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Exam 32: A Macroeconomic Theory of the Open Economy

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Question 91

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Suppose the U.S. government institutes a "Buy American" campaign, in order to encourage spending on domestic goods. What effect will this have on the U.S. trade balance?

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Such a campaign will increase the demand...

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Question 92

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Other things the same, if foreigners desire to purchase more U.S. bonds, then the demand for loanable funds shifts left.

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Question 93

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If the exchange rate falls, domestic goods become relatively ______ expensive. This change in the affordability of domestic goods makes domestic goods _____ attractive to domestic residents. So, _______ ______.

Because depreciation of the real exchange rate of the dollar increases U.S. net exports, the demand curve for dollars in the foreign-currency exchange market is downward sloping.

Although trade policies do not affect a country's overall trade balance, they do affect specific firms and industries.

In the open-economy macroeconomic model, the key determinant of net capital outflow is the

If the government budget deficit rises, what happens to the interest rate? What does this change in the interest rate do to net capital outflow? Provide a detailed explanation of why this change in the interest rate changes net capital outflow.

The purchase of a capital asset adds to the demand for loanable funds only if that asset is a domestic one.

A country reduces its government budget deficit and also makes political reforms that lead people to believe this country's assets are less risky. Given the combination of a reduced deficit and lower asset risk, what happens to the interest rate?

A country has national saving of $65 billion, government expenditures of $35 billion, domestic investment of $20 billion, and net capital outflow of $45 billion. What is its supply of loanable funds?

Scenario 32-5 ​ Suppose that Congress and the President enact legislation that provides a tax rebate to businesses that purchase capital goods. Assume other countries make no policy changes. -Refer to Scenario 32-5. What happens to the exchange rate, U.S. net exports, and the net exports of foreign countries?

A country recently had 500 billion euros of national saving and 200 billion euros of domestic investment. What was its net capital outflow? What was its quantity of loanable funds demanded?

Which of the following accurately describes of the effect of the government budget deficit on the open economy?

A country has a net capital outflow of $650 billion and domestic investment of $110 billion. What is the quantity of loanable funds demanded?

Fill in the table below with the direction of the variables that change in response to the events in the first column. $\begin{array}{c}\begin{array}{|l|}\hline\\\\\\\\ \hline\text {U.S. government }\\ \text {budget deficit}\\ \text { incteases }\\\hline \text {U.S. imposes}\\ \text { import quotas }\\\hline \text {capital flight}\\ \text { from the United }\\ \text {States}\\\hline \end{array}\begin{array}{l|}\hline\\\\ \text {U.S. real }\\\text {interest tate}\\\hline \\\\\\\hline \\\\\hline \\\\\\\hline \end{array}\begin{array}{l|}\hline\\\\ \text {U.S. domestic }\\ \text {investment}\\\hline \\\\\\\hline \\\\\hline \\\\\\\hline \end{array}\begin{array}{l|}\hline\\ \text {U.S. net}\\ \text {capital }\\ \text {outflow}\\\hline \\ \\\\\hline \\\\\hline \\\\\\\hline \end{array}\begin{array}{l|}\hline \text {U.S. real} \\ \text { exchange rate }\\ \text {of domestic }\\ \text {currency}\\\hline \\ \\\\\hline \\\\\hline \\\\\\\hline \end{array}\begin{array}{l|}\hline\\\\\text {U.S. trade}\\\text { balance}\\\hline \\ \\\\\hline \\\\\hline \\\\\\\hline \end{array}\end{array}$

Scenario 32-2 ​ Due to concerns about a rising level of debt relative to GDP, Congress and the President cut expenditures and raise taxes. -Refer to Scenario 32-2. What does this policy change do to net capital outflows? Defend your answer.

If at a given real interest rate desired national saving is $120 billion, domestic investment is $84 billion, and net capital outflow is $56 billion, then at that real interest rate in the loanable funds market there is a

An increase in national saving reduces the interest rate and so reduces net capital outflow.

If a country's exchange rate rises, what happens to its exports and what happens to its imports?

A country recently had 500 billion euros of national saving and -200 billion euros of net capital outflow. What was its domestic investment? What was its quantity of loanable funds supplied?