Question

4.According to the open economy macroeconomic model, which of the following statements is (are) correct?

(x)Capital flight requires the cooperation of the country’s airlines to move precious metals to safe areas.

(y)A large and sudden movement of funds out of a country is called capital flight

(z)Capital flight is frequently caused by an increase in political or economic instability

.A.(x), (y) and (z)

B. (x) and (y) only

C.(x) and (z) only

D.(y) and (z) only

E.(x) only

5.According to the textbook, which of the following statements is (are) correct?

(x)When a country suffers from capital flight, the exchange rate depreciates because supply in the market for foreign-currency exchange shifts right.

(y)When a country experiences capital flight its net capital outflow increases and its real exchange rate falls.

(z)When a country experiences capital flight its real interest rate increases as the country’s demand for loanable funds shifts to the left.

A.(x), (y) and (z)

B. (x) and (y) only

C.(x) and (z) only

D.(y) and (z) only

E.(z) only

6.According to the open economy macroeconomic model, which of the following statements is (are) correct?

(x)The usual effects of capital flight include a rightward shift of demand in the loanable funds marketand a rightward shift of the NCO curve,

(y)Capital flight typically causes a decrease in the domestic interest rate and an increase in NCO.

(z)Capital flight typically causes the real exchange rate of the domestic currency to depreciate because capital flight causes an increase in the supply of the currency in foreign currency exchange markets.

A.(x), (y) and (z)

B. (x) and (y) only

C.(x) and (z) only

D.(y) and (z) only

E.(x)only

Answer 1

Q No. 4. The correct answer is option ‘D’ that is ‘Y’ and ‘Z’ only. Option ‘X’ is wrong because capital flight means the movement of financial assets or money in large quantity from home country to foreign country. The movement happens not in terms of precious metals and the transfer of money or financial assets can be managed through bank account. There is no need of the cooperation of the country’s airlines.

Q No. 5. The correct answer is option ‘D’ that is ‘Y’ and ‘Z’ only. Option ‘X’ is wrong because when a country experience capital flight, the exchange rate will not depreciate (When capital flight happens the investor convert home currency denominated asset into foreign currency. That will lead to a fall in the exchange rate of home currency due to the increased demand of the foreign currency and increased supply of domestic currency).

Q No. 5. The correct answer is option ‘C’ that is ‘X’ and ‘Z’ only. Option ‘Y’ is wrong because when a country experience capital flight, NOC curve will shift right but the rate of interest will not fall instead it also tend to rise.