Group 1 Members:

1.
2.
3.
4.

GROUP ASSIGNMENT
(Week 9: Open Macroeconomics - Part 2)

Multiple Choices: Choose the correct answer!

1. The open-economy macroeconomic model includes

a. only the market for loanable funds.
b. only the market for foreign-currency exchange.
c. both the market for loanable funds and the market for foreign-currency
exchange.
d. neither the market for loanable funds or the market for foreign-currency exchange.

2. The open-economy macroeconomic model examines the determination of

a. the output growth rate and the real interest rate.
b. unemployment and the exchange rate.
c. the output growth rate and the inflation rate.
d. the trade balance and the exchange rate.

3. The open-economy macroeconomic model takes

a. the GDP but not the price level as given.
b. the price level but not the GDP as given.
c. both the price level and the GDP as given.
d. the price level and the GDP as variables to be determined by the model.

4. In an open economy, the market for loanable funds equates national saving with
a. domestic investment.
b. net capital outflow.
c. the sum of national consumption and government spending.
d. the sum of domestic investment and net capital outflow.

5. In the open-economy macroeconomic model, the supply of loanable funds comes from
a. national saving.
b. private saving.
c. domestic investment.
d. the sum of domestic investment and net capital outflow.

6. In the open-economy macroeconomic model, the demand for loanable funds comes from
a. domestic investment.
b. net exports.
c. net capital outflow.
d. the sum of net capital outflow and domestic investment.
 7. An increase in the real interest rate
a. discourages people from saving and so increases the quantity of loanable funds demanded.
b. discourages people from saving and so decreases the quantity of loanable funds demanded.
c. encourages people to save and so increases the quantity of loanable funds supplied. d.
encourages people to save and so decreases the quantity of loanable funds supplied.

8. A fall in the real interest rate

a. increases the quantity of loanable funds demanded because firms will want to
borrow more.
b. decreases the quantity of loanable funds demanded because firms will want to borrow less.
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c. increases the quantity of loanable funds supplied because firms will want to borrow more.
d. decreases the quantity of loanable funds supplied because firms will want to borrow less.

9. Other things the same, an increase in the interest rate would tend to reduce
a. domestic investment but not net capital outflow.
b. net capital outflow but not domestic investment.
c. both domestic investment and net capital outflow.
d. neither domestic investment nor net capital outflow.

10. At the equilibrium interest rate

a. the amount that people want to save less than the desired quantities of domestic
investment and net capital outflow.
b. the amount that people want to save more than the desired quantities of domestic
investment and net capital outflow.
c. the amount that people want to save exactly balances the desired quantities of domestic
investment and net capital outflow.
d. None of the above.

11. If the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied,
a. there is a surplus and the interest rate will rise.
b. there is a surplus and the interest rate will fall.
c. there is a shortage and the interest rate will rise.
d. there is a shortage and the interest rate will fall.

12. If there is a shortage of loanable funds,

a. the demand for loanable funds will shift to the right so the interest rate rises.
b. the supply of loanable funds will shift to the left so the interest rate falls.
c. there will be no shifts of the curves, but the interest rate will rise.
d. there will be no shifts of the curves, but the interest rate will fall.

13. Which of the following wo?

a. The demand for loanable funds shifts to the right.
b. The demand for loanable funds shifts to the left.
c. The supply of loanable funds shifts to the right.
d. The supply of loanable funds shifts to the left.

14. Which of the following would make both the equilibrium interest rate and the equilibrium quantity
of loanable funds decrease?
 a. The demand for loanable funds shifts to the right.
b. The demand for loanable funds shifts to the left.
c. The supply of loanable funds shifts to the right.
d. The supply of loanable funds shifts to the left.

15. In the open-economy macroeconomic model, other things the same, a decrease in the interest rate
shifts
a. the demand for dollars in the market for foreign-currency exchange to the
right. b. the demand for dollars in the market for foreign-currency exchange to the
left. c. the supply of dollars in the market for foreign-currency exchange to the
right. d. the supply of dollars in the market for foreign-currency exchange to the
left.

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Figure A

16. Refer to Figure A. The loanable funds market is in equilibrium at

a. 1 percent, $30 billion. c. 4 percent, $10 billion.
b. 2 percent, $20 billion. d. None of the above is correct.

17. Refer to Figure A. In the figure shown, if the real interest rate is 1 percent, there will be a
a. surplus of $10 billion. c. shortage of $10 billion.
b. surplus of $20 billion. d. shortage of $20 billion.

