Macroeconomics Canadian 5th Edition Mankiw Test Bank 1

Test Bank for Macroeconomics Canadian 5th
Edition Mankiw Scarth 1464168504

9781464168505
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1. An “open” economy is one in which:

A) the level of output is fixed.
B) government spending exceeds revenues.
C) the national interest rate equals the world interest rate.
D) there is trade in goods and services with the rest of the world.
2. A country's exports may be written as equal to:

A) GDP minus consumption minus investment minus government spending.
B) GDP minus consumption of domestic goods and services minus investment of
domestic goods and services minus government purchases of domestic goods and
services.
C) imports.
D) GDP minus imports.
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3. Net exports equal GDP minus domestic spending on:
A) all goods and services.
B) all goods and services plus foreign spending on domestic goods and services.
C) domestic goods and services.
D) domestic goods and services minus foreign spending on domestic goods and
services.
4. If domestic spending exceeds output, we ______ the difference—net exports are

______.
A) import; negative
B) export; positive
C) import; positive
D) export; negative
5. The value of net exports is also the value of:

A) net investment.
B) net saving.
C) national saving.
D) the excess of national saving over domestic investment.
6. If net capital outflow is positive, then:

A) exports must be positive.
B) exports must be negative.
C) the trade balance must be positive.
D) the trade balance must be negative.
7. Net capital outflow is equal to:

A) national saving minus the trade balance.
B) domestic investment plus the trade balance.
C) domestic investment minus national saving.
D) national saving minus domestic investment.
8. Net capital outflow is equal to the amount that:

A) foreign investors lend here.
B) domestic investors lend abroad.
C) foreign investors lend here minus the amount domestic investors lend abroad.
D) domestic investors lend abroad minus the amount that foreign investors lend here.
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9. If domestic saving exceeds domestic investment, then net exports are ______ and net
capital outflows are ______.
A) positive; positive
B) positive; negative
C) negative; negative
D) negative; positive
10. In a small, open economy, if net exports are negative, then:

A) domestic spending is greater than output.
B) saving is greater than investment.
C) net capital outflows are negative.
D) imports are less than exports.
11. If domestic saving is less than domestic investment, then net exports are ______ and net
capital outflows are ______ .
A) positive; positive
B) positive; negative
C) negative; negative
D) negative; positive
12. When exports exceed imports, all of the following are true except:
A) net capital outflows are positive.
B) net exports are positive.
C) domestic investment exceeds domestic saving.
D) domestic output exceeds spending.
13. In a small open economy, if exports equal $20 billion, imports equal $30 billion, and
domestic national saving equals $25 billion, then net capital outflow equals:
A) –$25 billion.
B) –$10 billion.
C) $10 billion.
D) $25 billion.
14. In a small open economy, if exports equal $5 billion and imports equal $7 billion, then
there is a trade ______ and ______ net capital outflow.
A) deficit; negative
B) surplus; negative
C) deficit; positive
D) surplus; positive
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15. In a small open economy, if exports equal $15 billion and imports equal $8 billion, then
there is a trade ______ and ______ net capital outflow.
B) surplus; negative
D) surplus; positive
16. In a small open economy, if domestic saving equals $50 billion and domestic investment
equals $50 billion, then there is ______ and net capital outflow equals ______ .
A) a trade deficit; $100 billion
B) balanced trade; $0
C) a trade surplus; $100 billion
D) balanced trade; $100 billion
17. In a small open economy, if domestic investment exceeds domestic saving, then the
extra investment will be financed by:
A) borrowing from abroad.
B) lending from abroad.
C) the domestic government.
D) the World Bank.
18. In a small open economy, if domestic saving exceeds domestic investment, then the
extra saving will be used to:
A) make loans to the government.
B) make loans to foreigners.
C) repay the national debt.
D) repay loans to the Bank of Canada.
19. A trade deficit can be financed in all of the following methods except by:
A) borrowing from foreigners.
B) selling domestic assets to foreigners.
C) selling foreign assets owned by domestic residents to foreigners.
D) borrowing from domestic lenders.
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20. If a Canadian corporation sells a product in Europe and uses the proceeds to purchase
shares in a European corporation, then Canadian net exports ______ and net capital
outflows ______.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
21. If a Canadian corporation purchases a product made in Europe and the European
producer uses the proceeds to purchase a Canadian government bond, then Canadian net
exports ______ and net capital outflows ______.
C) decrease; increase
D) decrease; decrease
22. If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a
product manufactured in Canada, then U.S. net exports ______ and net capital outflows
______.
B) decrease; decrease
C) do not change; do not change
D) do not change; increase
23. A “small” economy is one in which the:

