Question

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

(x) In the open economy macroeconomic model of the U.S. economy, net capital outflow is equal to the quantity of U.S. dollars supplied in the foreign exchange market.

(y) In the market for foreign currency exchange, the amount of U.S. net capital outflow desired at each real interest rate represents the quantity of U.S. dollars supplied for the purpose of buying foreign assets.

(z) In the market for foreign currency exchange, the amount of U.S. net exports desired at each real exchange rate represents the quantity of U.S. dollars demanded for the purpose of buying U.S. goods and services by foreign residents

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

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (x) only

15. Other things the same, an increase in the U.S. interest rate

A. raises net capital outflow which decreases the quantity of loanable funds supplied.

B. raises net capital outflow which decreases the quantity of loanable funds demanded.

C. raises net capital outflow which increases the quantity of loanable funds demanded.

D. lowers net capital outflow which decreases the quantity of loanable funds demanded.

E. lowers net capital outflow which increases the quantity of loanable funds demanded.

Answer 1

14. A. (x), (y) and (z)
(All the three statements are true for net capital outflow.)

15. D. lowers net capital outflow which decreases the quantity of loanable funds demanded.
(As interest rate increases, foreign investment will come in the US. So, net capital outflow will decrease and thus the demand for loanable funds will also decrease.)