Question 1

If after a country experiences capital flight, people become more confident about the safety of its assets, then in that country
A)the real exchange rate and the real interest rate will rise.
B)the real exchange rate will rise and the real interest rate will fall.
C)the real exchange rate will fall and the real interest rate will rise.
D)the real exchange rate and the real interest rate will fall.

Accepted Answer

Capital flight often leads to a decrease in demand for the country's currency, causing the real exchange rate to fall. However, if people become more confident about the safety of assets in the country after capital flight, demand for the currency will increase, causing its value to rise. At the same time, an increase in confidence in the safety of assets could lead to a decrease in the real interest rate, as investors may be willing to accept lower returns to invest in the country. Therefore, the real exchange rate will rise and the real interest rate will fall.

Question 2

In 2002 it looked like the Argentinean government might default on its debt (which eventually it did). The open-economy macroeconomic model predicts that this should have
A)raised Argentinean interest rates and caused the Argentinean currency to appreciate.
B)raised Argentinean interest rates and caused the Argentinean currency to depreciate.
C)lowered Argentinean interest rates and caused the Argentinean currency to appreciate.
D)lowered Argentinean interest rates and caused the Argentinean currency to depreciate.

Accepted Answer

When a country is at risk of defaulting on its debt, investors become more cautious and demand higher returns to compensate for the increased risk. This leads to an increase in interest rates in the country. Additionally, a default would make the country less creditworthy and therefore less attractive to foreign investors, which would lead to a depreciation of the currency. Therefore, the open-economy macroeconomic model predicts that in the case of Argentina, the default risk would have raised Argentinean interest rates and caused the Argentinean currency to depreciate.

Question 3

If the people thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate
A)and net exports would rise.
B)would rise and its net exports would fall.
C)would fall and its net exports would rise.
D)and its net exports would fall.

Accepted Answer

If the people thought that many banks in a certain country were at or near the point of bankruptcy, then there would be a decrease in confidence in the country's financial system. This would lead investors to pull out their money from the country, causing a decrease in demand for the country's currency. This would cause the country's real exchange rate to fall. A lower real exchange rate would make the country's exports cheaper and more attractive to foreign buyers, causing an increase in net exports. Therefore, the correct choice is C: the real exchange rate would fall and the net exports would rise.

Question 4

In which case(s) does(do) a country's supply of loanable funds shift right?
A)both an increase in the budget deficit and capital flight
B)an increase in the budget deficit, but not capital flight
C)capital flight, but not an increase in the budget deficit
D)neither an increase in the budget deficit nor capital flight

Accepted Answer

The answer of In which case(s) does(do) a country's supply...

Question 5

In 2009 Greece's budget deficit rose and people became worried about the ability of the Greek government to make payments on its debt. Which of the these events reduces a country's real exchange rate?
A)an increase in the budget deficit, and increased concerns about the ability of the government to pay back its debt
B)an increase in the budget deficit, but not increased concerns about the ability of the government to pay back its debt
C)increased concerns about the ability of the government to pay back its debt, but not an increase in the budget deficit
D)neither an increase in the budget deficit, nor increased concerns about the ability of the government to pay back its debt

Accepted Answer

Increased concerns about the ability of the government to pay back its debt would lead to a decrease in investor confidence in the country, which would result in a decrease in demand for the country's currency and a decrease in its real exchange rate. An increase in the budget deficit alone may not necessarily lead to a decrease in the real exchange rate, as it depends on the specific policies and actions taken by the government in response to the deficit.

Question 6

A firm produces construction equipment, some of which it sells to domestic businesses and some of which it exports. Which of the following effects of capital flight in the country where it produces would likely increase the quantity of equipment it sells?
A)both what happens to the interest rate and what happens to the exchange rate
B)what happens to the interest rate but not what happens to the exchange rate
C)what happens to the exchange rate but not what happens to the interest rate
D)neither what happens to the interest rate nor what happens to the interest rate.

Accepted Answer

If capital flight occurs and there is a decrease in demand for domestic currency, the exchange rate will decrease. This makes exports cheaper for foreign buyers, potentially increasing demand for the firm's construction equipment that is being exported. The interest rate does not directly affect the quantity of equipment sold, so option A is incorrect. Option B is also incorrect because changes in the interest rate alone would not have a direct impact on the quantity of equipment sold. Option D is incorrect because capital flight would have some effect on the economy, even if it doesn't directly impact the firm's sales.