A) level of output is fixed.
B) price level is fixed.
C) domestic interest rate equals the world interest rate.
D) domestic saving is less than domestic investment.
24. The world interest rate:

A) is equal to the domestic interest rate.
B) makes domestic saving equal to domestic investment.
C) is the interest rate charged on loans by the World Bank.
D) is the interest rate prevailing in world financial markets.
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25. In a country with a small open economy, the real interest rate will always be:
A) above the world real interest rate.
B) below the world real interest rate.
C) equal to the world real interest rate.
D) equal to the world nominal interest rate.
26. A small open economy with perfect capital mobility is characterized by all of the
following except that:
A) its domestic interest rate always exceeds the world interest rate.
B) it engages in international trade.
C) its net capital outflows always equal the trade balance.
D) its government does not impede international borrowing or lending.
27. In a small open economy, if the world real interest rate is above the rate at which
national saving exceeds domestic investment, then there will be a trade ______ and
______ net capital outflow.
A) surplus; negative
B) deficit; positive
C) surplus; positive
D) deficit; negative
Use the following to answer questions 28-29:
Exhibit: Saving and Investment in a Small Open Economy
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28. (Exhibit: Saving and Investment in a Small Open Economy) In a small open economy if
the world interest rate is r1, then the economy has:
A) a trade surplus.
B) balanced trade.
C) a trade deficit.
D) negative capital outflows.
29. (Exhibit: Saving and Investment in a Small Open Economy) In a small open economy if
the world interest rate is r3, then the economy has:
A) a trade surplus.
B) balanced trade.
C) a trade deficit.
D) positive capital outflows.
30. An increase in the trade deficit of a small open economy could be the result of:
A) an increase in taxes.
B) an increase in government spending.
C) a decrease in the world interest rate.
D) the expiration of an investment tax-credit provision.
31. An increase in the trade surplus of a small open economy could be the result of:
A) a domestic tax cut.
D) the implementation of an investment tax-credit provision.
32. In a small open economy, starting from a position of balanced trade, if the government
increases domestic government purchases, this produces a tendency toward a trade
______ and ______ net capital outflow.
B) surplus; positive
D) surplus; negative
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33. In a small open economy, starting from a position of balanced trade, if the government
increases the income tax, this produces a tendency toward a trade ______ and ______
net capital outflow.
B) surplus; positive
D) surplus; negative
34. Holding other factors constant, legislation to cut taxes in an open economy will:
A) increase national saving and lead to a trade surplus.
B) increase national saving and lead to a trade deficit.
C) reduce national saving and lead to a trade surplus.
D) reduce national saving and lead to a trade deficit.
35. I: The twin deficits prediction is the proposition that a country with a large government
budget deficit is likely to have a large trade deficit.
II: An increase in foreign interest rates will cause changes in a small open economy that
are consistent with the twin deficits prediction.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.
36. Starting from a small open economy with balanced trade, if large foreign countries
increase their domestic government purchases, this policy will tend to increase:
A) investment in the small open economy.
B) saving in the small open economy.
C) exports by the small open economy.
D) imports by the small open economy.
37. Starting from 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 _____.
C) increase, not change
D) decrease; increase
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38. If the government of a small open economy wishes to reduce a trade deficit, which
policy action will be successful in achieving this goal?
A) increasing taxes
B) increasing government spending
C) increasing investment tax credits
D) imposing protectionist trade policies
39. The adoption of an investment tax credit in a small open economy is likely to lead to:
A) no change in either domestic investment or domestic saving.
B) an increase in both domestic investment and domestic saving.
C) an increase in domestic saving but no change in domestic investment.
D) an increase in domestic investment but no change in domestic saving.
40. In a small open economy, policies that increase:

A) investment tend to cause a trade surplus.
B) investment tend to cause a trade deficit.
C) saving do not affect the trade balance.
D) saving tend to cause a trade deficit.
41. In an open economy:

A) a trade deficit is always good.
B) a trade deficit is always bad.
C) a trade deficit may be good or bad.
D) a trade surplus is always bad.
42. As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was
______ than the expansionary shift in the U.S. investment function, resulting in a trade
______.
A) stronger; deficit
B) stronger; surplus
C) weaker; deficit
D) weaker; surplus
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43. 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) have already accumulated high levels of capital relative to labour and may already
have access to advanced technologies.
C) legally prevent the inflow of foreign capital and provide strong legal protection of
private property.
D) have inferior production capabilities and not enforce property rights.
44. Based on a Cobb–Douglas production function and perfect capital mobility, capital
should flow to economies where:
A) capital is relatively scarce.
B) capital is relatively abundant.
C) technological production capabilities are inferior.
D) labour is relatively scarce.
45. The nominal exchange rate between the Canada dollar and the Japanese yen is the:
A) number of yen you can get for lending one dollar in Japan for one year.
B) number of yen you can get for one dollar.
C) price of Canadian goods divided by the price of Japanese goods.
D) price of Japanese goods divided by the price of Canadian goods.
46. If the number of dollars per yen rises, this is called a(n):
A) appreciation of the dollar.
B) appreciation of the yen.
C) increase in the terms of trade.
D) decrease in the terms of trade.
47. A country's real exchange rate:

