Question 1

The real exchange rate is:

Accepted Answer

A)   the nominal price of domestic goods
B)   the relative price of domestic and foreign goods
C)   the absolute price of foreign goods
D)   none of the aboveE) A) and B)
F) A) and C)

Question 2

If the interest rate were below the equilibrium level, the quantity of loanable funds supplied would _____ the quantity demanded.

Accepted Answer

A)   be greater than
B)   exactly equal
C)   be less than
D)   be independent ofE) A) and B)
F) B) and D)

Question 3

Suppose that the government of the small nation of Stabilia is overturned by a military coup (the new ruling junta restores the country's old name of Instabilia). What would you expect to happen to Instabilia's real interest rate and real exchange rate?

Accepted Answer

The military takeover is likely to lead ...

Question 4

In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will:

Accepted Answer

A)   rise, the real interest rate will rise, the nominal interest rate will rise, the real exchange rate will rise and the nominal exchange rate will rise
B)   rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will rise
C)   rise, the real interest rate will be unaffected, the nominal interest rate will be unaffected, the real exchange rate will be unaffected and the nominal exchange rate will be unaffected
D)   rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will fallE) B) and C)
F) A) and D)

Question 5

The demand curve for foreign-currency exchange slopes downwards because a lower real exchange rate makes the domestic goods more expensive and reduces the quantity of domestic currency demanded to buy those goods.

Accepted Answer

A) True 
 B)False

Question 6

Ceteris paribus, in an open economy, a stable government fiscal policy enables firms to invest more assuredly.

Accepted Answer

A) True 
 B)False

Question 7

The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is:

Accepted Answer

A)   downward-sloping
B)   upward-sloping
C)   vertical
D)   horizontal
E)   the theory doesn't imply anything about the shape of the demand curveF) A) and C)
G) A) and D)

Question 8

In the market for foreign-currency exchange, the demand curve represents:

Accepted Answer

A)   national saving
B)   private saving
C)   net foreign investment
D)   domestic investment
E)   none of the aboveF) A) and D)
G) A) and E)

Question 9

The price of imports will increase on the domestic market if two conditions are fulfilled: a strong local currency and a shortage of supply.

Accepted Answer

A) True 
 B)False

Question 10

Explain how net foreign investment is part of the demand for loanable funds and simultaneously part of the supply of dollars in the foreign exchange market.

Accepted Answer

To carry out net foreign investment, an ...

Question 11

A tax on imported goods is called a(n) :

Accepted Answer

A)   excise tax
B)   goods and services tax
C)   import quota
D)   tariffE) None of the above
F) A) and C)

Question 12

At the equilibrium real interest rate, the amount that people (including government) want to save exactly balances the desired quantity of net foreign investment.

Accepted Answer

A) True 
 B)False

Question 13

If the real exchange rate were above the equilibrium level, the currency would:

Accepted Answer

A)   not change
B)   appreciate
C)   depreciate
D)   fluctuateE) B) and D)
F) C) and D)

Question 14

The key determinant of net foreign investment is:

Accepted Answer

A)   the real exchange rate
B)   the nominal interest rate
C)   the real interest rate
D)   the nominal exchange rateE) None of the above
F) A) and B)

Question 15

NARRBEGIN 32-2
Graph 32-2
 
-Which of the following statements is correct when the Australian government runs a budget deficit?

Accepted Answer

A)   The supply of loanable funds increases
B)   The interest rate falls
C)   The dollar appreciates
D)   It causes a trade balance surplusE) A) and B)
F) None of the above

Question 16

In an open economy, a government budget deficit raises real interest rates, crowds out domestic investment, causes the currency to appreciate and pushes the trade balance towards deficit.

Accepted Answer

A) True 
 B)False

Question 17

Suppose that the government imposes a quota on imports. Explain why the result is a fall in imports and an equal fall in exports. (Hint: Think about what happens to net exports, and about what happens to the exchange rate.)

Accepted Answer

A quota on imports does not affect the o...

