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Flashcards in Chapter 6 Deck (111):
1

An “open” economy is one in which:

  1. the level of output is fixed.
  2. government spending exceeds revenues.
  3. the national interest rate equals the world interest rate.
  4. there is trade in goods and services with the rest of the world.

4

2

A country's exports may be written as equal to:

  1. GDP minus consumption minus investment minus government spending.
  2. GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.
  3. imports.
  4. GDP minus imports.

2

3

Net exports equal GDP minus domestic spending on:

  1. all goods and services.
  2. all goods and services plus foreign spending on domestic goods and services.
  3. domestic goods and services.
  4. domestic goods and services minus foreign spending on domestic goods and services.

1

4

If domestic spending exceeds output, we ______ the difference—net exports are ______.

  1. import; negative
  2. export; positive
  3. import; positive
  4. export; negative

1

5

The value of net exports is also the value of:

  1. net investment.
  2. net saving.
  3. national saving.
  4. the excess of national saving over domestic investment.

4

6

If net capital outflow is positive, then:

  1. exports must be positive.
  2. exports must be negative.
  3. the trade balance must be positive.
  4. the trade balance must be negative.

3

7

Net capital outflow is equal to:

  1. national saving minus the trade balance.
  2. domestic investment plus the trade balance.
  3. domestic investment minus national saving.
  4. national saving minus domestic investment.

4

8

Net capital outflow is equal to the amount that:

  1. foreign investors lend here.
  2. domestic investors lend abroad.
  3. foreign investors lend here minus the amount domestic investors lend abroad.
  4. domestic investors lend abroad minus the amount that foreign investors lend here.

4

9

If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______.

  1. positive; positive
  2. positive; negative
  3. negative; negative
  4. negative; positive

1

10

In a small, open economy if net exports are negative, then:

  1. domestic spending is greater than output.
  2. saving is greater than investment.
  3. net capital outflows are positive.
  4. imports are less than exports.

1

11

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

  1. positive; positive
  2. positive; negative
  3. negative; negative
  4. negative; positive

3

12

When exports exceed imports, all of the following are true except

  1. net capital outflows are positive.
  2. net exports are positive.
  3. domestic investment exceeds domestic saving.
  4. domestic output exceeds domestic spending.

3

13

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

  1. –$25 billion.
  2. –$10 billion.
  3. $10 billion.
  4. $25 billion.

2

14

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

  1. deficit; negative
  2. surplus; negative
  3. deficit; positive
  4. surplus; positive

1

15

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow.

  1. deficit; negative
  2. surplus; negative
  3. deficit; positive
  4. surplus; positive

4

16

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is ______ and net capital outflow equals ______.

  1. a trade deficit; $100 billion
  2. balanced trade; $0
  3. a trade surplus; $100 billion
  4. balanced trade; $100 billion

2

17

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

  1. borrowing from abroad.
  2. borrowing from domestic banks.
  3. the domestic government.
  4. the World Bank.

1

18

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

  1. make loans to the domestic government.
  2. make loans to foreigners.
  3. repay the national debt.
  4. repay loans to the Federal Reserve.

2

19

A trade deficit can be financed in all of the following ways except by:

  1. borrowing from foreigners.
  2. selling domestic assets to foreigners.
  3. selling foreign assets owned by domestic residents to foreigners.
  4. borrowing from domestic lenders.

4

20

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______.

  1. increase; increase
  2. increase; decrease
  3. decrease; increase
  4. decrease; decrease

1

21

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______.

  1. increase; increase
  2. increase; decrease
  3. decrease; increase
  4. decrease; decrease

4

22

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______.

  1. increase; increase
  2. decrease; decrease
  3. do not change; do not change
  4. do not change; increase

3

23

A “small” economy is one in which the:

  1. level of output is fixed.
  2. price level is fixed.
  3. domestic interest rate equals the world interest rate.
  4. domestic saving is less than domestic investment.

3

24

The world interest rate:

  1. is equal to the domestic interest rate.
  2. makes domestic saving equal to domestic investment.
  3. is the interest rate charged on loans by the World Bank.
  4. is the interest rate prevailing in world financial markets.

4

25

In a small open economy with perfect capital mobility, the real interest rate will always be:

  1. above the world real interest rate.
  2. below the world real interest rate.
  3. equal to the world real interest rate.
  4. equal to the world nominal interest rate.

