Exam 32: A Macroeconomic Theory of the Open Economy

In the market for foreign-currency exchange, the demand curve represents:

The price of imports will increase on the domestic market if two conditions are fulfilled: a strong local currency and a shortage of supply.

Suppose that the government of the small nation of Stabilia is overturned by a military coup (the new ruling junta restores the country's old name of Instabilia). What would you expect to happen to Instabilia's real interest rate and real exchange rate?

Ceteris paribus, in an open economy, a stable government fiscal policy enables firms to invest more assuredly.

The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is:

The key determinant of net foreign investment is:

If the interest rate were below the equilibrium level, the quantity of loanable funds supplied would _____ the quantity demanded.

A tax on imported goods is called a(n):

The demand curve for foreign-currency exchange slopes downwards because a lower real exchange rate makes the domestic goods more expensive and reduces the quantity of domestic currency demanded to buy those goods.

If the real exchange rate were above the equilibrium level, the currency would:

At the equilibrium real exchange rate, the demand for dollars to buy:

The real exchange rate is:

In an open economy, a government budget deficit raises real interest rates, crowds out domestic investment, causes the currency to appreciate and pushes the trade balance towards deficit.

At the equilibrium real interest rate, the amount that people (including government) want to save exactly balances the desired quantity of net foreign investment.

Economists have argued that removing trade restrictions benefits Australian industries that produce goods for export. Explain why this may be the case.

The supply of and demand for loanable funds directly depends on:

Explain how net foreign investment is part of the demand for loanable funds and simultaneously part of the supply of dollars in the foreign exchange market.

In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will:

Suppose that the government imposes a quota on imports. Explain why the result is a fall in imports and an equal fall in exports. (Hint: Think about what happens to net exports, and about what happens to the exchange rate.)

NARRBEGIN 32-2 Graph 32-2 -Which of the following statements is correct when the Australian government runs a budget deficit?