A) measures how many units of foreign exchange one really gets for one unit of
domestic currency.
B) is equal to the nominal exchange rate multiplied by the domestic price level
divided by the foreign price level.
C) is equal to the nominal exchange rate multiplied by the foreign price level divided
by the domestic price level.
D) the price of a domestic car divided by the price of a foreign car.
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48. If the real exchange rate is high, foreign goods:
A) and domestic goods are both relatively expensive.
B) and domestic goods are both relatively cheap.
C) are relatively expensive and domestic goods are relatively cheap.
D) are relatively cheap and domestic goods are relatively expensive.
49. If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Canadian
price level equals 2 francs per good, then the real exchange rate between Swiss goods
and Canadian goods is ______ Swiss goods per Canadian good.
A) 0.5
B) 2.5
C) 5
D) 10
50. When a country's real exchange rate rises:

A) exports will decrease but imports will be unaffected.
B) imports will decrease but exports will be unaffected.
C) exports will increase and imports will decrease.
D) exports will decrease and imports will increase.
51. If the real exchange rate depreciates from one Japanese good per Canadian good to 0.5
Japanese good per Canadian good, then Canadian exports ______ and Canadian imports
______.
B) decrease; decrease
C) increase; decrease
D) decrease; increase
52. If the real exchange rate of a country decreases, then net exports will:
A) be positive.
B) be negative.
C) increase.
D) decrease.
53. The lower our real exchange rate is, the ______ expensive domestic goods are relative
to foreign goods, and the ______ the demand is for net exports.
A) more; greater
B) more; smaller
C) less; greater
D) less; smaller
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54. In the small open economy in equilibrium:
A) saving is fixed and investment is determined by the investment function and the
world interest rate.
B) investment is fixed and saving is determined by the saving function and the world
interest rate.
C) saving is fixed and investment is determined by the trade balance.
D) investment is fixed and saving is determined by the trade balance.
55. If a graph is drawn with net exports on the horizontal axis and the real exchange rate on
the vertical axis, then the real exchange rate is determined by the intersection of the
______ net-exports schedule and the ______ line representing saving minus investment.
A) downward-sloping; vertical
B) upward-sloping; vertical
C) downward-sloping; upward-sloping
D) upward-sloping; downward-sloping
56. The real exchange rate is determined by the equality of:

