Question 1

Which of the following would do the most to reduce a trade deficit?
A)increase domestic saving
B)increase domestic political stability and respect of property rights
C)other countries reduce their trade restrictions
D)raise tariffs

Accepted Answer

Increasing domestic saving would lead to an increase in the supply of loanable funds, which would lead to a decrease in interest rates. This would, in turn, lead to a decrease in consumption and an increase in investment. With decreased consumption, there would be less demand for imports, which would reduce the trade deficit.

Note: While option C might also help in reducing the trade deficit, it is not within the control of the country experiencing the trade deficit to influence other countries' trade restrictions. Moreover, option D (raising tariffs) is not an ideal solution as it can lead to retaliation from other countries and start a trade war, ultimately making both countries worse off.

Question 2

If government policy encouraged households to save more at each interest rate,then
A)the real exchange rate and net exports would rise.
B)the real exchange rate and net exports would fall.
C)the real exchange rate would rise and net exports would fall.
D)the real exchange rate would fall and net exports would rise.

Accepted Answer

When households save more, the supply of loanable funds in the economy increases and interest rates fall. Lower interest rates lead to a decrease in the demand for domestic currency, causing it to depreciate. The lower exchange rate makes exports cheaper and imports more expensive, leading to an increase in net exports. Hence, the real exchange rate would fall and net exports would rise.

Question 3

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects.Such a tax credit would
A)shift both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right.
B)shift the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left.
C)shift the demand for loanable funds left and shift the supply of dollars in the market for foreign-currency exchange right.
D)shift both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange left.

Accepted Answer

A tax credit for investment projects would incentivize firms to invest more. This would increase the demand for loanable funds, shifting the demand curve right. However, if the tax credit was funded through government borrowing, it would increase the supply of dollars in the market for foreign-currency exchange, shifting the supply curve left. Therefore, the correct answer is B, which shows a rightward shift in the demand for loanable funds and a leftward shift in the supply of dollars in the market for foreign-currency exchange.

Question 4

If the government of India implemented a policy that decreased national saving,its real exchange rate would
A)depreciate and Indian net exports would rise.
B)depreciate and Indian net exports would fall.
C)appreciate and Indian net exports would rise.
D)appreciate and Indian net exports would fall.

Accepted Answer

A decrease in national saving would result in a decrease in the supply of loanable funds, leading to an increase in interest rates. This would cause an influx of foreign capital, increasing the demand for Indian currency and thus appreciating its exchange rate. An appreciation of the exchange rate would result in a decrease in net exports, as Indian goods and services would become relatively more expensive for foreigners. Therefore, the correct answer is D (appreciate and Indian net exports would fall).

Question 5

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects.Such a tax credit would
A)raise both the interest rate and the real exchange rate.
B)raise the interest rate and reduce the real exchange rate.
C)reduce the interest rate and raise the real exchange rate.
D)reduce both the interest rate and the real exchange rate.

Accepted Answer

The answer of During the financial crisis it was proposed...

Question 6

If U.S.citizens decide to purchase more foreign assets at each interest rate,the U.S.real interest rate
A)increases,the real exchange rate of the dollar appreciates,and U.S.net capital outflow decreases.
B)increases,the real exchange rate of the dollar depreciates,and U.S.net capital outflow increases.
C)decreases,the real exchange rate of the dollar depreciates,and U.S.net capital outflow decreases.
D)decreases,the real exchange rate of the dollar appreciates,and U.S.net capital outflow increases.

Accepted Answer

When U.S. citizens purchase more foreign assets, it means there is an increase in the demand for foreign currency. This leads to a depreciation of the U.S. real exchange rate. As the U.S. interest rate increases, it makes U.S. assets more attractive to foreign investors, leading to an increase in the supply of dollars and a decrease in U.S. net capital outflow. Therefore, option B is the correct answer.

Question 7

When a government reduces its budget deficit,then that country's
A)supply of loanable funds shifts right.
B)supply of loanable funds shifts left.
C)demand for loanable funds shifts right.
D)demand for loanable funds shifts left.

Accepted Answer

When a government reduces its budget deficit, it means that it is borrowing less money. This reduces the supply of loanable funds, which shifts the supply curve to the left.

