Chapter 13 - Macroecon. Theory of Open Economy

Question 1

Saving is positive on real inflation rates (r) (t/f)

Answer 1

true

Question 2

Domestic investment (I) is positive w/ real inflation rates (r) (t/f)

Answer 2

false - it is negative

Question 3

A fall in “r” shows that the assets are more attractive (t/f)

Answer 3

false - they are less attractive after a fall in “r”

Question 4

Q of LF by Canadian saving = Q of LF for domestic investment (t/f)

Answer 4

false - they are not equal b/c differ at NCO.

Question 5

Market for foreign currency exchange exists b/c…

Answer 5

ppl want to be paid in own currency

Question 6

NX =

Answer 6

Demand for $ - foreign need to buy Can exports

Question 7

NCO =

Answer 7

S for $ - Can sell money to get foreign currency to buy imports

Question 8

Real exchange rate…

Answer 8

balances S+D in market for foreign currency exchange

Question 9

D curve (f-c exch) is…

Answer 9

down slope b/c higher exchange rate makes exports more expensive.

Question 10

S curve (f-c exch) is…

Answer 10

vertical b/c Q of money supplied for NCO d/n relate to real inflation rate.

Question 11

if a Canadian buys import, does it affect S or D?

Answer 11

Demand for dollar decreases - incr in import reduces NX (as shown b/f NX=D for $)

Question 12

if foreigner buys Canadian asset, does it affect S or D?

Answer 12

S of Money falls - reduces NCO (as shown b/f NCO=S of $)

Question 13

Budget Deficit Effects… (5)

Answer 13

1. national saving falls; 2. real inflation rate rises; 3. domestic investment and NCO fall; 4. real exchange rate appreciates;
2. NX falls

Question 14

NCO links both markets (t/f)

• LF market + f-c exchange market
• which formulas show this

Answer 14

true

-NCO = NX and S = I + NCO

Question 15

If there is an increase in world inflation rates…

Answer 15

crowd out domestic investment ($ depreciates + NX rises)

Question 16

If there is a gov’t deficit…

Answer 16

negative saving - reduces S of LF, NCO + $ in f-c exchange market

Question 17

tariff is…

Answer 17

a tax on imported Goods

Question 18

import quota is…

-effect is…

Answer 18

limit Q of a Good imported + sold.

• causes incr in D for $ in f-c exchange market (appr of real exchange rate)
• has no effect on trade balance

Question 19

Capital Flight is…

-higher impact if _____ which is_____

Answer 19

sudden reduction in D for assets in a country.

-higher impact if capital fleeing (f investors leave too)

Question 20

If investors are concerned + capital flight + fleeing occur…

Answer 20

capital leaves economy quickly, inflation rates increase + dollar depreciates.