Chapter 32 Homework Questions

What does the basic model of the open economy try to illustrate?

• The principles of closed economy

• The interaction between domestic and foreign markets

• The process of government elections

• The methodology of individual savings

What are the two markets discussed in the model of the open economy?

• The market for consumer goods and the market for services

• The stock market and the bond market

• The market for agricultural products and the market for industrial goods

• The market for loanable funds and the market for foreign exchange

What does the supply of loanable funds domestically come from?

• Savers

• Corporate stocks

• Government bonds

• Foreign investments

What does the demand for loanable funds consist of?

• Consumer loans and mortgages

• Net capital outflow only

• Domestic investment only

• Domestic investment and net capital outflow

What determines the real exchange rate in the market for foreign exchange?

• Government regulations

• The intersection of supply and demand curves

• The interest rate

• The balance of trade

What is the 'bridge' that connects the two markets in the model of the open economy?

• Government policies

• Consumer preferences

• Net capital outflow

• Interest rates

How is the interest rate related to net capital outflow?

• Directly proportional

• Equal to

• Not related

• Inversely proportional

What effect does a government budget surplus have on the loanable funds market?

• Decreases the supply of loanable funds

• Shifts the demand curve to the left

• Shifts the supply curve to the right

• Increases the demand for loanable funds

What happens to the real exchange rate as a result of a government budget surplus?

• It decreases

• It remains unchanged

• It increases

• It becomes negative

What is the first step in analyzing how a change affects the model of the open economy?

• Calculate the change in interest rates

• Find which market is affected

• Assess the impact on net exports

• Determine the new equilibrium