Economics Test Questions

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  • Topic: Inflation, International trade, Bretton Woods system
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  • Published : June 19, 2012
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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.|

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

7.|(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r1, 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 r3, 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.|

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)|increase national saving and lead to a trade deficit.|
C)|reduce national saving and lead to a trade surplus.|
D)|reduce national saving and lead to a trade deficit.|

12.|Consider a small open economy. If large foreign countries increase their domestic government purchases, this policy will tend to increase:| A)|investment in the small open economy.|
B)|saving in the small open economy.|
C)|net exports by the small open economy.|
D)|imports by the small open economy.|

13.|Starting from trade balance, if the world interest rate falls, then, in a small open economy, the amount of domestic investment will _____ and net exports will _____.| A)|increase; increase|
B)|increase; decrease|
C)|increase, not change|
D)|decrease; increase|

14.|If the government of a small open economy wishes to reduce its trade deficit, which policy action will be successful in achieving this goal?| A)|increasing taxes|
B)|increasing government spending|
C)|increasing investment tax credits|
D)|imposing protectionist trade policies|

15.|The adoption of an investment tax credit in a small open economy is likely...
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