A macroeconomic theory of the open economy

48 terms by eiro 

Create a new folder

Advertisement Upgrade to remove ads

(National) saving =

Domestic investment + Net capital outflow
or
Y-C-G

real interest rate =

Nominal interest rate - Inflation rate

The Maket for loanable funds (figure)

The Maket for loanable funds

The interest rate is an open economy, as in a closed economy, is determined by the supply and demand for loanable funds. National saving is the source of the supply of loanable funds. Domestic investment and net capital outflow are the sources of the demand for loanable funds. At the equilibrium interest rate, the amount that people want to save exactly balances the amount that people want to borrow for the purpose of buying domestic capital and foreign assets.

Net capital outflow (NCO) =

Net exports (NX)

NCO

purchase and sale of capital assets abroad

The market for foreign currency exchange

Net capital outflow depends on the interest rate

Because a higher domestic real interest rate makes domestic assets more attractive, it reduces net capital outflow. Note the position of zero on the horizontal axis: net capital outflow can be positive or negative

Net capital outflow depends on the interest rate (figure)

The real equilibrium in an open economy

The effects of a government budget deficit

The effects of an import quota

The effects of capital flight

Net capital outflow is the purchase of domestic assets by foreigners minus the purchase of foreign assets by domestic residents. (T or F?)

F

A country's net capital outflow (NCO) is always equal to its net exports (NX). (T or F?)

T

All other things being equal, an increase in a country's real interest rate reduces net capital outflow. (T or F?)

T

An increase in UK net capital outflow increases the supply of pounds in the market for foreign currency exchange and decreases the real exchange rate of the pound. (T or F?)

T

If labour unions convince UK consumers to "buy British," it will improve (move toward surplus) the UK trade balance. (T or F?)

F

If a country's net capital outflow (NCO) is positive, it is an addition to its demand for loanable funds. (T or F?)

T

An increase in the government's budget deficit shifts the supply of loanable funds to the right. (T or F?)

F

An increase in the UK government's budget deficit tends to cause the real exchange rate of the pound to depreciate. (T or F?)

F

The term "twin deficits" refers to a country's trade deficit and its government budget deficit. (T or F?)

T

If the EU raises its tariff on imported sugar, it will reduce imports and improve the trade balance of EU members. (T or F?)

F

If the EU raises its tariff on imported sugar, domestic sugar growers will benefit, but the euro will appreciate and domestic producers of export goods will be harmed. (T or F?)

T

An increase in the government budget deficit reduces net exports. (T or F?)

T

A country experiencing capital flight will experience a reduction in its net capital outflow and its net exports. (T or F?)

F

If UK residents increase their saving, the pound will appreciate in the market for foreign currency exchange. (T or F?)

F

A rise in Denmark's net exports (NX) will increase the demand for the Danish krone in the market for foreign currency exchange and the krone will appreciate in value. (T or F?)

T

Which of the following statements regarding the loanable funds market is not true?
a. A decrease in a country's net capital outflow shifts the demand for loanable funds to the left.
b. An increase in domestic investment shifts the demand for loanable funds to the right.
c. An increase in a country's net capital outflow shifts the supply of loanable funds to the left.
d. An increase in a country's net capital outflow raises its real interest rate.

C

An increase in the government budget deficit
a. has no impact on the real interest rate and fails to crowd out investment because foreigners buy assets in the deficit country.
b. decreases the real interest rate and crowds out investment.
c. none of these answers
d. increases the real interest rate and crowds out investment.

D

Which of the following statement regarding the loanable funds market is true?
a. A decrease in the government budget deficit increases the real interest rate.
b. An increase in the government budget deficit shifts the supply of loanable funds to the right.
c. An increase in private saving shifts the supply of loanable funds to the left.
d. An increase in the government budget deficit shifts the supply of loanable funds to the left.

D

Assuming all other things unchanged, a higher UK real interest rate
a. decreases UK net capital outflow because UK residents and foreigners prefer to invest in the UK
b. none of these answers
c. decreases UK net capital outflow because UK residents and foreigners prefer to invest abroad.
d. increases UK net capital outflow because UK residents and foreigners prefer to invest in the UK.

A

An increase in Europe's taste for UK produced Hondas would cause the pound to
a. depreciate and would increase UK net exports.
b. appreciate and would increase UK net exports.
c. depreciate and would decrease UK net exports.
d. appreciate and would decrease UK net exports.
e. appreciate, but the total value of UK net export stays the same.

