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Multiple ChoiceEdit

1. In the open-economy macroeconomic model, the supply of loanable funds comes from

  • a. national saving.
  • b. private saving.
  • c. domestic investment.
  • d. the sum of domestic investment and net capital outflow.
  • e. foreign saving.

2. Other things the same, people in the United States would want to save more if the real interest rate in the United States

  • a. fell. The increased saving would increase the quantity of loanable funds demanded.
  • b. fell. The increased saving would increase the quantity of loanable funds supplied.
  • c. rose. The increased saving would increase the quantity of loanable funds demanded.
  • d. rose. The increased saving would increase the quantity of loanable funds supplied.
  • e. rose. The increased saving would increase the quantity of loanable funds supplied and would increase the quantity of loanable funds demanded.

3. An increase in the U.S. real interest rate induces

  • a. Americans to buy more foreign assets, which increases U.S. net capital outflow.
  • b. Americans to buy more foreign assets, which reduces U.S. net capital outflow.
  • c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.
  • d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.
  • e. foreigners to buy less U.S. assets, which increases U.S. net capital outflow.

4. Other things the same, if the interest rate falls,

  • a. firms will want to borrow more, which increases the quantity of loanable funds demanded.
  • b. firms will want to borrow less, which decreases the quantity of loanable funds demanded.
  • c. firms will want to borrow more, which increase the quantity of loanable funds supplied.
  • d. firms will want to borrow less, which decreases the quantity of loanable funds supplied.
  • e. firms will want to borrow more, but the quantity of loanable funds is not changed.

5. If there is a surplus of loanable funds, the quantity demanded is

  • a. greater than the quantity supplied and the interest rate will rise.
  • b. greater than the quantity supplied and the interest rate will fall.
  • c. less than the quantity supplied and the interest rate will rise.
  • d. less than the quantity supplied and the interest rate will fall.
  • e. less than the quantity supplied and the interest rate will remain high.

6. If the demand for loanable funds shifts right,

  • a. the real interest rate and the equilibrium quantity of loanable funds both fall.
  • b. the real interest rate falls and the equilibrium quantity of loanable funds rises.
  • c. the real interest rate and the equilibrium quantity of loanable funds both rise.
  • d. the real interest rate rises and the equilibrium quantity of loanable funds falls.
  • e. the real interest rate rises and the equilibrium quantity of loanable funds is indeterminate.

7. An increase in the budget deficit makes domestic interest rates

  • a. rise and the national debt rise.
  • b. fall and the national debt rise.
  • c. rise and the national debt fall.
  • d. fall and the national debt fall.
  • e. not change, but the national debt will rise.

8. An increase in the budget deficit

  • a. raises net exports and domestic investment.
  • b. raises net exports and reduces domestic investment.
  • c. reduces net exports and raises domestic investment.
  • d. reduces net exports and domestic investment.
  • e. reduces net exports and has an indeterminate effect on domestic investment.

9. If the government of a country with a zero trade balance increases its budget deficit, then interest rates

  • a. rise and the trade balance moves to a surplus.
  • b. rise and the trade balance moves to a deficit.
  • c. fall and the trade balance moves to a surplus.
  • d. fall and the trade balance moves to a deficit.
  • e. rise and the trade balance will be balanced.
Figure 32-1

Figure 32-1







10. Refer to Figure 32-1. The loanable funds market is in equilibrium at

  • a. 2 percent, $20 billion.
  • b. 4 percent, $40 billion.
  • c. 6 percent, $60 billion.
  • d. 2 percent, $60 billion.
  • e. 6 percent, $20 billion.

11. Refer to Figure 32-1. If the real interest rate is 6 percent, the quantity of loanable funds demanded is

  • a. $20 billion, and the quantity supplied is $40 billion.
  • b. $20 billion, and the quantity supplied is $60 billion.
  • c. $60 billion, and the quantity supplied is $20 billion.
  • d. $60 billion, and the quantity supplied is $40 billion.
  • e. $20 billion, and the quantity supplied is $20 billion.

12. Refer to Figure 32-1. If the real interest rate is 2 percent, there will be a

  • a. surplus of $20 billion.
  • b. surplus of $40 billion.
  • c. shortage of $20 billion.
  • d. shortage of $40 billion.
  • e. shortage of $60 billion.

AnswersEdit

  1. A
  2. D
  3. A
  4. A
  5. D
  6. C
  7. A
  8. D
  9. B
  10. B
  11. B
  12. D

Free ResponseEdit

1. Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate? 2. Fill in the following table with the direction of the variables that change in response to the events in the first column.

U.S. real interest rate U.S. domestic investment U.S. net capital outflow U.S. real exchange rate of domestic currency U.S. trade balance
U.S. government budget deficit increases increase
Capital flight from the United States

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