Chapter 18

Question 1

Which of the following represents the demand for domestic goods?
A) C + I + G
B) C + I + G + X
C) C + I + G - εIM
D) C + I + G + X + εIM
E) C + I + G + X - IM/ε

Answer 1

E) C + I + G + X - IM/ε

Question 2

Which of the following represents the domestic demand for goods?
A) C + I + G
B) C + I + G + X
C) C + I + G - IM/ε
D) C + I + G + X - IM/ε
E) C + I + G + X + εIM

Answer 2

A) C + I + G

Question 3

The quantity of imports will increase when there is
A) a reduction in the real exchange rate.
B) an increase in domestic output.
C) an increase in foreign output.
D) all of the above

Answer 3

B) an increase in domestic output.

Question 4

Exports will decrease when there is
A) an increase in the real exchange rate.
B) an increase in domestic output.
C) an increase in foreign output.
D) all of the above

Answer 4

A) an increase in the real exchange rate.

Question 5

Which of the following occurs when the goods market is in equilibrium?
A) Domestic output (Y) equals the demand for domestic goods.
B) Y equals the domestic demand for goods.
C) Y equals the domestic demand for domestic goods.
D) Net exports equals 0.
E) Demand for domestic goods equals the domestic demand for goods.

Answer 5

A) Domestic output (Y) equals the demand for domestic goods.

Question 6

Which of the following is true when a country is experiencing a trade surplus (NX > 0)?
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) A budget surplus exists.

Answer 6

B) Demand for domestic goods is greater than the domestic demand for goods.

Question 7

Which of the following is true when a country’s trade position is balanced (i.e., NX = 0)?
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) Neither a budget surplus nor deficit exists (i.e., G - T = 0).

Answer 7

A) Demand for domestic goods is equal to the domestic demand for goods.

Question 8

In an open economy, which of the following will cause an increase in the size of the multiplier?
A) a reduction in the marginal propensity to import
B) a reduction in foreign output
C) an increase in the marginal propensity to save
D) all of the above
E) none of the above

Answer 8

A) a reduction in the marginal propensity to import

Question 9

Suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of the following in the domestic country?
A) a reduction in output
B) a reduction in consumption
C) a reduction in net exports
D) all of the above
E) none of the above

Answer 9

D) all of the above

Question 10

Which of the following will always cause an increase in net exports?
A) a reduction in domestic output
B) an increase in the real exchange rate
C) an increase in government spending
D) an increase in investment

Answer 10

A) a reduction in domestic output

Question 11

Which of the following will occur in a small country with a high marginal propensity to import?
A) Changes in government spending will cause large changes in output.
B) Changes in government spending will cause large changes in the trade balance.
C) A depreciation will cause only small changes in the trade balance.
D) There is no combination of policies that can eliminate the trade deficit.
E) all of the above

Answer 11

B) Changes in government spending will cause large changes in the trade balance.

Question 12

Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y). This increase in Y will not cause which of the following to occur?
A) the domestic country’s output to increase
B) the domestic country’s consumption to increase
C) the domestic country’s output to increase and its trade balance to worsen as imports increase
D) all of the above
E) none of the above

Answer 12

C) the domestic country’s output to increase and its trade balance to worsen as imports increase

Question 13

In an open economy, net exports will be equal to which of the following?
A)  X - IM/ε
B) T - G
C) DD
D) Z
E) S - I

Answer 13

A) X - IM/ε

Question 14

Which of the following will occur as a result of a tax increase?
A) private saving increases
B) investment increases
C) the trade balance improves
D) the trade balance worsens
E) the budget deficit increases

Answer 14

C) the trade balance improves

Question 15

Policy coordination is difficult because each country
A) prefers to be the one to increase demand.
B) prefers to be the one to appreciate its currency.
C) prefers that other countries increase their demand.
D) prefers to be the one to increase taxes.
E) prefers that other countries increase taxes.

