Reference no: EM131023364

Quiz #2

Please fill in the blank for each of the following questions. Make sure your answer is neatly and legibly written.

1. The ________________ is the relative price of the currency of two countries.

2. ____________________ indicates the amount domestic residents are lending abroad minus the amount foreigners are lending to us. It is equal to domestic saving minus domestic investment.

3. A ___________________________ is a small part of the world market and thus, by itself, can have only a negligible effect on the world interest rate.

4. The total expenditure on domestic output is the sum of consumption, investment, and government purchases, and ____________________.

5. If a country's exports exceed its imports, it will have a _________________________.

6. The __________________________ is the rate at which one can trade the goods of one country for the goods of another country. More specifically, it measures the number of foreign goods one can exchange for one comparable domestic good.

7. If there is free access to world financial markets, investment in all small open economies will depend on ____________________________________.

8. If a country's exports are less than its imports, then the country's net capital outflows are ______________.

9. An increase in a country's real exchange rate will make domestically produced goods _________________ (relatively cheaper, relatively more expensive) than foreign produced goods.

10. When a country lends funds to another country, this implies that its net exports are ___________________.

Answer the following multiple choice questions by circling the letter of your answer.

1. As the real exchange rate of the U.S. dollar increases
a. Foreign goods become cheaper to U.S. citizens.
b. U.S net exports fall.
c. The U.S. trade surplus decreases or the U.S. trade deficit increases.
d. Answers (a), (b), and (c) are all correct answers.

2. The FALSE statement is below:
a. Net capital outflow is the excess of domestic saving over domestic investment.
b. The trade surplus and net capital outflow must both equal zero.
c. According to the national income accounts identity, net capital outflow must equal net exports.
d. According to the national income accounts identity, net capital outflow must equal the trade surplus (or the trade balance).

3. If domestic investment exceeds domestic saving, one would observe
a. Borrowing from abroad.
b. A government budget deficit.
c. A trade deficit.
d. Answers (a) and (c) are both correct.

4. With a constant world interest rate, full employment, and an initial trade surplus of zero, a tax cut in a small open economy will result in
a. A trade deficit for the small open economy.
b. A reduction in national saving for the small open economy.
c. Negative net capital outflow for the small open economy.
d. Answers (a), (b) and (c) are all correct answers.

5. Suppose that several large foreign countries decrease government spending, leading to an increase in the level of world savings. In a small open economy, which of the following is most likely to occur?
a. A decrease in saving.
b. A decrease in investment.
c. An increase in the trade deficit (or a reduction in the trade surplus).
d. An increase in net capital outflow.