18. Refer to Figure A. In the figure shown, if the real interest rate is 1 percent, there will be pressure
for
a. the real interest rate to rise.
b. the demand for loanable funds curve to shift to the right.
c. the supply for loanable funds curve to shift to the left.
d. All of the above are correct.

19. If net exports are positive, then

a. net capital outflow is positive, so the foreign assets bought by the Japanese are greater
than the Japanese assets bought by foreigners.
b. net capital outflow is positive, so the Japanese assets bought by foreigners are greater
than the foreign assets bought by the Japanese.
c. net capital outflow is negative, so the foreign assets bought by the Japanese are greater
 than the Japanese assets bought by foreigners.
d. net capital outflow is negative, so the Japanese assets bought by foreigners are greater than
the foreign assets bought by the Japanese.

20. In the open economy macroeconomic model, net capital outflow is equal to the quantity of
a. dollars supplied in the foreign exchange market.
b. dollars demand in the foreign exchange market.
c. funds supplied in the loanable funds market.
d. None of the above is correct.

21. Net capital outflow is equal to

a. national saving minus the trade balance.
b. domestic investment plus national saving.
c. national saving minus domestic investment.
d. domestic investment minus national saving.

22. The price that balances supply and demand in the market for foreign-currency exchange in the
open-economy macroeconomic model is the
a. nominal exchange rate. c. real exchange rate.
b. nominal interest rate. d. real interest rate.

23. In the open-economy macroeconomic model, the key determinant of net capital outflow is the
a. nominal exchange rate. c. real exchange rate.
b. nominal interest rate. d. real interest rate.

24. Other things the same, if the Thai real interest rate were to increase, Thai net capital outflow
a. and net capital outflow of other countries would rise.
b. and net capital outflow of other countries would fall.
c. would rise, while net capital outflow of other countries would fall.
d. would fall, while net capital outflow of other countries would rise.

25. In the open-economy macroeconomic model, which of the following would make India’s net
capital outflow decrease?
a. a decrease in US interest rates. c. an appreciation of the Indian rupee. b. a
decrease in Indian interest rates. d. None of the above is correct.

26. In the open-economy macroeconomic model, if a country’s interest rate increases, its net capital
outflow
a. and the real exchange rate increase.
b. and the real exchange rate decrease.
c. increases and the real exchange rate decreases.
d. decreases and the real exchange rate increases.

Figure B
27. Refer to Figure B. At an interest rate of 3 percent, the diagram indicates that
a. there is a surplus in the market for foreign-currency exchange.
b. national saving equals domestic investment.
c. net capital outflow + domestic investment = national saving.
d. in the market for foreign-currency exchange the quantity of dollars supplied equals the
quantity of dollars demanded.

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28. Refer to Figure B. The curve in panel b shows that as the interest rate rises,
a. domestic investment declines.
b. net capital outflow declines.
c. net capital outflow and domestic investment decline.
d. None of the above is correct.

29. Refer to Figure B. Which curve shows the relation between the exchange rate and net exports?
a. the demand curve in panel a c. the supply curve in panel a
b. the demand curve in panel c d. the supply curve in panel c

30. Because a government budget deficit represents

a. negative public saving, it increases national savings.
b. negative public saving, it decreases national savings.
c. positive public saving, it increases national savings.
d. positive public saving, it decreases national savings.

31. If a country went from a government budget deficit to a surplus,

a. national saving would increase, shifting the supply of loanable funds to the
right. b. national saving would increase, shifting the supply of loanable funds to the
left. c. national saving would decrease, shifting the demand for loanable funds to the
right. d. national saving would decrease, shifting the demand for loanable funds to the
left.

32. If the government of Indonesia implemented a policy that reduced national saving, its real
exchange rate would
a. depreciate and Indonesian net exports would rise.
b. depreciate and Indonesian net exports would fall.
c. appreciate and Indonesian net exports would rise.
d. appreciate and Indonesian net exports would fall.
33. If the government of Thailand made policy changes that increased national saving, the real
exchange rate of the baht would
a. depreciate and Thai net exports would rise.
b. depreciate and Thai net exports would fall.
c. appreciate and Thai net exports would rise.
d. appreciate and Thai net exports would fall.