Question 18

At the equilibrium real exchange rate, the demand for dollars to buy:

Accepted Answer

A)   foreign assets exactly balances the supply of dollars to be exchanged into foreign currency to buy domestic assets
B)   net exports exactly balances the supply of dollars to be exchanged into foreign currency to buy net imports
C)   foreign assets exactly balances the supply of dollars to be exchanged into foreign currency to buy net exports
D)   net exports exactly balances the supply of dollars to be exchanged into foreign currency to buy foreign assetsE) B) and C)
F) A) and D)

Question 19

Economists have argued that removing trade restrictions benefits Australian industries that
produce goods for export. Explain why this may be the case.

Accepted Answer

Export industries would find i...

Question 20

The supply of and demand for loanable funds directly depends on:

Accepted Answer

A)   the real interest rate
B)   exports
C)   imports
D)   none of the aboveE) A) and D)
F) A) and C)

Exam 32: A Macroeconomic Theory of the Open Economy

The demand curve for foreign-currency exchange slopes downwards because a lower real exchange rate makes the domestic goods more expensive and reduces the quantity of domestic currency demanded to buy those goods.

Correct AnswerverifiedShow Answer

Suppose that the government imposes a quota on imports. Explain why the result is a fall in imports and an equal fall in exports. (Hint: Think about what happens to net exports, and about what happens to the exchange rate.)

Correct AnswerverifiedA quota on imports does not affect the o...View AnswerShow Answer

If the interest rate were below the equilibrium level, the quantity of loanable funds supplied would _____ the quantity demanded.

Correct AnswerverifiedShow Answer

At the equilibrium real interest rate, the amount that people (including government) want to save exactly balances the desired quantity of net foreign investment.

Correct AnswerverifiedShow Answer

In the market for foreign-currency exchange, the demand curve represents:

Correct AnswerverifiedShow Answer

Suppose that the government of the small nation of Stabilia is overturned by a military coup (the new ruling junta restores the country's old name of Instabilia). What would you expect to happen to Instabilia's real interest rate and real exchange rate?

Correct AnswerverifiedThe military takeover is likely to lead ...View AnswerShow Answer

NARRBEGIN 32-2 Graph 32-2 -Which of the following statements is correct when the Australian government runs a budget deficit?

Correct AnswerverifiedShow Answer

In an open economy, a government budget deficit raises real interest rates, crowds out domestic investment, causes the currency to appreciate and pushes the trade balance towards deficit.

Correct AnswerverifiedShow Answer

The key determinant of net foreign investment is:

Correct AnswerverifiedShow Answer

Economists have argued that removing trade restrictions benefits Australian industries that produce goods for export. Explain why this may be the case.

Correct AnswerverifiedExport industries would find i...View AnswerShow Answer

The real exchange rate is:

Correct AnswerverifiedShow Answer

A tax on imported goods is called a(n) :

Correct AnswerverifiedShow Answer

Explain how net foreign investment is part of the demand for loanable funds and simultaneously part of the supply of dollars in the foreign exchange market.

Correct AnswerverifiedTo carry out net foreign investment, an ...View AnswerShow Answer

The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is:

Correct AnswerverifiedShow Answer

The price of imports will increase on the domestic market if two conditions are fulfilled: a strong local currency and a shortage of supply.

Correct AnswerverifiedShow Answer

In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will:

Correct AnswerverifiedShow Answer

At the equilibrium real exchange rate, the demand for dollars to buy:

Correct AnswerverifiedShow Answer

Ceteris paribus, in an open economy, a stable government fiscal policy enables firms to invest more assuredly.

Correct AnswerverifiedShow Answer

If the real exchange rate were above the equilibrium level, the currency would:

Correct AnswerverifiedShow Answer

The supply of and demand for loanable funds directly depends on:

Correct AnswerverifiedShow Answer

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A quota on imports does not affect the o...
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The military takeover is likely to lead ...
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Export industries would find i...
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To carry out net foreign investment, an ...
View Answer

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