A) saving and the demand for net exports.
B) investment and the demand for net exports.
C) net capital outflow and the demand for net exports.
D) the negative value of net capital outflow and the demand for net exports.
57. In the basic model of a small open economy, when the government reduces national
saving, the equilibrium real exchange rate:
A) rises and net exports fall.
B) rises and net exports rise.
C) falls and net exports fall.
D) falls and net exports rise.
58. In the basic version of a small open economy model, a reduction in the government's
budget deficit ______ net exports and the real exchange rate ______.
A) increases; appreciates
B) increases; depreciates
C) decreases; appreciates
D) decreases; depreciates
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59. In the basic model of a small open economy, when foreign governments reduce national
saving in their countries, the equilibrium real exchange rate:
B) rises and net exports rise.
C) falls and net exports fall.
D) falls and net exports rise.
60. In a small open economy, if the world interest rate falls, then domestic investment will
_____ and the real exchange rate will _____, holding all else constant.
A) decrease; decrease
B) decrease; increase
D) increase; increase
61. In a small open economy, if the world interest rate increases, then the supply of
domestic currency on the foreign exchange market will _____ and the real exchange
rate will _____, holding all else constant.
A) decrease; decrease
B) decrease; increase
D) increase; increase
62. In the basic model of a small open economy, if the government encourages investment,
say through an investment tax credit, investment:
A) increases and is financed through an increase in national saving.
B) increases and is financed through an increase in exports.
C) increases and is financed through an inflow of foreign capital.
D) does not increase; the interest rate rises instead.
63. If the information technology boom increases investment demand in the basic model of
a small open economy, then net exports ______ and the real exchange rate ______.
A) increase; appreciates
B) increase; depreciates
C) decrease; appreciates
D) decrease; depreciates
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64. An appreciation of the real exchange rate in the basic model of a small open economy
could be the result of:
A) an increase in government spending.
B) an increase in taxes.
65. A depreciation of the real exchange rate in the basic model of a small open economy
could be the result of:
A) a domestic tax cut.
C) an increase in the world interest rate.
66. In the basic model of a small open economy, if the government adopts a policy that
lowers imports, then that policy:
A) raises the real exchange rate and increases net exports.
B) raises the real exchange rate and does not change net exports.
C) raises the real exchange rate and decreases net exports.
D) lowers the real exchange rate.
67. In the basic model of a small open economy, if the government adopts a policy that
lowers imports, then the quantity of exports:
A) remains unchanged.
B) decreases but not as much as the quantity of imports decreases.
C) decreases by exactly the same amount as the quantity of imports decreases.
D) decreases by more than the quantity of imports decreases.
68. An effective policy to reduce a trade deficit in a small open economy would be to:
A) increase tariffs on imports.
B) impose stricter quotas on imported goods.
C) increase government spending.
D) increase taxes.
69. 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) decreasing; decreasing
B) not changing; decreasing
C) decreasing; not changing
D) not changing; not changing
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70. Protectionist policies in a small open economy do not alter the trade balance because
the:
A) quantity of imports and exports is fixed.
B) interest rate adjusts to offset any reductions in imports.
C) exchange rate appreciates to offset the increase in net exports.
D) level of net capital outflow is fixed by the world interest rate.
71. Which of the following would decrease the real exchange rate in the basic model of a
small open economy in the long run?
A) a personal income tax cut
B) a reduction in government spending
C) a tariff on imports
D) an increase in investment
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Use the following to answer questions 72-76:
Exhibit: Policies Influence Real Exchange Rate
72. (Exhibit: Policies Influence Real Exchange Rate) Which of the graphs illustrates the
impact on the real exchange rate of contractionary fiscal at home, in the basic version of
the small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
Page 16
impact on the real exchange rate of an increase in household saving in the basic version
of the small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
impact on the real exchange rate of contractionary fiscal policies abroad in the basic
version of the small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
impact on the real exchange rate of an increase in investment demand in the basic
version of the small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
impact on the real exchange rate of protectionist trade policies in the basic version of the
small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
77. The percentage change in the nominal exchange rate equals the percentage change in the
real exchange rate plus the:
A) foreign inflation rate minus the domestic inflation rate.
B) domestic inflation rate minus the foreign inflation rate.
C) foreign exchange rate minus the domestic exchange rate.
D) domestic interest rate minus the foreign interest rate.
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78. If a country has a high rate of inflation relative to Canada, our dollar will buy:
A) less of the foreign currency over time.
B) more of the foreign currency over time.
C) the same amount of the foreign currency over time.
D) an amount of foreign currency determined by the real exchange rate.
79. One consequence of high inflation is a(n):

A) appreciating nominal exchange rate.
B) appreciating real exchange rate.
C) depreciating nominal exchange rate.
D) depreciating real exchange rate.
80. If the real exchange rate between Canada and Japan remains unchanged, and the
inflation rate in Canada is 6 percent and the inflation rate in Japan is 3 percent, the:
A) dollar will appreciate by 3 percent against the yen.
B) yen will appreciate by 3 percent against the dollar.
C) yen will appreciate by 6 percent against the dollar.
D) yen will appreciate by 9 percent against the dollar.
81. If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent,
and the foreign price level rises 6 percent, the real exchange rate will fall:
A) 0 percent.
B) 8 percent.
C) 10 percent.
D) 12 percent.
82. The currencies of countries with high inflation rates relative to Canada have tended to
______, and the currencies of countries with low inflation rates relative to Canada have
tended to ______.
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; depreciate
D) depreciate; appreciate
83. If the purchasing-power parity theory is true, then:

A) the net exports schedule is very steep.
B) all changes in the real exchange rate result from changes in price levels.
C) all changes in the nominal exchange rate result from changes in price levels.
D) changes in saving or investment influence only the real exchange rate.
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84. The doctrine of purchasing-power parity:
A) is a completely accurate description of the real world.
B) would be entirely accurate if only goods were traded.
C) would be entirely accurate if all consumers had the same preferences.
D) provides a reason to expect that movements in the real exchange rate will typically
be small or temporary.
85. If purchasing-power parity held, if a Big Mac costs $2 in Canada, and if 10 Mexican
pesos trade for $1 Canadian dollar, then a Big Mac in Cancun, Mexico should cost:
A) 2 pesos.
B) 5 pesos.
C) 10 pesos.
D) 20 pesos.
86. The idea that the amount of any currency that can buy a particular good in one country
should be able to buy (after being exchanged for the local currency) the same quantity
of the same good anywhere in the world is called:
A) the theory of the real exchange rate.
B) equal currency conversion.
C) international monetary exchange.
D) purchasing-power parity.
87. If purchasing-power parity holds, then changes in domestic saving will _____ the real
exchange rate.
A) increase
B) decrease
C) not change
D) either increase or decrease
88. According to purchasing power-parity, if the dollar price of oil is higher in Toronto than
in London, arbitrageurs will _____ oil in Toronto and _____ oil in London to drive
_____ the price of oil in Toronto.
A) buy; sell; up
B) buy; sell; down
C) sell; buy; up
D) sell; buy; down
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89. The law of one price is enforced by:
A) governments.
B) producers.
C) consumers.
D) arbitrageurs.
90. In the basic model of a small open economy, if consumer confidence falls and
consumers decide to save more, then the real exchange rate:
B) and net exports both rise.
C) falls and net exports rise.
D) and net exports both fall.
91. In the basic model of a small open economy, if consumers shift their preferences toward
foreign cars, then net exports:
A) fall and the real exchange rate falls.
B) fall but the real exchange rate remains unchanged.
C) remain unchanged but the real exchange rate falls.
D) and the real exchange rate remain unchanged.
92. In the basic model of a small open economy, if the introduction of automatic-teller
machines reduces the demand for money, then net exports:
A) fall and the real exchange rate falls.
B) fall but the real exchange rate remains unchanged.
C) remain unchanged but the real exchange rate falls.
D) and the real exchange rate remain unchanged.
93. Assume that a small open economy gets involved in a global war, in which its
government purchases increase and the rest of the world's government purchases also
increase. Then, for the basic model of the small country, net exports:
A) will certainly decrease.
B) will certainly increase.
C) may increase or decrease.
D) will remain the same.
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94. Assume that some large foreign countries begin to subsidize investment by instituting an
investment tax credit. Then, if world saving does not depend on the interest rate, world
investment:
A) will rise and small country investment will fall.
B) will rise and small country investment will remain unchanged.
C) will remain unchanged and small country investment will fall.
D) and small country investment will both remain unchanged.
95. Assume that some large foreign countries decide to subsidize investment by instituting
an investment tax credit. Then a small country's real exchange rate:
A) will fall and its net exports will rise.
B) will rise and its net exports will fall.
C) and net exports will both fall.
D) and exports will both rise.
96. If a dollar bought 1,000 Chilean pesos 10 years ago and 1,500 pesos now, and inflation
for that period was 25 percent in the United States and 100 percent in Chile, then:
A) the purchasing-power parity theory is correct.
B) traveling in Chile today costs about the same as it did 10 years ago.
C) traveling in Chile is cheaper now than it was 10 years ago.
D) traveling in Chile is more expensive now than it was 10 years ago.
97. If the nominal interest rates in the United States and Canada are 8 percent and 12
percent, respectively, the real interest rates are the same, and the real exchange rate is
fixed, then the market's expectation about the number of Canadian dollars to be received
for a U.S. dollar a year from now will be that it will:
A) decrease by 8 percent.
B) decrease by 4 percent.
C) increase by 4 percent.
D) increase by 5 percent.
98. Assume that a war breaks out abroad, and foreign investors choose to invest more in a
large safe country, the United States. Then, according to the basic open-economy model,
the U.S. real interest rate:
A) and net exports will both fall.
B) will fall and net exports will rise.
C) will rise and net exports will fall.
D) and net exports will both rise.
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99. A small open economy has exports equal to 10, imports equal to 6, foreign debt equal to
20. The world interest rate is 10 percent. The country's current account balance is:
A) a surplus of 4.
B) a surplus of 2.
C) a deficit of 2.
D) a deficit of 4.
100. A small open economy has exports equal to 10, imports equal to 7, and foreign debt
service obligations of 4.
I: The country has a current account deficit.
II: The country is moving deeper into debt.
101. A small open economy is in long-run equilibrium; it has some foreign debt outstanding;
and its interest rate exceeds its growth rate.
I: The country has a trade surplus.
II: The world interest rate exceeds the country's growth rate.
102. If a small open economy is in long-run equilibrium with no foreign debt:

A) its balance of trade is positive.
B) its balance of trade is zero.
C) its balance of trade is negative.
D) not enough information is given to determine the sign of the trade balance.
103. In a long-run model of a small open economy, deficit reduction