34. When a country runs a government budget deficit,

a. the real exchange rate of its currency and its net exports increase.
b. the real exchange rate of its currency and its net exports decrease.
c. the real exchange rate of its currency increases and its net exports
decrease. d. the real exchange rate of its currency decreases and its net exports
increase.

35. A government budget deficit

a. increases both net capital outflow and net exports.
b. decreases both net capital outflow and net exports.
c. increases net capital outflow and decreases net exports.
d. decreases net capital outflow and increases net exports.

36. If a government increases its budget deficit, then interest rates

a. rise and the real exchange rate appreciates. c. rise and the real exchange rate depreciates.
b. fall and the real exchange rate depreciates. d. fall and the real exchange rate appreciates.

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37. If the government of a country with a zero trade balances increases its budget deficit, then interest
rates
a. rise and the trade balance moves to a surplus.
b. rise and the trade balance moves to a deficit.
c. fall and the trade balance moves to a surplus.
d. fall and the trade balance moves to a deficit.

38. Which of the following is the most likely result from an increase in the government’s budget
surplus?
a. higher interest rates c. lower net capital outflows
b. lower imports d. lower domestic investment

39. An increase in the Indonesian government budget deficit shifts the

a. demand for loanable funds to the right and decreases investment spending.
b. supply of loanable funds to the right and increases investment spending.
c. supply of loanable funds to the left and decreases investment spending.
d. None of the above is correct.

40. A trade policy is a government policy

a. directed toward the goal of improving the tradeoff between equity and efficiency. b.
that directly influences the quantity of goods and services that a country imports
or exports.
c. intended to exploit the tradeoff between inflation and unemployment by altering the
budget deficit.
 d. toward trade unions.

41. A tax on imported goods is called a(n)

a. excise tax. c. import quota.
b. tariff. d. None of the above is correct.

42. A limit on the quantity of a good produced abroad that can be purchased domestically is called a(n)
a. tariff. c. import quota.
b. excise tax. d. None of the above is correct.

43. Trade policies

a. affect a country’s overall trade balance but affect all firms and industries the same. b. affect
a country’s overall trade balance but affect some firms or industries differently than others.
c. do not affect a country’s overall trade balance but affect some firms or
industries differently than the others.
d. do not affect either a country’s overall trade balance or specific firms or industries.

44. Capital flight refers to

a. the movement of workers across international borders in response to exchange rate
changes.
b. the movement of funds between financial intermediaries when interest rates change.
c. the ability of foreign direct investment to lift a country out of poverty.
d. a large and sudden movement of funds out of a country.

45. When a country suffers from capital flight, the demand for loanable funds in that country shifts
a. to the right, which increases the interest rates in that country.
b. to the right, which decreases the interest rates in that country.
c. to the left, which increases the interest rates in that country.
d. to the left, which decreases the interest rates in that country.

Figure C

46. Refer to Figure C. Suppose that the Filipino economy starts at r0 and E1. Which of the following
is consistent with the effects of capital flight?
a. the shift from D0 to D1 in Panel A
b. the shift from NCO0 to NCO1 in Panel B
 c. the shift from S0 to S1 in Panel C
d. All the above shifts are consistent with the effects of capital flight.

47. Refer to Figure B. Which of the following is consistent with capital flight from the Philippines?
a. The real exchange rate of the peso appreciates from E0 to E1.
b. The real exchange rate of the peso depreciates from E0 to E1.
c. The real exchange rate of the peso appreciates from E1 to E0.
d. The real exchange rate of the peso depreciates from E1 to E0.

48. Refer to Figure B. Suppose the Philippino economy starts at r0 and E1. Of the following, which
new equilibrium is consistent with capital flight?
a. ro and E0 c. r1 and E1
b. r1 and E0 d. None of the above is correct.

49. A trade restriction

a. increases net exports for a given exchange rate and, therefore, increases the demand
for local currency in the market for foreign-currency exchange.
b. decreases net exports for a given exchange rate and, therefore, increases the demand for
local currency in the market for foreign-currency exchange.
c. increases net exports for a given exchange rate and, therefore, decreases the demand for
local currency in the market for foreign-currency exchange.
d. decreases net exports for a given exchange rate and, therefore, increases the demand for
local currency in the market for foreign-currency exchange.

50. Political instability can lead to capital flight, which tends to

a. decrease interest rates and cause the currency to hold its value.
b. decrease interest rates and cause the currency to depreciate.
c. increase interest rates and cause the currency to depreciate.
d. None of the choices are correct.

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