ch05-practice

ch05-practice - Practice Questions on Chapter 5: The Open...

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Practice Questions on Chapter 5: The Open Economy Assume that all questions are about the long run. Name: __________________________ Date: _____________ 1. An “open” economy is one in which: A) the level of output is fixed. B) government spending exceeds revenues. C) the national interest rate equals the world interest rate. D) there is trade in goods and services with the rest of the world. 2. The value of net exports is also the value of: A) net investment. B) net saving. C) national saving. D) the excess of national saving over domestic investment. 3. If domestic investment ( I ) exceeds domestic saving ( S ), then the extra investment will be financed by: A) borrowing from abroad. B) lending from abroad. C) the domestic government. D) the World Bank. 4. If domestic saving exceeds domestic investment, then the extra saving will be used to: A) make loans to the government. B) make loans to foreigners. C) repay the national debt. D) repay loans to the Federal Reserve.
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5. The world real interest rate ( r * ): A) is defined as the domestic real interest rate. B) makes domestic saving equal to domestic investment. C) is the interest rate charged on loans by the World Bank. D) is defined as the real interest rate prevailing in world financial markets. 6. In a country with a "small open economy", the real interest rate will always be: A) above the world real interest rate. B) below the world real interest rate. C) equal to the world real interest rate. D) equal to the world nominal interest rate. Use the following to answer questions 7-8: Exhibit: Saving and Investment in a Small Open Economy
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7. (Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r 1 , then the economy has: A) a trade surplus. B) balanced trade. C) a trade deficit. D) negative capital outflows. 8. (Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r 3 , then the economy has: A) a trade surplus. B) balanced trade. C) a trade deficit. D) positive capital outflows. 9. An increase in the trade deficit of a small open economy could be the result of: A) an increase in taxes. B) an increase in government spending. C) a decrease in the world interest rate. D) the expiration of an investment tax-credit provision. 10. An increase in the trade surplus of a small open economy could be the result of: A) a domestic tax cut. B) an increase in government spending. C) an increase in the world interest rate. D) the implementation of an investment tax-credit provision. Page 3
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11. Holding other factors constant, legislation to cut taxes in an open economy will: A) increase national saving and lead to a trade surplus. B)
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ch05-practice - Practice Questions on Chapter 5: The Open...

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