I: leads initially to increased net exports.
II: eventually leads to lower foreign debt and increased consumption.
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104. In a long-run model of a small open economy, deficit reduction
I: leads to higher living standards.
II: leads to a fall in the country's real exchange rate once the new full-equilibrium level
of foreign debt is reached.
105. In the long-run, increased national saving must

I: increase total labour income in a closed economy.
II: increase total labour income in a small open economy.
106. In the long-run, increased national saving must

I: increase the income of the owners of capital in a closed economy.
II: increase the income of the domestic owners of capital in a small open economy.
107. Tax breaks for capitalists "trickle down" to labourers in:

A) closed economies but not necessarily in small open economies.
B) small open economies but not necessarily in closed economies.
C) both closed and small open economies.
D) neither closed nor small open economies.
108. Consider a small open economy whose demand and domestic supply of capital
relationships are R = 30 - (1/2)K and K = 7R, respectively (where K and R denote capital
and its marginal product). Capital is perfectly mobile internationally, and the yield on
capital (R) in the rest of the world is 6.
I: GNP exceeds 90 percent of GDP in this country.
II: Labour's share of GDP in this country is two-thirds.
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capital (R) in the rest of the world is 6.
I: This country's GDP exceeds 900.
II: This country's GNP exceeds 800.
capital (R) in the rest of the world is 6. Starting from this situation, suppose that an
increase in national savings changes the domestic supply of capital relationship to K =
8R.
I: This country's GNP increases by 36.
II: Labour's share of GNP falls.
111. Assume that in a small open economy where full employment always prevails, national
saving is 300.
a. If domestic investment is given by I = 400 – 20r, where r is the real interest rate
in percent, what would the equilibrium interest rate be if the economy were
closed?
b. If the economy is open and the world interest rate is 10 percent, what will
investment be?
c. What will the current account surplus or deficit be? What will net capital outflow
be?
Page 24
112. Assume that in a small open economy with full employment, consumption depends only
on disposable income. National saving is 300, investment is given by I = 400 – 20r,
where r is the real interest rate in percent, and the world interest rate is 10 percent.
a. If government spending rises by 100, does investment change? What is the
level of investment after the change?
b. Does the trade balance change if G rises by 100? If it changes, does it
increase or decrease, and by how much?
c. Does net capital outflow change if G rises by 100? If it changes, does it
increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the
change in G?
113. In April 1995, Michel Camdessus, managing director of the International Monetary
Fund (IMF), criticized U.S. economic policy for allowing the dollar exchange rate to fall
too low. He recommended that the United States reduce its budget deficit in order to
raise the exchange rate.
a. Use the long-run model of a small open economy to illustrate graphically the impact of
reducing the government's budget deficit on the exchange rate and the trade balance. Be
sure to label:
i. the axes
ii. the curves
iii. the initial equilibrium values
iv. the direction the curves shift
v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain whether Mr. Camdessus's policy
recommendation will work. Specifically state what happens to the exchange rate and the
trade balance as a result of the government budget deficit reduction.
114. In September 1995, Patrick Buchanan, a Republican candidate for U.S. president,
proposed a 10 percent tariff on Japanese imports to the United States, a 20 percent tariff
on Chinese imports to the United States, and an unspecified “social” tariff on imports
from third-world countries.
a. Use the long-run model of a small open economy to illustrate graphically the impact of
these trade policies on the U.S. exchange rate and the trade balance. Assume that the
country starts from a position of trade balance, i.e., exports equal imports. Be sure to label:
i. the axes
ii. the curves
b. Based on your graphical analysis, explain the predicted impact of Mr. Buchanan's proposed
policies. Specifically state what happens to the exchange rate, the trade balance, the volume
of imports, and the volume of exports.
Page 25
115. Suppose that governments around the world begin to engage in expansionary fiscal
policy (run large budget deficits) in order to stimulate economic activity in their
countries.
a. Use the basic version of the long-run model of a small open economy to illustrate
graphically the impact of this expansionary fiscal policy by foreigners on the Canadian
exchange rate and the Canadian trade balance. Assume that the country starts from a
position of trade balance, i.e., exports equal imports. Be sure to label:
i. the axes
ii. the curves
b. Based on your graphical analysis, explain the predicted impact of the foreign
expansionary fiscal policy on the Canadian exchange rate and the Canadian trade
balance.
116. If corporate downsizing and lack of job security cause consumers to spend less and save
more, what will be the impact on the exchange rate and trade balance?
a. Use the basic version of the long-run model of a small open economy to illustrate graphically
the impact of this decline in consumer confidence on the exchange rate and the trade balance.
Assume the country starts from a position of trade balance, i.e., exports equal imports. Be
sure to label:
i. the axes
ii. the curves
b. Based on your graphical analysis, explain the predicted impact of a decline in consumer
confidence on the exchange rate and the domestic economy's trade balance.
117. Suppose that the large industrial countries of the world are concerned about the
depreciating currencies of a number of small open economies.
a. What type of fiscal policies must the large industrial countries undertake in order to
