Practise Quiz 5

Question 1

Q1 - If domestic saving exceeds domestic investment, then net exports are ___ and net capital outflows are ___

A - Negative; negative
B - Positive; negative
C - Negative; positive
D - Positive; positive

Answer 1

D - Positive; positve

Question 2

Q3 - An increase in the trade surplus of a small open economy could be the result of:

A - An increase in GOVT spending
B - A domestic tax cut
C - An increase in the world interest rate
D - The implementation of an investment tax credit provision

Answer 2

C - An increase in the world interest rate

Question 3

Q4 - 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 _____.

A - Increase; increase
B - decrease; increase
C - Increase; decrease
D - increase; not change

Answer 3

C - Increase; decrease

Question 4

Q5 - The real exchange rate is determined by the equality of:

A - Saving and the demand for net exports
B - Net capital outflow and the demand for net exports
C - The negative value of net capital outflow and the demand for net exports
D - Investment and the demand for net exports

Answer 4

B - Net capital outflow and the demand for net exports

Question 5

Q6 - In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:

A - Rises and net exports fall
B - Falls and net exports fall
C - Falls and net exports rise
D - Rises and net exports rise

Answer 5

A - Rises and net exports fall

Question 6

Q7 - Two reasons why capital may not flow to poor countries are that the poorer countries may:

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

Answer 6

D - have inferior production capabilities and not enforce property rights.

Question 7

Q8 - Based on a Cobb–Douglas production function and perfect capital mobility, capital should flow to economies in which:

A - Capital is relatively scarce
B - Capital is relatively abundant
C - Technological production capabilities are inferior
D - Labour is relatively scarce

Answer 7

A - Capital is relatively scarce

Question 8

Q9 - 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.

A - Not changing; decreasing
B - Not changing; not changing
C - Decreasing; decreasing
D - Decreasing; not changing

Answer 8

A - Not changing; decreasing