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Questions and Answers
If a country has a positive net capital outflow, then which statement is correct?
If a country has a positive net capital outflow, then which statement is correct?
- On net other countries are purchasing assets from it. This adds to its demand for domestically generated loanable funds.
- On net other countries are purchasing assets from it. This subtracts from its demand for domestically generated loanable funds.
- On net it is purchasing assets from abroad. This adds to its demand for domestically generated loanable funds. (correct)
- On net it is purchasing assets from abroad. This subtracts from its demand for domestically generated loanable funds.
If the real interest rate is 7 percent, what will be the result?
If the real interest rate is 7 percent, what will be the result?
- Surplus of $60 billion. (correct)
- Shortage of $80 billion.
- Shortage of $60 billion.
- Surplus of $80 billion.
How do trade policies affect the trade balance?
How do trade policies affect the trade balance?
- Alter the trade balance because they alter imports of the country that implemented them.
- Alter the trade balance because they alter the net capital outflow of the country that implemented them.
- Do not alter the trade balance because they cannot alter the real exchange rate of the currency of the country that implements them.
- Do not alter the trade balance because they cannot alter the national saving or domestic investment of the country that implements them. (correct)
What is the supply of loanable funds if a country has national saving of $60 billion, government expenditures of $40 billion, domestic investment of $10 billion, and net capital outflow of $45 billion?
What is the supply of loanable funds if a country has national saving of $60 billion, government expenditures of $40 billion, domestic investment of $10 billion, and net capital outflow of $45 billion?
What happens if the United States were to impose import quotas?
What happens if the United States were to impose import quotas?
What occurs when the quantity of loanable funds supplied is greater than the quantity demanded?
What occurs when the quantity of loanable funds supplied is greater than the quantity demanded?
What is the effect of a higher real interest rate on loanable funds?
What is the effect of a higher real interest rate on loanable funds?
Which accurately describes the effect of the government budget deficit on the open economy?
Which accurately describes the effect of the government budget deficit on the open economy?
In the market for foreign-currency exchange, what happens to the supply curve during capital flight?
In the market for foreign-currency exchange, what happens to the supply curve during capital flight?
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Study Notes
Capital Outflow and Demand for Funds
- Positive net capital outflow indicates other countries are purchasing domestic assets, raising demand for domestic loanable funds.
- If a country is net purchasing assets abroad, demand for domestic loanable funds decreases.
Interest Rates and Loanable Funds
- At a real interest rate of 7%, a surplus of $60 billion occurs.
- If quantity of loanable funds supplied exceeds quantity demanded, a surplus occurs, leading to a drop in interest rates.
- Higher real interest rates lead to increased quantity of loanable funds supplied.
Trade Policies and Balance
- Trade policies do not affect trade balance as they do not influence national saving or domestic investment.
- Imposing import quotas increases the demand for dollars in foreign-currency exchange, but does not raise demand for loanable funds.
Loanable Funds Supply
- A country with national saving of $60 billion, government expenditures of $40 billion, domestic investment of $10 billion, and net capital outflow of $45 billion, has a supply of loanable funds equal to $60 billion.
Government Budget Deficits
- A government budget deficit causes real interest rates to rise, crowding out domestic investment and leading to currency appreciation, resulting in a trade balance deficit.
Effects of Capital Flight
- Capital flight in the foreign-currency exchange market leads to a rightward shift in the supply curve.
Tariffs and Import Effects
- The introduction of higher tariffs on imports, such as those on steel in 2002 by the United States, is expected to result in reduced imports according to the open-economy macroeconomic model.
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