Exam 13: A Macroeconomic Theory of the Small Open Economy

If a government started with a deficit and moved to a surplus, which statement would best describe the effects of these changes?

Why do higher real interest rates lead to lower net capital outflow?

A drop in the Costa Rican real interest rate reduces Costa Rican net capital outflow.

The People's Republic of China has had a large trade surplus in recent years. What is the most likely explanation of this surplus?

What does a lower real interest rate decrease the quantity of?

According to the theory of purchasing-power parity, what is the shape of the demand curve for foreign-currency exchange?

If the government of Barbados implemented a policy that reduced national saving, which statement would best predict the consequences?

Suppose that the world consists of only two countries, A and B, of relatively equal sizes. The world interest rate in such a model is some average of the autarkic (no trade) interest rates in each of the two countries. a. Draw "parallel" loanable funds markets for the two countries and show the position of the world interest rate. (Hint: What relationship must exist between the NCOs of the two countries?) b. Suppose country A enacts laws that induce people to save more. Show the effects of such laws on each country's domestic amounts saved and invested. c. In the currency-exchange diagrams for both countries, show the effect of country A's savings policies on both countries' exchange rates and net exports.

If a government increases its budget deficit, which statement would best predict the effects?

What is the effect of an increase in the Canadian real interest rate above the world interest rate?

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

What are the main elements of our open-economy macroeconomic model?

Figure 13-1 -Refer to Figure 13-1. In the figure shown, if the real interest rate is 3 percent, what is the quantity of loanable funds demanded?

In the open-economy macroeconomic model, other things the same, when a Canadian resident imports a foreign good, our model treats this as a decrease in the demand for dollars in the foreign-currency exchange market.

Which of the following is an effect of capital flight in a small economy such as Panama?

If the quantity of loanable funds supplied is greater than the quantity demanded, which statement best describes the difference?

Figure 13-2 -Refer to Figure 13-2. Suppose that these diagrams refer to Canada. Which shift shows the effect of a voluntary export restriction by the Swiss government?

Fill in the table below with the direction of the variables that change in response to the events in the first column.

The key determinant of net capital outflow is the real exchange rate.

In the open-economy macroeconomic model, the supply curve of currency is vertical because the quantity of currency supplied does not depend on the real exchange rate.