Question

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 market and 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

According to the open-economy macro model, which of the following causes the real exchange rate of the United States dollar to depreciate?
(x) the United States government decreases the budget deficit
(y) the United States eliminates import quotas and tariffs.
(z) capital flight from the United States
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

1:

Since the Demand for Loanable Funds is the horizontal sum of the I-curve and the NCO-curve, the outward shift in the NCO-curve also shifts the Demand-for-Loanable-Funds out.

Capital flight is the outflow of capital from a country due to negative monetary policies, such as currency depreciation, or carry trades in which low interest rate currencies are exchanged for higher-return assets

Hemce the answer is : C (x and z only)

2:

A depreciation of the dollar makes US exports more competitive but raises the cost of importing goods into the US.

Also when deficits are reduced, it weakens the exchange rate

Hence the answer is B( x and y only)