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67 Cards in this Set

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  • Back
A large and sudden reduction in the demand for assets located in a country:
capital flight
In an open economy, the source of supply of loans in the loanable funds market is ________, and the source of demand is ________.
National Saving, Investment and Net Capital Outflow
If American goods become more popular both at home and abroad, the real exchange rate will ________, and Net Exports will ________.
appreciate, remain unchanged
A government policy that directly influences the quantity of goods and services that a country imports or exports:
trade policy
If Net Capital Outflow increases, the ________ of loans will increase, causing the real domestic interest rate to ________.
demand, rise
If the government imposes hefty taxes on imports (tariffs), imports will decrease, causing the real exchange rate to ________ exports, so that overall, Net Exports ________.
appreciate and so reduce, don't change at all
If the Net Capital Outflow increases, the ________ of dollars in the Foreign Currency Exchange Market will increase, causing the real exchange rate to ________.
supply, depreciate
In the Foreign Currency Exchange Market, the supply of dollars comes from ________, and the demand for dollars comes from ________.
Net Capital Outflow, Net Exports
If the Federal government budget deficit increases, the real interest rate will ________, causing Net Capital Outflow and Net Exports to ________.
increase, decrease
If an economic crisis were to occur in the U.S., domestic interest rates would ________, the real exchange rate would ________, and Net Exports would ________.
rise, depreciate, increase
If American goods become more popular both at home and abroad, the ________ of dollars in the Foreign Currency Exchange Market will increase, causing the real exchange rate to ________.
demand, appreciate
Where does the supply of loanable funds come from?

Where does the demand for loanable funds come from?
SUPPLY: national saving
DEMAND: domestic investment and net capital outflow
____ ____ do not affect the trade balance.
Trade policies
The two sides of the foreign-currency exchange market are represented by ____ and ____.
NCO, NX
What is the key determinant of net capital outflow?
The real interest rate
What is the effect of capital flight on a country’s interest rate and exchange rate?
Capital flight causes the interest rate to INCREASE and the exchange rate to DEPRECIATE.
The price that balances the supply and demand for foreign-currency:
The real exchange rate
What are the 4 key macroeconomic variables in an open economy?
1) net exports
2) net foreign investment
3) nominal exchange rates
4) real exchange rates
What don’t trade policies affect the trade balance?
Because they do not change national saving or domestic investment.
What adjusts to balance the supply and demand for dollars in the market for foreign-currency exchange?
The real exchange rate
A limit on the quantity of a good produced abroad and sold domestically:
Import quota
Where does the supply of dollars in the market for foreign exchange come from?

Where does the demand for dollars in the market for foreign exchange come from?
SUPPLY: net capital outflow
DEMAND: net exports
What links the market for loanable funds and the market for foreign-currency exchange?
Net capital outflow
Trade policies do not affect the ____ ____.
trade balance
The real interest rate is the key determinant of:
Net capital outflow
A large and sudden movement of funds out of a country:
Capital flight
The supply and demand for loanable funds depend on:
The real interest rate
The magnitude and variation in important macroeconomic variables depend on what 3 factors?
1) Government budget deficits
2) Trade policies
3) Political and economic stability
A tax on an imported good:
Tariff
Trade policies have a greater effect on ____ ____ than on ____ ____.
Microeconomic markets, macroeconomic markets
The rising U.S. budget deficits of the early 1980s helped contribute to:
The crowding out of domestic investment.
Suppose the budget deficit of a nation decreases. What will result?
The supply of loanable funds will increase.
Suppose a nation's net exports fall. This will be accompanied by:
A decrease in net foreign investment.
In the market for foreign-currency exchange, why is the demand curve downward sloping?
Because a decline in the real exchange rate makes everything purchased in America cheaper to foreign buyers.
Interest rates will increase in a country that experiences ____.
capital flight
What effect will there be on the exchange rate if the U.S. imposes an import quota on Japanese cars?
The exchange rate will increase.
What must be in simultaneous equilibrium for an open economy to be in macroeconomic equilibrium?
The foreign currency exchange market and the market for loanable funds.
What is most likely to cause a rise in net capital outflow?
A reduction in the U.S. government deficit
Suppose real interest rates decline sharply in the United States. What 2 things will result?
1) the supply of dollars will increase

2) the U.S. dollar will depreciate
Where do the actions of borrowers and lenders take place?
In the market for loanable funds.
What resulted from the large government deficits of the 1980s?
Public saving in the U.S. fell and net capital outflow fell.
Which of the following statements is correct?

