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1. Problems and Applications Q1 True or False: Japan generally runs a significant trade surplus because of low Japanese demand for foreign goods. O True 0 False 2. Problems and Applications Q2 Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment. Which of the following accurately describes the effect of an investment tax credit? Check all that apply. [3 Net capital outflow decreases [3 Real interest rate decreases [:1 Exchange rate increases C] National saving decreases [3 Trade balance decreases [3 Domestic investment increases True or False: As a result of the investment tax credit, exports to other countries decrease. 0 True 0 False 3. Problems and Applications Q3 The chapter notes that the rise in the U.S. trade deficit during the 19805 was due largely to the rise in the U.S. budget deficit. On the other hand, some in the popular press have claimed that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products. Assume that U.S. products did decline in relative quality during the 19805. This caused net exports at any given exchange rate to V . decrease Indicate the effect of this shift in net exports on the U.S. ureign exchange. increase /3 Indicate the effect of this shift in net exports on the U.S. market for foreign exchange. Supply O Demand O Supply Real Exchange Rate Demand Quantity of DollarsAccording to this model, which of the following statements are true as a result of the quality change? Check all that apply. C] The real exchange rate increases. 1:] There is no change in the real interest rate. [:I The trade balance increases. C] Net capital outflow is unchanged. True or False: The claim that some people made in the popular press is not consistent with the model in this chapter. 0 True 0 False True or False: The change in the real exchange rate that resulted from the decline in the quality of U.S. products may increase our standard of living. 0 True 0 False 4. Problems and Applications Q4 An economist discussing trade policy in the New Republic wrote: \"One of the benefits of the United States removing its trade restrictions [is] the gain to US. industries that produce goods for export. Export industries would find it easier to sell their goods abroadeven if other countries didn't follow our example and reduce their trade barriers.\" Which of the following statements is true about the effect of a reduction in restrictions of imports? Check all that apply. [3 Imports will increase. C] The demand curve for dollars will shift to the left. [3 Net exports at any given real exchange rate will decrease. [j The real exchange rate will increase. D Exports will remain unchanged. C] The equilibrium level of net exports will decrease. 5. Problems and Applications Q5 Suppose the Canadians suddenly have a switch in taste from Japanese automobiles to American automobiles. On the following graph, indicate what happens to the demand for U.S. dollars in the market for foreign-currency exchange as a result of this change in tastes. /_\\ (-0 Supply 0 Demand El E g Supply ) 0'! E - - - - - - - - - -+ g I L\" I E w I n: I I Demand I I I I I Quantity of Dollars This causes the value of dollars in the market for foreigncurrency exchange to V , and the equilibrium quantity of net exports to Y Quantity of Dollars This causes the value of dollars in the market for foreign-currency exchange to V , and the equilibrium quantity of net exports to V remain unchanged Quantity of Dollars increase decrease of dollars in the market for foreign-currency exchange to v , and the equilibrium quantity of net exports to V 6. Problems and Applications Q6 A senator renounces his past support for protectionism: "The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness." Show the effect of an export subsidy on the market for foreign exchange. ? Supply O Demand O Supply Real Exchange Rate Demand Quantity of DollarsTrue or False: The US. real exchange rate appreciates as a result of this export subsidy. 0 True O False The export subsidy leads to V in the trade deficit. True or False: The US. real - appreciates as a result of this export subsidy. no changes 0 True an increase O False a decrease The export subsidy leads to V in the trade deficit. Suppose the United States decides to reduce export subsidies on U.S. agricultural products, but it does not decrease taxes or increase any other government spending. On the following graph, indicate the effect of a reduction in export subsidies on the demand for dollars in the U.S. foreign exchange market. Supply O Demand Supply Real Exchange Rate Demand Quantity of Dollars8. Problems and Applications Q8 1_ Effect on NCO 2_ Effecton Foreign Exchange STEP:1of2 Suppose that real interest rates decrease across Europe. This development will V U.S. net capital outflow at all US. real interest rates, which in turn will cause the V loanable funds to V because net capital outflow is a component of the relevant curve in the loanable funds market. 8. Problems and Applications Q8 2_ Effect on Foreign Exchange 1 . Effect on N00 STEP: 1 of2 Suppose that real interest rates decrease across Europe. This development will V U.S. net capital outflow at all US. real interest rates, which in turn will cause the V loanable funds to et capital outow is a component of the relevant curve in the loanable funds market. W TOTAL SCORE: 013 (to complete this step and unlock the next step) 8. Problems and Applications Q8 2_ Effect on Foreign Exchange 1 , Effect on N00 STEP: 1 of2 Suppose that real interest rates decrease across Europe. This development will V U.S. net capital outflow at all US. real interest rates, which in turn will cause the V loanable funds to v because net capital outflow is a component of the relevant curve in the loanable funds market. supply of demand for W (to complete this step and unlock the next step) TOTAL SCORE: 013 8. Problems and Applications Q8 2_ Effect on Foreign Exchange 1 , Effect on N00 STEP: 1 of2 Suppose that real interest rates decrease across Europe. This development will V U.S. net capital outflow at all US. real interest rates, which in turn will cause the V loanable funds to v because net capital outflow is a component of the relevant curve in the loanable funds market. TOTAL SI decrease (to complete this step and unlock the next step) Graea ep 1 9. Problems and Applications Q9 Suppose that Americans decide to decrease their saving. As a result, the real interest rate will V , and U.S. net capital outflow will Y . If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, thi e in private saving will have a V effect on U.S. domestic investment. If the elasticity of U.S. exports with respect to the real exchange rate is very low, this decrease in private saving will have a V effect on the U.S. real exchange rate. 9. Problems and Applications Q9 Suppose that Americans decide to decrease their saving. As a result, the real interest rate will V , and U.S. net capital outflow will Y . U.S. domestic investment. increase If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, this decrease in private saving will have a If the elasticity of U.S. exports with respect to the real exchange rate is very low, this decrease in private saving will have a V effect on the U.S. real exchange rate. 9. Problems and Applications Q9 Suppose that Americans decide to decrease their saving. As a result, the real interest rate will V , and U.S. net capital outflow will Y . If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, this decrease in private saving will have a V effect on U.S. domestic investment. If the elasticity of U.S. exports with respect to the real exchange rate is very low, this decrease in private saving will have a V eff e U.S. real exchange rate. 9. Problems and Applications Q9 Suppose that Americans decide to decrease their saving. As a result, the real interest rate will V , and U.S. net capital outflow will Y . If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, this decrease in private saving wi V effect on U.S. domestic investment. If the elasticity of U.S. exports with respect to the real exchange rate is very low, this decrease in private saving will have a V effect on the U.S. real exchange rate