Question 7

Figure 32-7
Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below.   
 
-Refer to Figure 32-7. Suppose the Mexican economy starts at r2 and e2. Which of the following new equilibrium is consistent with capital flight?
A)r2 and e3
B)r3 and e2
C)r3 and e1
D)None of the above is correct.

Accepted Answer

The answer of Figure 32-7
Refer to this diagram of the...

Question 8

Figure 32-7
Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below.   
 
-Refer to Figure 32-7. Suppose that the Mexican economy starts at r2 and e3. Which of the following is consistent with the effects of capital flight?
A)a shift from D2 to D1 in Panel A
B)a shift from NCO1 to NCO2 in Panel B
C)a shift from D2 to D1 in Panel C
D)All of the above shifts are consistent with the effects of capital flight.

Accepted Answer

Capital flight refers to the outflow of capital from a country due to a decrease in confidence in the economy. This would result in a decrease in the demand for Mexican assets, which would shift the net capital outflow curve to the right from NCO1 to NCO2 in Panel B. This would lead to a decrease in the exchange rate from e3 to e2, as shown in Panel A, and a decrease in output from Y3 to Y2, as shown in Panel C. Therefore, the shift from NCO1 to NCO2 in Panel B is the only consistent choice with the effects of capital flight. The shifts in Panels A and C may be caused by other factors, such as changes in monetary or fiscal policy.

Question 9

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then
A)net capital outflow and the real exchange rate will rise.
B)net capital outflow will rise and the real exchange rate will fall.
C)net capital outflow will fall and the real exchange rate will rise.
D)net capital outflow and the exchange rate will fall.

Accepted Answer

If the risk of buying U.S. assets rises, investors are likely to pull their capital out of the U.S. and invest it elsewhere, resulting in a rise in net capital outflow. As a result, the demand for U.S. dollars will fall, leading to a depreciation of the U.S. dollar and a fall in the real exchange rate.

Question 10

Which of the following is most likely to result if foreigners decide to withdraw the funds that they have loaned to the United States?
A)U.S. net exports will fall
B)U.S. net capital outflow will rise
C)U.S. domestic investment will rise
D)the dollar will appreciate

Accepted Answer

The answer of Which of the following is most likely...

Question 11

In which case(s) does(do) a country's supply of loanable funds shift left?
A)both an increase in the budget deficit and capital flight
B)an increase in the budget deficit, but not capital flight
C)capital flight, but not an increase in the budget deficit
D)neither an increase in the budget deficit nor capital flight

Accepted Answer

The answer of In which case(s) does(do) a country's supply...

Question 12

If people thought that many banks in a certain country were at or near the point of bankruptcy, then that country's interest rate
A)and net exports would rise.
B)would rise and its net exports would fall.
C)would fall and its net exports would rise.
D)and its net exports would fall.

Accepted Answer

The answer of If people thought that many banks in...

Question 13

In which case(s) does(do) a country's demand for loanable funds shift right?
A)both an increase in the budget deficit and capital flight
B)an increase in the budget deficit, but not capital flight
C)capital flight, but not an increase in the budget deficit
D)neither an increase in the budget deficit nor capital flight

Accepted Answer

The answer of In which case(s) does(do) a country's demand...

Question 14

The country of Solidia is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, we would expect Solidia's
A)real interest rate to rise.
B)real exchange rate to rise.
C)net exports to rise.
D)None of the above is likely.

Accepted Answer

The answer of The country of Solidia is politically very...

Question 15

If the risk of holding assets in foreign countries rises relative to the risk of holding U.S assets, then
A)U.S. net capital outflow rises which increases the U.S. exchange rate.
B)U.S. net capital outflow rises which decreases the U.S. exchange rate.
C)U.S. net capital outflow falls which increases the U.S. exchange rate.
D)U.S. net capital outflow falls which decreases the U.S. exchange rate.

Accepted Answer

The answer of If the risk of holding assets in...