a. A government budget deficit increases the supply of loanable funds, increases the interest rate, and increases investment.

b. A government budget deficit decreases the supply of loanable funds, decreases the interest rate, and crowds out investment.

c. A government budget deficit decreases the supply of loanable funds, increases the interest rate, and crowds out investment.

d. A government budget deficit decreases the supply of loanable funds, increases the interest rate, and increases investment.
c. A government budget deficit decreases the supply of loanable funds, increases the interest rate, and crowds out investment.
In the market for foreign-currency exchange, why is the supply curve of dollars vertical?
Because it is affected only by the real interest rate.
What is determined by the intersection of the demand for loanable funds with the supply of loanable funds?
interest rates
The sum of domestic investment and net capital outflow:
The supply of loanable funds
The country of Monac experiences a coup that causes capital flight from the country. What happens as a result?
The demand for loanable funds in Monac will increase.
The effect has the restriction on imports of Japanese vehicles into the United States had?
It has caused the real exchange rate to appreciate.
Suppose domestic investment in the U.S. falls while net capital outflow is unchanged. What effect is there on national saving?
National saving will decrease.
The government of France bans all imports of British cattle. What will happen as a result?
The demand for French francs will increase.
What will happen if people decide that Mexico is a risky place to keep their savings?
Mexico's net capital outflow will increase.
When the U.S. government runs a budget deficit, this action creates:
An increase in the real exchange rate of the dollar.
Presently, the U.S. is a net debtor in international markets. What do this mean?
This means that foreigners own more real and financial assets here than Americans own abroad.
An increase in budget deficits will increase the ____ ____.
trade deficit
In an open economy, what is used to explain why the U.S. economy experiences trade deficits?
The market for loanable funds
What would most likely to cause the Hong Kong dollar to appreciate on the foreign-currency exchange market?
Higher budget deficits in Hong Kong.
Which of the following is correct?

a. The U.S. economy is more globally integrated now than 20 years ago.

b. Economies are becoming more self-sufficient and less outward-looking to trading partners, because of the many barriers to free trade.

c. The size of the foreign sector in the U.S., relative to the overall economy, is diminishing.

d. In the past decade, the U.S. economy has persistently exported more goods than it imported.
a. The U.S. economy is more globally integrated now than 20 years ago.
What happens to interest rates and domestic investment if a government increases its budget deficit?
Interest rates rise and domestic investment falls.
What effect was there on Mexico's net exports and net capital outflow when it suffered from capital flight in 1994?
Mexico's net capital outflow
and net exports INCREASED.
What happens to the dollar when the US interest rate increases?
Higher interest rates in the US cause NCO to fall - therefore, the supply of dollars in the foreign exchange market falls. As the real exchange rate rises, the dollar APPRECIATES.
What happens to NCO if a country has balanced trade?
NCO=0
What has the US economy been experiencing since the 1980's?
The US has been running a trade deficit since the 1980's. Part of the explanation for this is the federal budget deficit, which caused the dollar to appreciate, making imports cheaper and our exports more expensive.
When the US real interest rate rises, domestic assets become _____ attractive to foreigners and foreign assets become _____ attractive to domestic residents.
more, less

The higher interest paid within the US makes US assets more attractive relative to foreign assets, explaining why the higher real interest rate will decrease purchases of foreign assets by domestic residents and increase purchases of domestic assets by foreigners (both of which reduce NCO).
An increase in __________ will cause net capital outflow to fall.
The real interest rate

(NCO is inversely related to the real interest rate)
The equilibrium in an open economy requires a simultaneous equilibrium in which 2 markets?
The equilibrium in the open economy determines the real interest rate (MARKET FOR LOANABLE FUNDS) and the real exchange rate (FOREIGN CURRENCY EXCHANGE MARKET).
What is the effect on imports and exports if net capital outflow is negative?
If net foreign investment is negative, net exports must also be negative - therefore, IMPORTS MUST EXCEED EXPORTS.
Which of the following is most likely to increase U.S. exports?
a. The govt. gives subsidies to U.S. firms that export goods or services.
b. The govt. reduces the size of the budget surplus.
c. The US reduces its restrictions on foreign imports.
d. Taxes on domestic saving rise.
c. The US reduces its restrictions on foreign imports.
Why is the demand curve in the market for foreign-currency exchange downward sloping?
B/c a higher exchange rate makes domestic goods more expensive.