Answer 15

C) prefers that other countries increase their demand.

Question 16

Which of the following conditions must be satisfied for the demand for domestic goods to be equal to the domestic demand for goods?
A) X = εIM
B) X = 0
C) G - T = 0
D) S = I
E) X = IM/ε

Answer 16

E) X = IM/ε

Question 17

An increase in which of the following variables will cause a reduction in the demand for domestic goods?
A) foreign income
B) the real exchange rate
C) consumer confidence
D) domestic income
E) all of the above

Answer 17

B) the real exchange rate

Question 18

An increase in domestic demand will have which of the following effects in an open economy?
A) a smaller effect on output than in a closed economy and a positive effect on the trade balance
B) a smaller effect on output than in a closed economy and a negative effect on the trade balance
C) a larger effect on output than in a closed economy and a positive effect on the trade balance
D) a larger effect on output than in a closed economy and a negative effect on the trade balance

Answer 18

B) a smaller effect on output than in a closed economy and a negative effect on the trade balance

Question 19

An increase in the marginal propensity to import will cause
A) the ZZ line to become flatter and a given change in government spending (G) to have a larger effect on domestic output.
B) the ZZ line to become flatter and a given change in government spending (G) to have a smaller effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending (G) to have a larger effect on domestic output.
D) the ZZ line to become steeper and a given change in government spending (G) to have a smaller effect on domestic output.

Answer 19

B) the ZZ line to become flatter and a given change in government spending (G) to have a smaller effect on domestic output.

Question 20

A reduction in the marginal propensity to import will cause
A) the multiplier to increase and a given change in government spending (G) to have a larger effect on domestic output.
B) the multiplier to increase and a given change in government spending (G) to have a smaller effect on domestic output.
C) the multiplier to decrease and a given change in government spending (G) to have a larger effect on domestic output.
D) the multiplier to decrease and a given change in government spending (G) to have a smaller effect on domestic output.

Answer 20

A) the multiplier to increase and a given change in government spending (G) to have a larger effect on domestic output.

Question 21

In a large country, the effect of a given change in government spending
A) on output is large and the effect on the trade balance is small.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is small.
D) on output is small and the effect on the trade balance is large.

Answer 21

A) on output is large and the effect on the trade balance is small.

Question 22

We will generally observe that the more open an economy
A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
D) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.

Answer 22

C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.

Question 23

Suppose policy makers want to increase Y and keep NX constant. Which of the following policies would most likely achieve this?
A) an increase in government spending
B) a real depreciation
C) an increase in government spending and a reduction in the real exchange rate
D) a reduction in the real exchange rate
E) encourage the country’s trading partners to implement policies that will cause an increase in foreign income (Y*)

Answer 23

C) an increase in government spending and a reduction in the real exchange rate

Question 24

Suppose policy makers want to increase NX and keep Y constant. Which of the following policies would most likely achieve this?
A) a reduction in government spending
B) a real depreciation
C) a reduction in government spending and a reduction in the real exchange rate
D) a reduction in the real exchange rate and a tax cut

Answer 24

C) a reduction in government spending and a reduction in the real exchange rate

Question 25

Suppose the rest of the world experiences an expansion that causes an increase in foreign income (Y*). From the domestic economy's perspective, this increase in foreign income will cause which of the following as the domestic economy adjusts to the rise in Y*?
A) an increase in domestic income
B) an increase in imports
C) an increase in net exports
D) all of the above

Answer 25

D) all of the above

Question 26

In an open economy, a reduction in government spending will cause
A) an increase in domestic output.
B) an increase in imports.
C) an increase in net exports.
D) all of the above

Answer 26

C) an increase in net exports.

Question 27

Which of the following will occur as a result of a tax cut?
A) private saving decreases
B) investment decreases
C) the trade balance improves
D) the trade balance worsens
E) the budget deficit decreases

Answer 27

D) the trade balance worsens