) A) and D)

Question 16

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

Accepted Answer

A)   national saving, the domestic investment function, and the net capital outflow function.
B)   national saving, the domestic investment function, and the net exports function.
C)   the domestic investment function, the net capital outflow function, and the net exports function.
D)   national saving, the domestic investment function, the net capital outflow function, and the net exports function.E) B) and D)
F) B) and C)

Question 17

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

Accepted Answer

A)   net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises.
B)   net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate falls.
C)   net exports rise and the real exchange rate rises.
D)   net exports rise and the real exchange rate falls.E) A) and D)
F) B) and C)

Question 18

Use the following to answer questions :
Exhibit: Policies Influence Real Exchange Rate A)

B)

C)

D)

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

Accepted Answer

A)   (
A)  
B)   (
B)  
C)   (
C)  
D)   (
D)  E) B) and D)
F) B) and C)

Question 19

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:

Accepted Answer

A)   the theory of the real exchange rate.
B)   equal currency conversion.
C)   international monetary exchange.
D)   purchasing-power parity.E) All of the above
F) C) and D)

Question 20

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

Accepted Answer

When a country is a net export...

Exam 6: The Open Economy

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

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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:

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

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

Correct AnswerverifiedWhen a country is a net export...View AnswerShow Answer

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

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

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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:

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

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

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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:

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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:

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

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

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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 ______.

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The world interest rate:

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

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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.

Correct AnswerverifiedShow Answer

Use the following to answer questions : Exhibit: Policies Influence Real Exchange Rate A) B) C) D) -(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in investment demand?

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

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What determines the real exchange rate and what determines the nominal exchange rate in a small open economy with perfect capital mobility, fully employed factors of production, and flexible prices?

Correct AnswerverifiedThe real exchange rate adjusts to bring ...View AnswerShow Answer

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

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When a country is a net export...
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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 .

Correct Answer
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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.

Correct Answer
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The real exchange rate adjusts to bring ...
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