Assignment

1. A U.S. citizen buys bonds issued by an automobile manufacturer in Japan. Her expenditures are U.S.
A. foreign portfolio investment that increase U.S. net capital outflow
B. foreign direct investment that increase U.S. net capital outflow
C. foreign direct investment that decrease U.S. net capital outflow
D. foreign portfolio investment that decrease U.S. net capital outflow

2. Bolivia buys railroad engines from a U.S. firm and pays for them with Bolivianos (Bolivian currency). This transaction
A. none of the above is correct
B. increases both U.S. net exports and U.S. net capital outflow
C. decreases both U.S. net exports and U.S. net capital outflow
D. increases U.S. net exports and does not affect U.S. net capital outflow

3. If a country has negative net capital outflows, then its net exports are
A. positive and its saving is larger than its domestic investment
B. negative and its saving is larger than its domestic investment
C. negative and its saving is smaller than its domestic investment
D. positive and its saving is smaller than its domestic investment

4. If there is a trade surplus then
A. saving is less than domestic investment and Y > C +I + G
B. saving is less than domestic investment and Y C. saving is greater than domestic investment and Y > C + I + G
D. saving is greater than domestic investment and Y

5. A country has $200 billion of domestic investment and net capital outflow of $100 billion. What is the value of national savings (S)?
A. -$200 billion
B. $300 billion
C. $100 billion
D. -$300 billion

6. Suppose that the price of one taco is $1 in the U.S., and that tourists can buy a taco in Mexico for 2.50 pesos. If the nominal exchange rate is 7.50 pesos per dollar, which of the following statements are true
A. The real exchange rate is 1/3 Mexican tacos per U.S. taco, which are unfavorable terms of trade for American tourists.
B. The real exchange rate is 3 Mexican tacos per U.S. taco, which are favorable terms of trade for American tourists.
C. The real exchange rate is 3 Mexican tacos per U.S. taco, which are unfavorable terms of trade for American tourists.
D. The real exchange rate is 1/3 Mexican taco per U.S. taco, which are favorable terms of trade for American tourists.

Suppose that you own a brewery in Salisbury, MD that produces high quality pale ale beer. Assume that it costs you $4 to produce a six-pack and ship it to Great Britain, and that your target revenue is $5 per six-pack. Finally assume that the current exchange rate is 0.68 British Pounds (£)/U.S. dollar ($).

7.1. Based on the current exchange rate of 0.68 £/$ and your target revenue of $5 per six-pack, what is the price you charge for your beer in England?
A. £ 5.88
B. £ 7.35
C. £ 2.72
D. £ 3.40

7.2. Suppose that the U.S. dollar appreciates against the British Pound and the new exchange rate is 0.8 £/$. Calculate the new price you charge for your beer in England. Do you expect your sales volume to rise or decline?
A. £ 3.20; sales should decline
B. £ 4.00; sales should decline
C. £ 3.20; sales should rise
D. £ 4.00; sales should rise

7.3. Suppose that instead of the dollar appreciating as it did in question 29, the dollar weakens against the Pound, causing the exchange rate to fall from the original value of 0.68 £/$, down to 0.5 £/$. Calculate the new price you charge for your beer in England. Do you expect your sales volume to rise or decline (as compared to the 0.68 £/$ exchange rate)?
A. £ 2.00; sales should rise
B. £ 2.00; sales should decline
C. £ 2.50; sales should rise
D. £ 2.50; sales should decline

8. Suppose that in an attempt to protect workers, Congress imposes legislation that makes it more difficult and time consuming to reduce workers' nominal wages. How would SRAS and LRAS be affected by this change?
A. the SRAS curve would shift to the right and the LRAS curve would shift to the right
B. the SRAS curve would become flatter and the LRAS curve would remain unchanged
C. neither curve would be affected
D. the SRAS curve would become steeper and the LRAS curve would remain unchanged

9. Suppose that American business leaders become convinced that prices are going to fall in the short run, what would you anticipate will happen to the unemployment rate and GDP?
A. unemployment will fall and GDP will fall
B. unemployment will rise and GDP will rise
C. unemployment will fall and GDP will rise
D. unemployment will rise and GDP will fall

10. Suppose that members of Congress successfully eliminated the Commerce Department, and in so doing the federal government no longer collected or distributed economic data (including inflation data). What impact would this have on the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve?
A. the SRAS curve would shift to the right and the LRAS curve would shift to the right
B. neither curve would be affected
C. the SRAS curve would become flatter and the LRAS curve would remain unchanged
D. the SRAS curve would become steeper and the LRAS curve would remain unchanged

11. Suppose that the government is debating an increase in expenditures equal to $5 billion dollars. Assume that the marginal propensity to consume (MPC) is equal to 0.90. According to Keynesian theory, all other things being equal, how large of an increase in GDP would you expect if the extra government spending is approved?
A. $5.55 billion
B. $0.5 billion
C. $50 billion
D. $4.5 billion

12. If real interest rates were to increase in foreign countries while remaining fixed in the United States, all else equal, net capital outflow must:
A. remain unchanged
B. increase
C. none of the above
D. fall

13. If national savings remain unchanged and net capital outflow falls, what will happen to domestic investment (I)?
A. investment will rise
B. investment will remain unchanged
C. investment will fall
D. uncertain

