1.

An “open” economy is one in which:

A.

the level of output is fixed.

B.

government spending exceeds revenues.

C.

the national interest rate equals the world interest rate.

D.

there is trade in goods and services with the rest of the world.



2.

Net exports equal GDP minus domestic spending on:

A.

all goods and services.

B.

all goods and services plus foreign spending on domestic goods and services.

C.

domestic goods and services.

D.

domestic goods and services minus foreign spending on domestic goods and services.



3.

The value of net exports is also the value of:

A.

net investment.

B.

net saving.

C.

national saving.

D.

the excess of national saving over domestic investment.



4.

Net capital outflow is equal to the amount that:

A.

foreign investors lend here.

B.

domestic investors lend abroad.

C.

foreign investors lend here minus the amount domestic investors lend abroad.

D.

domestic investors lend abroad minus the amount that foreign investors lend here.



5.

If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are ______.

A.

positive; positive

B.

positive; negative

C.

negative; negative

D.

negative; positive



6.

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow.

A.

deficit; negative

B.

surplus; negative

C.

deficit; positive

D.

surplus; positive



7.

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

A.

borrowing from abroad.

B.

lending from abroad.

C.

the domestic government.

D.

the World Bank.



8.

A “small” economy is one in which the:

A.

level of output is fixed.

B.

price level is fixed.

C.

domestic interest rate equals the world interest rate.

D.

domestic saving is less than domestic investment.



9.

A small open economy with perfect capital mobility is characterized by all of the following except that:

A.

its domestic interest rate always exceeds the world interest rate.

B.

it engages in international trade.

C.

its net capital outflows always equal the trade balance.

D.

its government does not impede international borrowing or lending.



10.

An increase in the trade surplus of a small open economy could be the result of:

A.

a domestic tax cut.

B.

an increase in government spending.

C.

a decrease in the world interest rate.

D.

the implementation of an investment tax-credit provision.



11.

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade ______ and ______ net capital outflow.

A.

deficit; negative

B.

surplus; positive

C.

deficit; positive

D.

surplus; negative



12.

In a small open economy, policies that increase:

A.

investment tend to cause a trade surplus.

B.

investment tend to cause a trade deficit.

C.

saving do not affect the trade balance.

D.

saving tend to cause a trade deficit.



13.

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

A.

number of yen you can get for lending one dollar in Japan for one year.

B.

number of yen you can get for one dollar.

C.

price of U.S. goods divided by the price of Japanese goods.

D.

price of Japanese goods divided by the price of U.S. goods.



14.

The real exchange rate:

A.

measures how many Japanese yen one really gets for a U.S. dollar.

B.

is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.

C.

is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level.

D.

the price of a domestic car divided by the price of a foreign car.



15.

When the real exchange rate rises:

A.

exports will decrease but imports will be unaffected.

B.

imports will decrease but exports will be unaffected.

C.

exports will increase and imports will decrease.

D.

exports will decrease and imports will increase.



16.

In the small open economy in equilibrium:

A.

saving is fixed and investment is determined by the investment function and the world interest rate.

B.

investment is fixed and saving is determined by the saving function and the world interest rate.

C.

saving is fixed and investment is determined by the trade balance.

D.

investment is fixed and saving is determined by the trade balance.



17.

In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:

A.

rises and net exports fall.

B.

rises and net exports rise.

C.

falls and net exports fall.

D.

falls and net exports rise.



18.

In a small open economy, if the government encourages investment, say through an investment tax credit, investment:

A.

increases and is financed through an increase in national saving.

B.

increases and is financed through an increase in exports.

C.

increases and is financed through an inflow of foreign capital.

D.

does not increase; the interest rate rises instead.



19.

In a small open economy, if the government adopts a policy that lowers imports, then that policy:

A.

raises the real exchange rate and increases net exports.

B.

raises the real exchange rate and does not change net exports.

C.

raises the real exchange rate and decreases net exports.

D.

lowers the real exchange rate.



20.

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the:

A.

foreign inflation rate minus the domestic inflation rate.

B.

domestic inflation rate minus the foreign inflation rate.

C.

foreign exchange rate minus the domestic exchange rate.

D.

domestic interest rate minus the foreign interest rate.



21.

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:

A.

dollar will appreciate by 3 percent against the yen.

B.

yen will appreciate by 3 percent against the dollar.

C.

yen will appreciate by 6 percent against the dollar.

D.

yen will appreciate by 9 percent against the dollar.



22.

If the purchasing-power parity theory is true, then:

A.

the net exports schedule is very steep.

B.

all changes in the real exchange rate result from changes in price levels.

C.

all changes in the nominal exchange rate result from changes in price levels.

D.

changes in saving or investment influence only the real exchange rate.



23.

Net capital outflow in a large country:

A.

rises as the real interest rate rises.

B.

declines as the interest rate rises.

C.

depends on the foreign interest rate.

D.

depends only on domestic saving.



24.

In a large open economy, the real interest rate is determined by:

A.

national saving, the domestic investment function, and the net capital outflow function.

B.

national saving, the domestic investment function, and the net-exports function.

C.

the domestic investment function, the net capital outflow function, and the net-exports function.

D.

national saving, the domestic investment function, the net capital outflow function, and the net-exports function.



25.

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow.

A.

decreases; decreases

B.

increases; increases

C.

decreases; increases

D.

increases; decreases



26.

In a small open economy, if consumers shift their preferences toward Japanese cars, then net exports:

A.

fall and the real exchange rate falls.

B.

fall but the real exchange rate remains unchanged.

C.

remain unchanged but the real exchange rate falls.

D.

and the real exchange rate remain unchanged.




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