Question 16

In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its debt. During the day of this announcement, U.S. interest rates rose and the real exchange rate of the U.S. dollar depreciated. Which of these changes is consistent with the results of the open-economy macroeconomic model?
A)the increase in U.S. interest rates
B)the depreciation of the real exchange rate of the U.S. dollar
C)Both a and b are consistent.
D)Neither a nor b are consistent.

Accepted Answer

In an open economy macroeconomic model, a threat of default on debt can cause a decrease in confidence in the U.S. economy, leading to a decrease in demand for U.S. financial assets and an increase in U.S. interest rates. Additionally, a decrease in demand for U.S. financial assets could cause a depreciation of the U.S. dollar in the foreign exchange market, leading to a decrease in the real exchange rate. Therefore, both the increase in U.S. interest rates and the depreciation of the real exchange rate of the U.S. dollar are consistent with the results of the model.

Question 17

When fear of default on bonds issued by U.S. corporations decline, then
A)net capital outflow and the exchange rate both rise.
B)net capital outflow rises and the exchange rate falls.
C)net capital outflow falls and the exchange rate rises.
D)net capital outflow and the exchange rate both fall.

Accepted Answer

A decline in fear of default on bonds issued by U.S. corporations implies that the bonds are considered less risky, therefore investors are more likely to invest in them. This leads to a decrease in net capital outflow (as more foreign investors are investing in the U.S.) and an increase in the demand for U.S. dollars, which results in an appreciation of the exchange rate.

Question 18

In 1998 the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have
A)increased Russian interest rates and net exports.
B)reduced Russian interest rates and net exports.
C)increased Russian interest rates and reduced Russian net exports.
D)reduced Russian interest rates and increased Russian net exports.

Accepted Answer

The answer of In 1998 the Russian government defaulted on...

Question 19

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then
A)the real exchange rate and the interest rate will rise.
B)the real exchange rate will rise and the interest rate will fall.
C)the real exchange rate will fall and the interest rate will rise.
D)the real exchange rate and the interest rate will fall.

Accepted Answer

If lending institutions had not carefully evaluated borrowers, it means that there is a higher probability of default, which increases the risk of buying U.S. assets. As a result, investors will demand a higher interest rate to compensate for the increased risk, leading to a rise in the interest rate. On the other hand, the real exchange rate will fall due to the decreased demand for U.S. assets.

Question 20

In which case(s) does(do) a country's demand for loanable funds shift left?
A)both an increase in the budget deficit and capital flight
B)an increase in the budget deficit, but not capital flight
C)capital flight, but not an increase in the budget deficit
D)neither an increase in the budget deficit nor capital flight

Accepted Answer

The answer of In which case(s) does(do) a country's demand...

Quiz 32: A Macroeconomic Theory of the Open Economy

If after a country experiences capital flight, people become more confident about the safety of its assets, then in that country

In 2002 it looked like the Argentinean government might default on its debt (which eventually it did) . The open-economy macroeconomic model predicts that this should have

If the people thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate

In which case(s) does(do) a country's supply of loanable funds shift right?

In 2009 Greece's budget deficit rose and people became worried about the ability of the Greek government to make payments on its debt. Which of the these events reduces a country's real exchange rate?

A firm produces construction equipment, some of which it sells to domestic businesses and some of which it exports. Which of the following effects of capital flight in the country where it produces would likely increase the quantity of equipment it sells?

Figure 32-7 Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below. -Refer to Figure 32-7. Suppose the Mexican economy starts at r2 and e2. Which of the following new equilibrium is consistent with capital flight?

Figure 32-7 Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below. -Refer to Figure 32-7. Suppose that the Mexican economy starts at r2 and e3. Which of the following is consistent with the effects of capital flight?

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then

Which of the following is most likely to result if foreigners decide to withdraw the funds that they have loaned to the United States?

In which case(s) does(do) a country's supply of loanable funds shift left?

If people thought that many banks in a certain country were at or near the point of bankruptcy, then that country's interest rate

In which case(s) does(do) a country's demand for loanable funds shift right?

The country of Solidia is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, we would expect Solidia's

If the risk of holding assets in foreign countries rises relative to the risk of holding U.S assets, then

When fear of default on bonds issued by U.S. corporations decline, then

In 1998 the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have

If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then

In which case(s) does(do) a country's demand for loanable funds shift left?