Exam 13: A Macroeconomic Theory of the Small Open Economy

Suppose a prime ministerial candidate promises to increase the government budget surplus and claims that doing so will stop Canadian citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise.

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

If Canadian firms decide to invest more domestically at each interest rate, which statement would best describe the results?

Suppose that the Romanian government budget deficit increases. What curves in the open-economy macroeconomic model shift? Explain why each curve shifts the direction it does.

How does the supply or demand for loanable funds shift when a country decreases its budget deficit?

Which statement best predicts the effects of a fall in the Canadian real interest rate?

Which statement could be prompted by an interest rate that is temporarily higher in Canada than in the rest of the world?

Which statement best defines a trade policy?

Suppose that Canadian citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

What are the effects of an increase in the supply of loanable funds?

Other things the same, when a Canadian company imports cotton from Egypt, the open-economy macroeconomic model treats this transaction as a decrease in the quantity of dollars demanded in the Canadian foreign-currency exchange market.

What is most likely to increase Canadian exports?

Suppose the Federal Reserve, which is the central bank of the U.S., decided to lower the monetary policy interest rate. Use the macroeconomic model studied in this chapter to analyze the possible effects of this event on Canada's net capital outflow, net exports, and exchange rate. (Hint: Consider the United States a large economy, which is able to influence the world interest rate.)

If Canadian citizens decide to save a smaller fraction of their incomes, which statement would best describe the effects?

Which of the following would do the most to reduce a trade deficit?

Which statement best predicts the effects of an increase in the Canadian real interest rate?

In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that people (including government) want to save exactly balances desired domestic investment.

In the open-economy macroeconomic model, where does the demand for loanable funds come from?

Which statement best predicts the effects of an increase in the supply of loanable funds?

Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-market macroeconomic model?