3

26

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

  1. its domestic interest rate always exceeds the world interest rate.
  2. it engages in international trade.
  3. its net capital outflows always equal the trade balance.
  4. its government does not impede international borrowing or lending.

1

27

Building an economic model based on the assumption of a small open economy is useful because:

  1. it accurately describes the U.S. economy.
  2. it is more complicated and realistic than a model based on the assumption of a large open economy.
  3. this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.
  4. it is not possible to build models of large open economies.

3

28

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.

  1. surplus; negative
  2. deficit; positive
  3. surplus; positive
  4. deficit; negative

3

29

In a small open economy, if the world interest rate is r1, then the economy has:

  1. a trade surplus.
  2. balanced trade.
  3. a trade deficit.
  4. negative capital outflows.

Q image thumb

1

30

In a small open economy, if the world interest rate is r3, then the economy has:

  1. a trade surplus.
  2. balanced trade.
  3. a trade deficit.
  4. positive capital outflows.

Q image thumb

3

31

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

  1. an increase in taxes.
  2. an increase in government spending.
  3. an increase in the world interest rate.
  4. the expiration of an investment tax-credit provision.

2

32

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

  1. a domestic tax cut.
  2. an increase in government spending.
  3. an increase in the world interest rate.
  4. the implementation of an investment tax-credit provision.

3

33

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

  1. deficit; negative
  2. surplus; positive
  3. deficit; positive
  4. surplus; negative

1

34

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.

  1. deficit; negative
  2. surplus; positive
  3. deficit; positive
  4. surplus; negative

2

35

Holding other factors constant, legislation to cut taxes in an open economy will:

  1. increase national saving and lead to a trade surplus.
  2. increase national saving and lead to a trade deficit.
  3. reduce national saving and lead to a trade surplus.
  4. reduce national saving and lead to a trade deficit.

4

36

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:

  1. investment in the small open economy.
  2. saving in the small open economy.
  3. exports by the small open economy.
  4. imports by the small open economy.

3

37

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____.

  1. increase; increase
  2. increase; decrease
  3. increase, not change
  4. decrease; increase

2

38

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

  1. increasing taxes
  2. increasing government spending
  3. increasing investment tax credits
  4. imposing protectionist trade policies

1

39

The adoption of an investment tax credit in a small open economy is likely to lead to:

  1. no change in either domestic investment or domestic saving in the small open economy.
  2. an increase in both domestic investment and domestic saving in the small open economy.
  3. an increase in domestic saving but no change in domestic investment in the small open economy.
  4. an increase in domestic investment but no change in domestic saving in the small open economy.

4

40

In a small open economy, policies that increase:

  1. investment tend to cause a trade surplus.
  2. investment tend to cause a trade deficit.
  3. saving do not affect the trade balance.
  4. saving tend to cause a trade deficit.

2

41

In an open economy:

  1. a trade deficit is always good.
  2. a trade deficit is always bad.
  3. a trade deficit may be good or bad.
  4. a trade surplus is always bad.

3

42

A shrinking U.S. budget deficit in the 1990s coincided with a ______ U.S. trade deficit.

  1. shrinking
  2. continuing
  3. nonexistent
  4. stable

2

43

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was ______ than the expansionary shift in the U.S. investment function, resulting in a trade ______.

  1. stronger; deficit
  2. stronger; surplus
  3. weaker; deficit
  4. weaker; surplus

3

44

Two reasons why capital may not flow to poor countries are that the poorer countries may:

  1. have economies unlike those described by a Cobb–Douglas production function and not be subject to diminishing returns to capital.
  2. have already accumulated high levels of capital relative to labor and may already have access to advanced technologies.
  3. legally prevent the inflow of foreign capital and provide strong legal protection of private property.
  4. have inferior production capabilities and not enforce property rights.

4

45

Based on a Cobb–Douglas production function and perfect capital mobility, capital should flow to economies in which:

  1. capital is relatively scarce.
  2. capital is relatively abundant.
  3. technological production capabilities are inferior.
  4. labor is relatively scarce.

1

46

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

  1. number of yen you can get for lending one dollar in Japan for one year.
  2. number of yen you can get for one dollar.
  3. price of U.S. goods divided by the price of Japanese goods.
  4. price of Japanese goods divided by the price of U.S. goods.

