Question

1. Which of the following would cause the real exchange rate of the Canadian dollar to depreciate?

1. an increase in the Canadian government budget deficit
2. capital flight from Canada
3. the imposition of Canadian government import quotas
4. a decrease in the world interest rate

2. The 1998 default by the Russian government had results that were predictable using the textbook model.

Which of the following best describes what happened?

1. The event increased Russian interest rates and net exports.
2. The event reduced Russian interest rates and net exports.
3. The event increased Russian interest rates and reduced Russian net exports.
4. The event reduced Russian interest rates and increased Russian net exports.

3. Suppose that Canada imposes an import quota on automobiles. Which of the following describes the most likely effects of this quota?

1. The quota would cause the real exchange rate of Canadian dollars to appreciate, but it would not change the real interest rate in Canada.
2. The quota would cause the real exchange rate of Canadian dollars to appreciate and the real interest rate in Canada to increase.
3. The quota would cause the real exchange rate of Canadian dollars to depreciate and the real interest rate in Canada to decrease.
4. The quota would cause the real exchange rate of Canadian dollars to depreciate, but it would not change the real interest rate in Canada.

4. Which of the following equations is the GDP identity in an open economy?

1. Y = C + I + G + NCO
2. NX = -NCO
3. NCO = S - I+NX
4. Y = C + I + G - NX

5. What does the market for loanable funds coordinate?

1. supply and demand for dollars in the foreign exchange market
2. people who want to import or export goods
3. sellers and buyers
4. lenders and borrowers

Answer 1

Answer(1) B) Capital flight from Canada

Explanation - The capital flight from Canada will lead to the real exchange rate of the Canadian dollar to depreciate; The capital flight is a time when money or assets are rapidly flowing out from the country which weakens the economy and further depreciates the domestic currency.

Answer (2) (C) The event increased Russian interest rates and reduced Russian net exports

Explanation- The financial crisis of 1998 has reduced the exports from Russia which eventually increased the Russian interest rates; however the situation was stabilized after 1999.

Answer (3) (B) The quota would cause the real exchange rate of Canadian dollars to appreciate and the real interest rate in Canada to increase.

Explanation- As the import quota will be imposed on the automobiles there will be less outflow of domestic currency and it will strengthen the Canadian dollar as the Canadian dollar will appreciate the real interest rate in Canada will also increase.

Answer (4) (D) Y = C + I + G - NX

Explanation- Y = C + I + G - NX is an equation of GDP for Open Economy where

Y= Output

NX= Net Exports

C+I+G= Domestic Spending

Answer (5) (D) Lenders and Borrowers

Explanation - In general market buyers and sellers meet each other to deal in services and goods just like that market for loanable funds is a place where sellers and buyers meet to lend and borrow money.