Question 1

Which of the following best describes the main insight from the open economy goods market model introduced in Chapter 18?

Accepted Answer

Output depends on both domestic and foreign demand.

Question 2

Given the open economy IS relation, which equation correctly represents the demand for domestic goods ($$Z$$)?

Accepted Answer

$$Z = C + I + G - IM + X$$

Question 3

Suppose the real exchange rate ($$e) $$increases. What is the likely effect on imports ($$IM) $$and exports ($$X) in $$the open economy model?

Accepted Answer

Imports increase, exports decrease.

Question 4

Which of the following equations correctly expresses imports as a function of domestic income ($$Y) $$and the real exchange rate ($$e$$)?

Accepted Answer

$$IM = IM(Y, e)$$

Question 5

If the government increases its spending ($$G) in an $$open economy, what is the most likely effect on output and the trade balance?

Accepted Answer

Output increases and the trade balance deteriorates.

Question 6

Which of the following best explains why the multiplier is smaller in an open economy compared to a closed economy?

Accepted Answer

Some of the increased demand falls on imports rather than domestic goods.

Question 7

Given the equilibrium condition $$Y = Z$$, which of the following is the correct expanded form for an open economy?

Accepted Answer

$$Y = C(Y - T) + I(Y, r) + G - IM(Y, e) + X(Y^*, e)$$

Question 8

If foreign income ($$Y^*) $$increases, what is the likely effect on the domestic economy's output and trade balance?

Accepted Answer

Output increases and the trade balance improves.

Question 9

Which of the following is a direct implication of the Marshall-Lerner condition?

Accepted Answer

A real depreciation will increase net exports if the sum of the absolute values of the price elasticities of exports and imports is greater than one.

Question 10

Suppose a country wants to reduce its trade deficit without changing output. According to the open economy model, which policy mix should it pursue?

Accepted Answer

Depreciate its currency and decrease government spending.

Question 11

Which of the following best describes the effect of a global recession on a small open economy?

Accepted Answer

Foreign demand for domestic goods falls, reducing domestic output.

Question 12

If the real exchange rate is defined as $$e = EP^* / P$$, what happens to the real exchange rate if the domestic price level ($$P) $$rises while the nominal exchange rate ($$E) $$and foreign price level ($$P^*) $$remain constant?

Accepted Answer

The real exchange rate decreases (real appreciation).

Question 13

Which of the following is NOT a channel through which a real depreciation affects the trade balance?

Accepted Answer

It increases domestic investment.

Question 14

Consider the equation for net exports: $$NX = X(Y^*, e) - IM(Y, e). If$$ $$Y$$ increases while $$Y^*$$ and $$e$$ remain constant, what happens to net exports?

Accepted Answer

Net exports decrease.

Question 15

Which of the following best explains why policy coordination among countries is challenging in an open economy?

Accepted Answer

Shocks to demand in one country affect other countries, complicating policy responses.

Question 16

Suppose the government increases $$G$$ and, at the same time, the currency depreciates. What is the likely combined effect on output and the trade balance?

Accepted Answer

Output increases, but the effect on the trade balance is ambiguous.

Question 17

Which of the following scenarios would most likely result in a trade surplus for a country?

Accepted Answer

A significant increase in foreign income ($$Y^*) $$with no change in domestic income ($$Y).$$

Question 18

If a country experiences a real depreciation, which of the following is most likely to occur according to the open economy model?

Accepted Answer

Net exports increase, leading to higher output.

Question 19

Which of the following best describes the relationship among saving, investment, and the trade balance in an open economy?

Accepted Answer

The trade balance equals saving minus investment.

The Goods Market in an Open Economy (Chapter 18) – Study Notes

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