2

47

The real exchange rate:

  1. measures how many Japanese yen one really gets for a U.S. dollar.
  2. is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.
  3. is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level.
  4. is the price of a domestic car divided by the price of a foreign car.

2

48

If the number of dollars per yen rises, this is called a(n):

  1. appreciation of the dollar.
  2. appreciation of the yen.
  3. increase in the terms of trade.
  4. decrease in the terms of trade.

2

49

If the real exchange rate is high, foreign goods:

  1. and domestic goods are both relatively expensive.
  2. and domestic goods are both relatively cheap.
  3. are relatively expensive and domestic goods are relatively cheap.
  4. are relatively cheap and domestic goods are relatively expensive.

4

50

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good.

  1. 0.5
  2. 2.5
  3. 5
  4. 10

2. [2.5]

51

When the real exchange rate rises:

  1. exports will decrease but imports will be unaffected.
  2. imports will decrease but exports will be unaffected.
  3. exports will increase and imports will decrease.
  4. exports will decrease and imports will increase.

4

52

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______ and U.S. imports ______.

  1. increase; increase
  2. decrease; decrease
  3. increase; decrease
  4. decrease; increase

3

53

If the real exchange rate decreases, then net exports will _____.

  1. be positive.
  2. be negative.
  3. increase.
  4. decrease.

3

54

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports.

  1. more; greater
  2. more; smaller
  3. less; greater
  4. less; smaller

3

55

In the small open economy in equilibrium:

  1. saving is fixed, and investment is determined by the investment function and the world interest rate.
  2. investment is fixed, and saving is determined by the saving function and the world interest rate.
  3. saving is fixed, and investment is determined by the trade balance.
  4. investment is fixed, and saving is determined by the trade balance.

1

56

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment.

  1. downward-sloping; vertical
  2. upward-sloping; vertical
  3. downward-sloping; upward-sloping
  4. upward-sloping; downward-sloping

1

57

The real exchange rate is determined by the equality of:

  1. saving and the demand for net exports.
  2. investment and the demand for net exports.
  3. net capital outflow and the demand for net exports.
  4. the negative value of net capital outflow and the demand for net exports.

3

58

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

  1. rises and net exports fall.
  2. rises and net exports rise.
  3. falls and net exports fall.
  4. falls and net exports rise.

1

59

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______.

  1. increases; appreciates
  2. increases; depreciates
  3. decreases; appreciates
  4. decreases; depreciates

2

60

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate:

  1. rises and net exports fall.
  2. rises and net exports rise.
  3. falls and net exports fall.
  4. falls and net exports rise.

4

61

In a small open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange rate will _____, holding all else constant.

  1. decrease; decrease
  2. decrease; increase
  3. increase; decrease
  4. increase; increase

4

62

In a small open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant.

  1. decrease; decrease
  2. decrease; increase
  3. increase; decrease
  4. increase; increase

3

63

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

  1. increases and is financed through an increase in national saving.
  2. increases and is financed through an increase in exports.
  3. increases and is financed through an inflow of foreign capital.
  4. does not increase; the interest rate rises instead.

3

64

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______.

  1. increase; appreciates
  2. increase; depreciates
  3. decrease; appreciates
  4. decrease; depreciates

3

65

An appreciation of the real exchange rate in a small open economy could be the result of:

  1. an increase in government spending.
  2. an increase in taxes.
  3. a decrease in the world interest rate.
  4. the expiration of an investment tax-credit provision.

1

66

A depreciation of the real exchange rate in a small open economy could be the result of:

  1. a domestic tax cut.
  2. an increase in government spending.
  3. a decrease in the world interest rate.
  4. the expiration of an investment tax-credit provision

4

67

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

  1. raises the real exchange rate and increases net exports.
  2. raises the real exchange rate and does not change net exports.
  3. raises the real exchange rate and decreases net exports.
  4. lowers the real exchange rate.

2

68

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

  1. remains unchanged.
  2. decreases but not as much as the quantity of imports decreases.
  3. decreases by exactly the same amount as the quantity of imports decreases.
  4. decreases by more than the quantity of imports decreases.

