Open Economy Analysis Quiz

The market where savers lend money to borrowers, driven by the interest rate.

The market where people exchange one currency for another.

Combining the markets for loanable funds and foreign-currency exchange to analyze how an economy interacts with the global economy.

The difference between a country's exports and imports.

The price of one currency expressed in terms of another currency.

A situation where a country imports more goods and services than it exports.

Government policies aimed at influencing a country's trade balance and exchange rate.

The real exchange rate is the relative price of domestic and foreign goods. It is a key determinant of net exports. When the real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods, leading to a decrease in net exports. This is because exports fall and imports rise.

A higher real exchange rate makes domestic goods more expensive relative to foreign goods, reducing demand for domestic goods both domestically and internationally. This results in a decrease in exports and an increase in imports, leading to a decrease in net exports.

A lower real exchange rate makes domestic goods cheaper relative to foreign goods, increasing demand for domestic goods both domestically and internationally. This results in an increase in exports and a decrease in imports, leading to an increase in net exports.

The demand for dollars in the foreign exchange market comes from the need to buy US goods and services, known as net exports. A lower real exchange rate stimulates net exports by making US goods cheaper and more attractive to foreign buyers. This increases the demand for dollars to pay for these exports.

The equilibrium real exchange rate is the price at which the quantity of dollars supplied equals the quantity of dollars demanded in the foreign exchange market. This means that the number of dollars people supply to buy foreign assets balances the number of dollars people demand to buy US goods and services.

The supply of dollars in the foreign exchange market comes from the demand for foreign assets, such as foreign bonds. When US residents want to buy foreign assets, they need to exchange dollars for the currency of the foreign country. This increases the supply of dollars in the foreign exchange market.

When a foreign entity, such as a Japanese airline, wants to buy US goods or services, they need to exchange their currency into dollars. This creates demand for dollars in the foreign exchange market, as they require dollars to pay for these US goods and services.

Net exports are the difference between exports and imports. When US residents buy foreign goods and services, they supply dollars in the foreign exchange market. When foreign residents buy US goods and services, they demand dollars in the foreign exchange market.

A budget deficit reduces national saving, shifting the supply of loanable funds to the left, leading to higher interest rates.

Reduced availability of loanable funds due to a budget deficit results in less domestic investment as borrowers cut back on capital goods.

A rise in domestic interest rates makes investing abroad less attractive, causing a decrease in net foreign investment.

Budget deficits cause a decrease in net foreign investment as domestic residents buy fewer foreign assets and foreign investors are attracted to higher U.S. returns.

A budget deficit drives up interest rates, influencing both domestic and foreign behavior, leading to a reduction in the demand for loanable funds (movement along the demand curve).

A budget deficit influences the market for foreign-currency exchange by affecting net foreign investment, which impacts the demand for the domestic currency.

Increased interest rates due to budget deficits make domestic assets more attractive to foreign investors, leading to an appreciation in domestic currency.

Budget deficits create tension between the government's borrowing needs and the private sector's investment opportunities, impacting several aspects of the economy.

An increase in the demand for a currency leads to its appreciation in value, meaning it can buy more of another currency.

Imports are discouraged and exports are encouraged, resulting in changes to net exports.

The real exchange rate appreciation offsets the impact of reduced imports on net exports, keeping them unchanged.

This refers to the difference between the total value of a country's exports and its imports.

Net foreign investment remains unchanged, even though the import quota reduces imports, due to the offsetting impact of the real exchange rate change.

An import quota limits the quantity of a specific good that can be imported.

This change in the demand for dollars is reflected in the shift from D1 to D2, showing an increased demand for dollars.

The interest rate that equates the quantity of loanable funds supplied and demanded. It reflects the cost of borrowing and the return on saving.

A situation where investors rapidly withdraw their funds from a country due to concerns about political instability or economic uncertainty.

The amount of funds available for lending. It originates from national saving, reflecting the surplus of income over consumption.

Trade policies, such as tariffs or quotas, can have a localized impact on specific industries or firms within a country. However, their overall impact on the national trade balance is often minimal.

A sudden and substantial reduction in the demand for assets located within a specific country. This often arises due to concerns about political instability, economic turmoil, or a loss of confidence in the country's financial system.

The demand for funds for investment purposes, including both domestic investment and net foreign investment. Represents the desire to utilize funds for productive purposes.

The investment in foreign assets by domestic residents minus the investment in domestic assets by foreign residents. It reflects the difference between capital flows out of and into the country.

Free trade allows countries to specialize in producing goods and services where they have a comparative advantage, leading to overall economic gains for all participating nations.

Trade restrictions, such as tariffs or quotas, can impede the gains from free trade by hindering specialization and increasing costs for consumers. Consequently, they can reduce overall economic well-being.

The assassination of a prominent political leader in Mexico in 1994 sparked concerns about political instability, leading to capital flight as investors moved their funds to safer havens.

Capital flight from Mexico in 1994 was a significant economic event, prompting a shift in equilibrium in the Mexican economy. This event highlights the interconnectedness of global financial markets and the potential impact of political instability.