promote currency appreciation in the small open economies?
b. Illustrate graphically the impact of the industrial countries' policies on the exchange
rate of the small open economies.
c. What will happen to the trade balance of the typical small open economy, assuming
that it starts from a position of balanced trade?
Page 26
118. Suppose that the International Monetary Fund (IMF) is concerned about currency
depreciation in a small open economy. Use the basic version of our exchange-rate model
for your answers.
a. What type of fiscal policy should the IMF propose to the government of the
small open economy to generate a currency appreciation?
b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the
small open economy.
c. What will happen to the trade balance of the small open economy, assuming
that it started from a position of balanced trade?
119. The government of a small open economy wishes to promote trade policies that will
result in currency appreciation.
a. Would protectionist policies (higher tariffs and more quotas) or freer trade
policies (tariff reductions and quota eliminations) be more effective in
generating currency appreciation?
b. Using the basic version of the long-run exchange-rate model to illustrate
graphically the impact of the trade policy on the exchange rate of the small open
economy.
c. What will happen to the trade balance of the small open economy as a result of
the trade policies, assuming that the country started from a position of free
trade?
d. What will happen to the quantity of exports and imports as a result of the trade
policies?
120. Compare the impact of an increase in the government's budget deficit on investment
spending in a small open economy with an otherwise comparable closed economy.
Assume prices are flexible and that factors of production are fully employed in both
economies. Use the basic version of the open-economy model that abstracts from
foreign debt accumulation.
121. Explain why government budget deficits crowd out private investment spending in a
closed economy, but crowd out net exports in a small open economy. Assume prices are
flexible and that factors of production are fully employed in both economies. Use the
basic version of the open-economy model that abstracts from foreign debt accumulation.
122. What determines the real exchange rate and what determines the nominal exchange rate
in a small open economy with perfect capital mobility, fully employed factors of
production, and flexible prices?
Page 27
123. Suppose a new technology is developed that increases investment demand in both a
closed economy and in a small open economy that are in other ways identical. Holding
other factors constant, will the quantity of investment spending increase more in the
closed economy or in the small open economy? Explain. Assume prices are flexible and
that factors of production are fully employed in both economies. Use the basic version
of the open-economy model that abstracts from foreign debt accumulation.
124. The real interest rates and real exchanges rates are constant and equal in North Country
and South Country. The Fisher equation and purchasing power parity hold in both
countries. If the nominal interest rate is 8 percent in North Country and 10 percent in
South Country, do you expect North Country's nominal exchange rate to appreciate,
depreciate, or remain the same? Explain.
Page 28
Answer Key
1. D
2. B
3. A
4. A
5. D
6. C
7. D
8. D
9. A
10. A
11. C
12. C
13. B
14. A
15. D
16. B
17. A
18. B
19. D
20. A
21. D
22. C
23. C
24. D
25. C
26. A
27. C
28. A
29. C
30. B
31. C
32. A
33. B
34. D
35. A
36. C
37. B
38. A
39. D
40. B
41. C
42. C
43. D
44. A
Page 29
45. B
46. B
47. B
48. D
49. B
50. D
51. C
52. C
53. C
54. A
55. A
56. C
57. A
58. B
59. D
60. D
61. C
62. C
63. C
64. A
65. D
66. B
67. C
68. D
69. B
70. C
71. B
72. A
73. A
74. B
75. C
76. D
77. A
78. B
79. C
80. B
81. D
82. D
83. C
84. D
85. D
86. D
87. C
88. D
89. D
90. C
Page 30
91. C
92. D
93. C
94. C
95. A
96. D
97. C
98. A
99. B
100. C
101. C
102. B
103. C
104. A
105. A
106. B
107. A
108. C
109. B
110. C
111. a. 5 percent
b. 200
c. The trade surplus will be 100. Net capital outflow will be 100.
112. a. No. 200
b. Yes. It decreases by 100.
c. Yes. It decreases by 100
d. It will rise.
113. a.
b. Mr. Camdessus's policy will not have the intended effect. The dollar exchange rate will
decline and the trade balance will move toward surplus.
Page 31
114. a.
b. Under Mr. Buchanan's policy, the dollar exchange rate would appreciate but the trade
balance would remain unchanged. However, the volume of imports will decrease (because
of the tariffs) and the volume of exports will decrease by the same amount (because of the
appreciation of the exchange rate).
115. a.
b. The fiscal expansion in the rest of the world would raise the world interest rate and
lower domestic investment. As a result, the exchange rate will depreciate and the trade
balance will move toward surplus.
116. a.
Page 32
b.
The increase in private saving caused by the loss of consumer confidence will lower the
exchange rate and move the trade balance toward surplus.
117. a. The large economies must execute contractionary fiscal policy
(decreasing government spending and/or increasing taxes) to generate a
lower world interest rate.
b. The lower world interest rate increases investment in the small open
economy, which reduces the supply of currency going into the foreign
exchange market and increases the exchange rate of the small open
economy.
c. The trade balance of the small open economy will move into deficit.
118. a. The IMF must propose expansionary fiscal policy, i.e., increasing
government spending and/or cutting taxes. This will decrease saving in the
small open economy.
b. The decrease in domestic saving will reduce the supply of currency to the
foreign exchange market, resulting in currency appreciation.
c. The trade balance of the small open economy will move into deficit.
119. a. Protectionist policies will result in currency appreciation.
Page 33
b. The protectionist policies increase the demand for net exports.
c. The trade balance will remain unchanged—still balanced.

