Nargiz Hey

How NCO Depends on the Real Interest Rate?

• A fall in r makes domestic assets less attractive relative to foreign assets.

• An increase in r makes domestic assets less attractive relative to foreign assets.

• they are not related

• A fall in r makes domestic assets more attractive relative to foreign assets.

Choose the correct answer:

• Both I and NCO do not depend negatively on r, so the D curve is downward-sloping

• r adjusts to balance supply and demand in the LF market

• S = I - NCO

• all of the answers are true

In the market for foreign-currency exchange

• NX does not equal NCO

• NCO is the demand of dollars:U.S. residents sell dollars to obtain the foreign currency they need to buy foreign asset

• NX is the supply for dollars: Foreigners need dollars to buy U.S. net exports

• NX is the demand for dollars: Foreigners need dollars to buy U.S. net exports

Choose the correct

• An increase in E makes U.S. goods more expensive to foreigners, reduces foreign demand for U.S. goods—and U.S. dollars

• An increase in E has no effect on saving or investment, so it does not affect NCO or the supply of dollars

• E adjusts to balance supply and demand for dollars in the market for foreign- currency exchange

• all of the answers are correct

What are the consequences of a budget deficit in open market?

• interest rate falls

• NCO rises

• NCO falls

• exchange rate is not affected

Suppose the government decreases incentives to encourage investment. What would be an effect?

• r rises, NCO rises; E rises, NX rises

• r rises, NCO rises; E rises, NX falls

• r rises, NCO falls; E rises, NX falls

• r falls, NCO falls; E rises, NX falls

Which one is not correct?

• Tariff – a tax on imports

• Import quota – a limit on the quantity of imports

• “Voluntary export restrictions” – the govt pressures another country to increase its exports

• “Voluntary export restrictions” – the govt pressures another country to restrict its exports

Choose the wrong answer:

• In the market for foreign-currency exchange, the real exchange rate adjusts to balance the supply of dollars (net capital outflow) with the demand for dollars (net exports).

• Net capital outflow is the variable that connects loanable fund market and foreign currency exchange market

• A policy that restricts imports does not affect net capital outflow, so it cannot affect net exports or improve a country’s trade deficit. Instead, it drives up the exchange rate and reduces exports as well as imports.

• In an open economy, the real exchange rate adjusts to balance the supply of loanable funds (saving) with the demand for loanable funds (domestic investment and net capital outflow).

Which one is true about capital flight?

• it is a a large and sudden rise in the demand for assets located in a country

• when capital flight increases, NCO falls

• when capital flight rises in the country the real exchange rate falls

• all of the answers are correct

Choose the wrong answer

• Political instability may cause capital flight, as nervous investors sell assets and pull their capital out of the country

• Both I and NCO depend negatively on r, so the D curve is upward-sloping

• E is the real value of a currency in the market for foreign-currency exchange

• Budget surplus is when tax revenue is more than government expenditure