14. A _________ shift in aggregate ______________ can cause stagflation.
A. leftward ; supply
B. rightward ; supply
C. leftward ; demand
D. rightward ; demand

15. With regard to the long-run model of aggregate supply (LRAS), an increase in the price level will lead to:
A. lower levels of aggregate supply
B. no change in aggregate supply
C. higher levels of aggregate supply
D. uncertain

16. With regard to the short-run model of aggregate demand (AD) and aggregate supply (AS), a wave of pessimism causing a reduction in aggregate demand will lead to:
A. lower equilibrium prices and lower equilibrium output
B. higher equilibrium prices and lower equilibrium output
C. lower equilibrium prices and higher equilibrium output
D. higher equilibrium prices and higher equilibrium output

17. Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures
A. none of the above
B. decrease U.S. net capital outflow, but increase Israeli net capital outflow.
C. increase U.S. and Israeli net capital outflow.
D. increase U.S. net capital outflow, but decrease Israeli net capital outflow.

18. When Microsoft establishes a distribution center in France, U.S. net capital outflow
A. decreases because Microsoft makes a direct investment in France.
B. increases because Microsoft makes a portfolio investment in France.
C. decreases because Microsoft makes a portfolio investment in France.
D. increases because Microsoft makes a direct investment in France.

19. If a country has negative net capital outflows, then its net exports are
A. negative and its saving is smaller than its domestic investment.
B. negative and its saving is larger than its domestic investment.
C. positive and its saving is larger than its domestic investment.
D. positive and its saving is smaller than its domestic investment.

20. If the U.S. real exchange rate appreciates relative to the euro, U.S. exports to Europe
A. rise, and European exports to the U.S. fall.
B. and European exports to the U.S. both fall.
C. and European exports to the U.S. both rise.
D. fall, and European exports to the U.S. rise.

21. Other things the same, an increase in the interest rate would tend to reduce
A. domestic investment, but not net capital outflow.
B. neither domestic investment nor not capital outflow.
C. both domestic investment and net capital outflow.
D. net capital outflow, but not domestic investment.

22. In an open economy the supply of loanable funds comes from
A. domestic investment and net capital outflow. Demand for loanable funds comes from national saving.
B. national saving. Demand comes from only domestic investment.
C. only net capital outflow. Demand for loanable funds comes from national saving.
D. national saving. Demand comes from domestic investment and net capital outflow.

23. When the real exchange rate for the dollar appreciates, U.S. goods become
A. less expensive relative to foreign goods, which makes exports fall and imports rise.
B. more expensive relative to foreign goods, which makes exports fall and imports rise.
C. more expensive relative to foreign goods, which makes exports rise and imports fall.
D. less expensive relative to foreign goods, which makes exports rise and imports fall.

24. Which of the following is the most likely result from an increase in the government's budget surplus?
A. lower net capital outflows
B. lower domestic investment
C. higher interest rates
D. lower imports

25. If something caused resources to become more readily available, then
A. the price level and real GDP would fall.
B. the price level would rise and real GDP would fall.
C. the price level would fall and real GDP would rise.
D. the price level and real GDP would rise.

26. Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long-run, prices
A. are the same and output is lower than in the original long-run equilibrium.
B. and output are higher than in the original long-run equilibrium.
C. are higher and output is the same as the original long-run equilibrium.
D. and output are lower than in the original long-run equilibrium.

27. The long-run effect of an increase in government spending is to increase
A. real output and lower the price level.
B. the price level and leave real output unchanged.
C. real output and leave the price level unchanged.
D. both real output and the price level.

28. Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S. dollar increases. This has two effects: (1) people in the U.S. revise their expectations so that the expected price level falls, and (2) net exports decline. We would expect that in the short-run
A. real GDP will fall and the price level might rise, fall, or stay the same.
B. real GDP will rise and the price level might rise, fall, or stay the same.
C. the price level will fall, and real GDP might rise, fall, or stay the same.
D. the price level will rise, and real GDP might rise, fall, or stay the same.

29. According to liquidity preference theory, if the quantity of money demanded is greater than the quantity supplied, the interest rate will
A. increase and the quantity of money demanded will increase.
B. decrease and the quantity of money demanded will decrease.
C. decrease and the quantity of money demanded will increase.
D. increase and the quantity of money demanded will decrease.

30. Classical economists believe that the demand for money will decline if the _________ decreases, while Keynesian economists believe that the demand for money will decline if the _________ increases.
A. price level ; unemployment rate
B. unemployment rate ; interest rate
C. interest rate ; price level
D. price level ; interest rate

31. In recent years, the Federal Reserve has conducted policy by setting a target for
A. the federal funds rate.
B. bank reserves.
C. the monetary growth rate.
D. the exchange rate.

32. Suppose the economy is in long-run equilibrium when GDP declines by $50 billion. The government wants to increase its spending in order to stimulate the economy and avoid a recession. Assume that the crowding-out effect is always half as strong as the multiplier effect, and the MPC equals 0.9. According to Keynesian theory, how much additional government spending is needed to restore economic output?
A. $10 billion
B. $45 billion
C. $100 billion
D. $50 billion

33. Suppose that average output per worker equals $50,000 and the government expenditure multiplier (?Y/?G) is only 0.6. How much additional government spending is required to artificially create a job for one year?
A. $83,333
B. $5,000
C. $20,000
D. $30,000.