d. The volume of exports will decrease (as a result of the currency appreciation),
and the volume of imports will decrease (as a result of the protectionist policies).
120. Investment spending decreases in the closed economy, but does not change in the small
open economy. In the closed economy the increase in the budget deficit reduces national
saving and increases the interest rate, which decreases private investment spending. In
the small open economy the domestic interest rate remains unchanged at the world
interest rate. Although national saving also declines in the small open economy, capital
inflows make up this shortfall in domestic saving to finance domestic investment.
121. In the closed economy, the increase in the budget deficit reduces national saving and
increases the interest rate, which crowds out (decreases) private investment spending. In
the small open economy, the budget deficit reduces national saving, which increases the
real exchange rate. The increase in the real exchange rate crowds out (decreases) net
exports.
122. The real exchange rate adjusts to bring the net exports and net capital outflows into
equilibrium. The nominal exchange rate equals the real exchange rate times the ratio of
the foreign price level to the domestic price level.
123. Investment spending will not change in the closed economy, but will increase in the
small open economy. In the closed economy, there is no change in domestic saving, so
the domestic interest rate must rise to keep investment spending equal to the unchanged
domestic saving. In the small open economy, the increase in investment demand is
financed by net capital inflows (a decrease in net capital outflows) at the unchanged
world interest rate. The decrease in net capital outflows raises the real exchange rate and
reduces net exports in the small open economy.
124. From the Fisher equation, inflation is expected to be higher in South Country than in
North Country, since the nominal interest rate equals the real interest rate plus the
expected rate of inflation and the real interest rate is the same in both countries while the
nominal interest rate is higher in South Country. According to purchasing power parity,
the change in the North Country's nominal exchange rate equals the change in the real
exchange rate (which is constant) plus the difference in inflation rates (foreign inflation
minus domestic inflation). Since South Country's expected inflation is higher, then
North Country's nominal exchange rate should appreciate; i.e., each unit of North
Country's currency should exchange for more units of South Country's currency in the
future.
Page 34

Macroeconomics Canadian 5th Edition Mankiw Test Bank 1

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Macroeconomics Canadian 5th Edition Mankiw Test Bank 1

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Test Bank for Macroeconomics Canadian 5th

Edition Mankiw Scarth 1464168504

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1. An “open” economy is one in which:

2. A country's exports may be written as equal to:

4. If domestic spending exceeds output, we ______ the difference—net exports are

5. The value of net exports is also the value of:

6. If net capital outflow is positive, then:

7. Net capital outflow is equal to:

8. Net capital outflow is equal to the amount that:

10. In a small, open economy, if net exports are negative, then:

23. A “small” economy is one in which the:

24. The world interest rate:

Use the following to answer questions 28-29:

Exhibit: Saving and Investment in a Small Open Economy

40. In a small open economy, policies that increase:

41. In an open economy:

47. A country's real exchange rate:

50. When a country's real exchange rate rises:

56. The real exchange rate is determined by the equality of:

Exhibit: Policies Influence Real Exchange Rate

79. One consequence of high inflation is a(n):

83. If the purchasing-power parity theory is true, then:

102. If a small open economy is in long-run equilibrium with no foreign debt:

103. In a long-run model of a small open economy, deficit reduction

105. In the long-run, increased national saving must

106. In the long-run, increased national saving must

107. Tax breaks for capitalists "trickle down" to labourers in:

c. The trade balance will remain unchanged—still balanced.

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