Chapter 32 Study Guide

Multiple Choice
1. In the open-economy macroeconomic model, the supply of loanable funds comes from 2. Other things the same, people in the United States would want to save more if the real interest rate in the United States 3. An increase in the U.S. real interest rate induces 4. Other things the same, if the interest rate falls, 5. If there is a surplus of loanable funds, the quantity demanded is 6. If the demand for loanable funds shifts right, 7. An increase in the budget deficit makes domestic interest rates 8. An increase in the budget deficit 9. If the government of a country with a zero trade balance increases its budget deficit, then interest rates
 * a. national saving.
 * b. private saving.
 * c. domestic investment.
 * d. the sum of domestic investment and net capital outflow.
 * e. foreign saving.
 * 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.
 * 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.
 * 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.
 * 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.
 * 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.
 * 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.
 * 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.
 * 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.

10. Refer to Figure 32-1. The loanable funds market is in equilibrium at 11. Refer to Figure 32-1. If the real interest rate is 6 percent, the quantity of loanable funds demanded is 12. Refer to Figure 32-1. If the real interest rate is 2 percent, there will be a
 * 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.
 * 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.
 * 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.

Answers

 * A
 * D
 * A
 * A
 * D
 * C
 * A
 * D
 * B
 * B
 * D
 * D

Free Response
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.