Question 8

If the government of Venezuela made policy changes that increased national saving,the real exchange rate of the peso would
A)depreciate and Venezuelan net exports would rise.
B)depreciate and Venezuelan net exports would fall.
C)appreciate and Venezuelan net exports would rise.
D)appreciate and Venezuelan net exports would fall.

Accepted Answer

An increase in national saving would lead to a lower interest rate, causing the real exchange rate to depreciate, making Venezuelan goods cheaper for foreigners, thus increasing net exports.

Question 9

If U.S.citizens decide to save a smaller fraction of their incomes,U.S.domestic investment
A)increases,and U.S.net capital outflow increases.
B)increases,and U.S.net capital outflow decreases.
C)decreases,and U.S.net capital outflow increases.
D)decreases,and U.S.net capital outflow decreases.

Accepted Answer

If U.S. citizens decide to save a smaller fraction of their incomes, then there will be less money available for domestic investment. This will lead to a decrease in U.S. domestic investment and a decrease in U.S. net capital outflow.

Question 10

If U.S.citizens decide to save a larger fraction of their incomes,the real interest rate
A)decreases,the real exchange rate of the dollar depreciates,and U.S.net capital outflow increases.
B)decreases,the real exchange rate of the dollar appreciates,and U.S.net capital outflow decreases.
C)increases,the real exchange rate of the dollar appreciates,and U.S.net capital outflow decreases.
D)increases,the real exchange rate of the dollar depreciates,and U.S.net capital outflow increases.

Accepted Answer

When U.S. citizens save more, the supply of loanable funds increases, leading to a decrease in the real interest rate. A lower interest rate makes U.S. assets less attractive, causing the dollar to depreciate and increasing net capital outflow.

Question 11

If a country repeals an investment tax credit that,subsidizes domestic investment,
A)net capital outflow and the real exchange rate rise.
B)net capital outflow rises and the real exchange rate falls.
C)net capital outflow falls and the real exchange rate rises.
D)net capital outflow and the real exchange rate fall.

Accepted Answer

Repealing an investment tax credit that subsidizes domestic investment would lower the incentive for foreigners to invest capital in that country, causing a decrease in net capital outflow. A decrease in net capital outflow would lead to a decrease in the demand for the country's currency, causing a fall in the real exchange rate. Therefore, Choice B is the correct answer.

Question 12

If a country imposes a tariff on some good,then which of the following curves shifts right?
A)both the demand for loanable funds and demand in the market for foreign-currency exchange.
B)the demand for loanable funds and demand in the market for foreign-currency exchange.
C)demand in the market for foreign-currency exchange but not the demand for loanable funds.
D)neither the demand for loanable funds nor demand in the market for foreign-currency exchange.

Accepted Answer

When a country imposes a tariff on some good, it makes the imported good more expensive relative to domestic goods. As a result, people will demand fewer foreign goods and instead demand more domestic goods. This increased demand for domestic goods relative to foreign goods increases the demand for domestic currency (since people need domestic currency to buy domestic goods) and decreases the demand for foreign currency (since people need less foreign currency to buy fewer foreign goods). Hence, the demand in the market for foreign-currency exchange shifts to the left, and the demand for domestic currency (and thus the supply of foreign currency) shifts to the right. This increase in the demand for domestic currency could potentially increase the demand for loanable funds, but this effect is ambiguous and depends on various factors such as the size and duration of the tariff, the elasticity of demand for the domestic currency, and the interest rate effects of the tariff. Therefore, choice C is the only correct answer.

Quiz 19: A Macroeconomic Theory of the Open Economy: How Policies and Events Affect an Open Economy

Which of the following would do the most to reduce a trade deficit?

If government policy encouraged households to save more at each interest rate,then

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects.Such a tax credit would

If the government of India implemented a policy that decreased national saving,its real exchange rate would

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects.Such a tax credit would

If U.S.citizens decide to purchase more foreign assets at each interest rate,the U.S.real interest rate

When a government reduces its budget deficit,then that country's

If the government of Venezuela made policy changes that increased national saving,the real exchange rate of the peso would

If U.S.citizens decide to save a smaller fraction of their incomes,U.S.domestic investment

If U.S.citizens decide to save a larger fraction of their incomes,the real interest rate

If a country repeals an investment tax credit that,subsidizes domestic investment,

If a country imposes a tariff on some good,then which of the following curves shifts right?