Question

According to the open-economy macroeconomic model, trade policies do not alter the trade balance because they do not alter the national saving or domestic investment of the country that implements them.

Select one:

True

False

Question text

In the 1980s, the U.S. government budget deficit rose. At the same time the U.S. trade deficit grew larger, the real exchange rate of the dollar appreciated, and U.S. net capital outflow decreased.

Select one:

True

False

Question text

If a country has domestic investment of $800 billion, national saving of $900 billion, and purchased $400 billion of foreign assets, then foreigners purchased $500 billion of domestic assets.

Select one:

True

False

Question text

Ceteris paribus, if the Canadian real interest rate were to decrease, Canadian net capital outflow would fall and net capital outflow of other countries would rise.

Select one:

True

False

Question text

Capital flight typically causes a decrease in the domestic interest rate because both the NCO curve and demand curve for loanable funds both shift to the right.

Select one:

True

False

Answer 1

The answer is true. According to the open-economy macroeconomic model, trade policies such as tariffs or quotas on imports do not necessarily have the effect to alter the trade balance. Hence, trade policies do not affect national saving or domestic investment and
they cannot affect net exports.

The answer is true. In the early 1980s, the U.S. government budget deficit rose and at the same time the U.S. trade deficit grew larger, the real exchange rate of the dollar appreciated, and U.S. net capital outflow decreased. The U.S. dollar appreciates and it's net capital outflow will tend to depreciate as the trade deficit grows.

The answer is false. Because,

Net Capital Outflow(NCO) = Acquisition of foreign assets by residents($400) - Acquisition of domestic assets by non-residents($500)= -$100

Savings= Investment ($800)+ NCO (-$100) = $700 . The given national saving is $900 billion. Hence, the answer is false.

The answer is false. Canadian net capital outflow would fall and net capital outflow of other countries would rise when the Canadian real interest rate increases. Increase in the real interest rate would also rise the real exchange rate.