E

An increase in the UK government budget deficit
a. increases UK net exports and decreases UK net capital outflow.
b. decreases UK net exports and UK net capital outflow the same amount.
c. increases UK net exports and UK net capital outflow the same amount.
d. decreases UK net exports and increases UK net capital outflow.

B

The phrase "twin deficits" refers to
a. a country's trade deficit and its government budget deficit.
b. the fact that if a country has a trade deficit, its trading partners must also have trade deficits.
c. the equality of a country's saving deficit and its investment deficit.
d. a country's trade deficit and its net capital outflow deficit.

A

Which of the following statements regarding the market for foreign currency exchange is true?
a. An increase in UK net exports decreases the supply of pounds and the pound depreciates.
b. An increase in UK net exports increases the demand for pounds and the pound appreciates.
c. An increase in UK net exports increases the supply of pounds and the pound depreciates.
d. An increase in UK net exports decreases the demand for pounds and the pound appreciates.

B

Which of the following statements regarding the market for foreign currency exchange is true?
a. An increase in UK net capital outflow increases the supply of pounds and the pound depreciates.
b. An increase in UK net capital outflow increases the demand for pounds and the pound appreciates.
c. An increase in UK net capital outflow increases the demand for pounds and the pound depreciates.
d. An increase in UK net capital outflow increases the supply of pounds and the pound appreciates.

A

If the EU imposes a quota on the importing of clothing produced in China, so reducing UK imports of clothing, which of the following is true regarding the market for foreign currency exchange?
a. The demand for pounds decreases and the pound depreciates.
b. The supply of pounds increases and the pound depreciates.
c. The supply of pounds decreases and the pound appreciates.
d. The demand for pounds increases and the pound appreciates.

D

If the EU imposes a quota on the importing of clothing produced in China, so reducing UK imports of clothing, which of the following is true regarding UK net exports?
a. Net exports will rise.
b. none of these answers
c. Net exports will fall.
d. Net exports will remain unchanged.

D

Suppose, due to political instability, Russians suddenly choose to invest in UK assets as opposed to Russian assets. Which of the following statements is true regarding UK net foreign investment?
a. UK net foreign investment is unchanged because only UK residents can alter UK net foreign investment.
b. UK net foreign investment rises.
c. UK net foreign investment falls.
d. none of these answers

C

Suppose, due to political instability, Russians suddenly choose to purchase UK assets as opposed to Russian assets. Which of the following statements is true regarding the value of the pound and UK net exports?
a. The pound appreciates, and UK net exports rise.
b. The pound appreciates, and UK net exports fall.
c. The pound depreciates, and UK net exports rise.
d. The pound depreciates, and UK net exports fall.

B

An increase in UK private saving
a. increases UK net exports and UK net capital outflow the same amount.
b. increases UK net exports and decreases UK net capital outflow.
c. decreases UK net exports and UK net capital outflow the same amount.
d. decreases UK net exports and increases UK net capital outflow.

A

Which of the following statements about trade policy is true?
a. A country's trade policy has no impact on the size of its trade balance.
b. none of these answers
c. A restrictive import quota decreases a country's net exports.
d. A restrictive import quota increases a country's net exports.

A

Which of the following groups would not benefit from an EU import quota on Japanese cars?
a. EU consumers who buy electronics from Japan.
b. EU farmers who export grain.
c. Employees of EU car manufacturers.
d. Shareholders of German carmaker BMW.

B

An example of a trade policy is
a. a tariff on sugar.
b. All are examples of trade policy.
c. capital flight because it increases a country's net exports.
d. an increase in the government budget deficit because it reduces a country's net exports.

A

An export subsidy should have the opposite effect of
a. a government budget deficit.
b. capital flight.
c. an increase in private saving.
d. a tariff.

D

Which of the following groups would be most harmed by a UK government budget deficit?
a. Foreigners who wish to buy assets in the UK.
b. BAe Systems wishing to sell aircraft to Saudi Arabia.
c. UK residents wishing to buy foreign produced cars.
d. Lenders of loanable funds.

B

Capital flight
a. decreases a country's net exports and increases its long-run growth path.
b. increases a country's net exports and increases its long-run growth path.
c. increases a country's net exports and decreases its long-run growth path.
d. decreases a country's net exports and decreases its long-run growth path.

C

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

NEW! Voice Recording

Create Set