3

69

An effective policy to reduce a trade deficit in a small open economy would be to:

  1. increase tariffs on imports.
  2. impose stricter quotas on imported goods.
  3. increase government spending.
  4. increase taxes.

4

70

Protectionist policies implemented in a small open economy with a trade deficit have the effect of ______ the trade deficit and ______ the quantity of imports and exports.

  1. decreasing; decreasing
  2. not changing; decreasing
  3. decreasing; not changing
  4. not changing; not changing

2

71

Protectionist policies in a small open economy do not alter the trade balance because the:

  1. quantity of imports and exports is fixed.
  2. interest rate adjusts to offset any reductions in imports.
  3. exchange rate appreciates to offset the increase in net exports.
  4. level of net capital outflow is fixed by the world interest rate.

3

72

Which of the following would decrease the real exchange rate in a small open economy in the long run?

  1. a personal income tax cut
  2. a reduction in government spending
  3. a tariff on imports
  4. an increase in investment

2

73

Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies at home?

  1. (A)
  2. (B)
  3. (C)
  4. (D)

Q image thumb

1. [A]

74

Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies abroad?

  1. (A)
  2. (B)
  3. (C)
  4. (D)

Q image thumb

2. (B)

75

Which of the panels illustrates the impact on the real exchange rate of an increase in investment demand?

  1. (A)
  2. (B)
  3. (C)
  4. (D)

Q image thumb

3. (C)

76

Which of the panels illustrates the impact on the real exchange rate of protectionist trade policies?

  1. (A)
  2. (B)
  3. (C)
  4. (D)

Q image thumb

4. (D)

77

Which of the panels illustrates the impact on the real exchange rate of an increase in household saving?

  1. (A)
  2. (B)
  3. (C)
  4. (D)

Q image thumb

1. (A)

78

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

  1. foreign inflation rate minus the domestic inflation rate.
  2. domestic inflation rate minus the foreign inflation rate.
  3. foreign exchange rate minus the domestic exchange rate.
  4. domestic interest rate minus the foreign interest rate.

1

79

If a country has a high rate of inflation relative to the United States, the dollar will buy:

  1. less of the foreign currency over time.
  2. more of the foreign currency over time.
  3. the same amount of the foreign currency over time.
  4. an amount of foreign currency determined by the real exchange rate.

2

80

One consequence of high inflation is a(n):

  1. appreciating nominal exchange rate.
  2. decrease in the price of goods measured in terms of money.
  3. depreciating nominal exchange rate.
  4. decrease in the price of foreign currencies measured in terms of the domestic currency.

3

81

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:

  1. dollar will appreciate by 3 percent against the yen.
  2. yen will appreciate by 3 percent against the dollar.
  3. yen will appreciate by 6 percent against the dollar.
  4. yen will appreciate by 9 percent against the dollar.

2

82

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall:

  1. 0 percent.
  2. 8 percent.
  3. 10 percent.
  4. 12 percent.

4

83

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to ______, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to ______.

  1. appreciate; appreciate
  2. appreciate; depreciate
  3. depreciate; depreciate
  4. depreciate; appreciate

2

84

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

  1. the net exports schedule is very steep.
  2. all changes in the real exchange rate result from changes in price levels.
  3. all changes in the nominal exchange rate result from changes in price levels.
  4. changes in saving or investment influence only the real exchange rate.

3

85

The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called:

  1. the theory of the real exchange rate.
  2. equal currency conversion.
  3. international monetary exchange.
  4. purchasing-power parity.

4

86

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate.

  1. increase
  2. decrease
  3. not change
  4. either increase or decrease

3

87

According to purchasing-power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will ___ oil in New York and _____ oil in London to drive _____ the price of oil in New York.

  1. buy; sell; up
  2. buy; sell; down
  3. sell; buy; up
  4. sell; buy; down

4

88

The law of one price is enforced by:

  1. governments.
  2. producers.
  3. consumers.
  4. arbitrageurs.

4

89

The doctrine of purchasing-power parity:

  1. is a completely accurate description of the real world.
  2. would be entirely accurate if only goods were traded.
  3. would be entirely accurate if all consumers had the same preferences.
  4. provides a reason to expect that movements in the real exchange rate will typically be small or temporary.

4

90

If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost:

  1. 2 pesos.
  2. 5 pesos.
  3. 10 pesos.
  4. 20 pesos.

4

91

In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out; the expansion also causes a trade:

  1. surplus and a fall in the real exchange rate.
  2. deficit and a rise in the real exchange rate.
  3. surplus and a rise in the real exchange rate.
  4. deficit and a fall in the real exchange rate.

2

92

Net capital outflow in a large country:

  1. rises as the real domestic interest rate rises.
  2. declines as the domestic interest rate rises.
  3. depends on the foreign interest rate.
  4. depends only on domestic saving.

2

93

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

  1. vertical line at 0.
  2. horizontal line at the world real interest rate.
  3. line that slopes up and to the right.
  4. line that slopes down and to the right.

1

94

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

  1. vertical line at 0.
  2. horizontal line at the world real interest rate.
  3. line that slopes up and to the right.
  4. line that slopes down and to the right.

2

95

A statement that is generally true about capital in a large open economy is that it is:

  1. perfectly mobile, and the country does not influence world financial markets.
  2. perfectly mobile, and the country influences world financial markets.
  3. not perfectly mobile, but the country does not influence world financial markets.
  4. not perfectly mobile, but the country influences world financial markets.

4

96

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

  1. national saving, the domestic investment function, and the net capital outflow function.
  2. national saving, the domestic investment function, and the net exports function.
  3. the domestic investment function, the net capital outflow function, and the net exports function.
  4. national saving, the domestic investment function, the net capital outflow function, and the net exports function.

1

97

In a large open economy, the interest rate adjusts so that domestic saving equals:

  1. domestic investment.
  2. net exports.
  3. net capital outflow.
  4. domestic investment plus net capital outflow.

4

98

In a large open economy, the exchange rate adjusts so that net exports equal:

  1. domestic saving.
  2. domestic investment.
  3. net capital outflow.
  4. domestic investment plus net capital outflow.

3

99

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.

  1. does not change; increases
  2. increases; increases
  3. increases; decreases
  4. decreases; increases

2

100

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

  1. decreases; decreases
  2. increases; increases
  3. decreases; increases
  4. increases; decreases

1

101

In a large open economy, if an import quota is adopted, then:

  1. net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises.
  2. net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate falls.
  3. net exports rise and the real exchange rate rises.
  4. net exports rise and the real exchange rate falls.

1

102

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

  1. rises, while the real exchange rate rises and net exports fall.
  2. rises, while the real exchange rate falls and net exports rise.
  3. falls, while the real exchange rate rises and net exports rise.
  4. falls, while the real exchange rate rises and net exports fall.

3

103

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:

  1. rises and net exports fall.
  2. and net exports both rise.
  3. falls and net exports rise.
  4. and net exports both fall.

3

104

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

  1. fall and the real exchange rate falls.
  2. fall but the real exchange rate remains unchanged.
  3. remain unchanged but the real exchange rate falls.
  4. and the real exchange rate remains unchanged.

3

105

In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net exports:

  1. fall and the real exchange rate falls.
  2. fall but the real exchange rate remains unchanged.
  3. remain unchanged but the real exchange rate falls.
  4. and the real exchange rate remain unchanged.

4

106

Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports:

  1. will certainly decrease.
  2. will certainly increase.
  3. may increase or decrease.
  4. will remain the same.

3

107

Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment:

  1. will rise and small country investment will fall.
  2. will rise and small country investment will remain unchanged.
  3. will remain unchanged and small country investment will fall.
  4. and small country investment will both remain unchanged.

3

108

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate:

  1. will fall and its net exports will rise.
  2. will rise and its net exports will fall.
  3. and net exports will both fall.
  4. and exports will both rise.

1

109

If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 lire now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then:

  1. the purchasing-power parity theory is correct.
  2. traveling in Chile today costs about the same as it did ten years ago.
  3. traveling in Chile is cheaper now than it was ten years ago.
  4. traveling in Chile is more expensive now than it was ten years ago.

4

110

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

  1. decrease by 8 percent.
  2. decrease by 4 percent.
  3. increase by 4 percent.
  4. increase by 5 percent.

3

111

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate:

  1. and net exports will both fall.
  2. will fall and net exports will rise.
  3. will rise and net exports will fall.
  4. and net exports will both rise.

1