Test Bank for Macroeconomics, Fifth Canadian Edition, 5/E 5th Edition Olivier Blanchard, Dav

Test Bank for Macroeconomics, Fifth Canadian

Edition, 5/E 5th Edition Olivier Blanchard, David W.
Johnson

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 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

Chapter 7 The Goods Market in an Open Economy

1) Which of the following represents the demand for domestic goods?

A) C + I + G - εQ
B) C + I + G + X - εQ
C) C + I + G + X + εQ
D) C + I + G + X
E) C + I + G
Answer: B
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

2) Which of the following represents the domestic demand for goods?

A) C + I + G + X + εQ
B) C + I + G - εQ
C) C + I + G + X
D) C + I + G
E) C + I + G + X - εQ
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

3) The expression, εQ, represents the value of imports in terms of:

A) domestic goods.
B) exports.
C) foreign goods.
D) foreign currency.
E) domestic currency.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

4) Which of the following would cause an increase in the quantity of imports?

A) an increase in domestic output
B) a real depreciation
C) an increase in foreign output
D) a nominal depreciation
E) a decrease in foreign output
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-1

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

5) Which of the following would cause a reduction in exports?

A) an increase in foreign output
B) an increase in domestic output
C) a real appreciation of the domestic exchange rate
D) a real depreciation of the domestic exchange rate
E) a decrease in domestic output
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

6) The goods market in an open economy is in equilibrium when:

A) Y equals the domestic demand for domestic goods.
B) demand for domestic goods equals the domestic demand for goods.
C) domestic output (Y) equals the demand for domestic goods.
D) Y equals the domestic demand for goods.
E) net exports equal 0.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

7) Suppose there is a reduction in government spending (G). In an open economy, this reduction
in G will cause:
A) a decrease in net exports.
B) an increase in imports.
C) an increase in domestic output.
D) a reduction in domestic output.
E) an increase in domestic consumption.
Answer: D
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 7-1

8) Assume the domestic economy is an open economy. Which of the following will make the
government spending multiplier larger?
A) a smaller marginal propensity to consume
B) a smaller marginal propensity to import
C) a larger value for foreign output
D) a lower value for foreign output
E) a larger value for domestic output
Answer: B
Diff: 2 Type: MC
Skill: Recall
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-2

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

9) Suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of
the following in the domestic country?
A) an increase in consumption
B) an increase in net exports
C) an increase in output
D) a reduction in net exports
E) an increase in foreign consumption
Answer: D
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 7-3

10) Which of the following will always cause an increase in net exports?
A) a depreciation of the real exchange rate
B) an increase in government spending
C) an increase in investment
D) a reduction in domestic output
E) a decrease in interest rates
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-3

11) Assume the Marshall-Lerner condition is satisfied. Which of the following will cause a
reduction in net exports?
A) a decrease in government spending
B) a real appreciation
C) a decrease in investment
D) an increase in foreign output
E) an increase in taxes
Answer: B
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-4

12) An increase in the budget deficit can be reflected in:

A) an increase in net exports.
B) a decrease in saving.
C) a reduction in investment.
D) an increase in output.
E) an increase in consumption.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-3

Copyright © 2015 Pearson Canada Inc. 7-3

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

13) Which of the following will occur in a small country with a high marginal propensity to
import?
A) A depreciation will cause only small changes in the trade balance.
B) There is no combination of policies that can eliminate the trade deficit.
C) Changes in government spending will cause large changes in output.
D) Changes in government spending will cause large changes in the trade balance.
E) Changes in government spending will cause large changes in consumption.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Section Ref.: 7-3

14) Which of the following would make the spending multiplier larger?
A) a small marginal propensity to consume
B) a real appreciation
C) a small marginal propensity to import
D) a large initial trade deficit
E) a real depreciation
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-3

15) Assume the Marshall-Lerner condition holds. Which of the following would occur as a result
of a real depreciation?
A) an increase in the quantity of imports
B) a deterioration of the trade balance
C) a decrease in domestic output
D) an improvement of the trade balance
E) a decrease in domestic consumption
Answer: D
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 7-4

16) Suppose there is a real depreciation. This real depreciation is more likely to cause an increase
in net exports when:
A) imports are not at all sensitive to price changes.
B) exports are very sensitive to price changes.
C) foreign output is relatively high.
D) the Marshall-Lerner condition does not hold.
E) domestic output is relatively low.
Answer: B
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 7-4

Copyright © 2015 Pearson Canada Inc. 7-4

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

17) The existence of the J-curve indicates that which of the following will occur after a
depreciation?
A) The trade deficit will worsen temporarily before it improves.
B) The trade deficit will improve temporarily before it worsens.
C) The real exchange rate will rise temporarily before it falls.
D) The real exchange rate will fall temporarily before it rises.
E) The trade deficit and the real exchange rate will remain unchanged.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-5

18) Which of the following conditions would most likely cause the Marshall-Lerner condition
NOT to hold?
A) The marginal propensity to consume is very large.
B) Imports and exports are very price-sensitive.
C) The marginal propensity to consume is very small.
D) Imports and exports are not very price-sensitive.
E) The budget deficit is very large.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-4

19) The evidence suggests that in rich countries, a depreciation:

A) immediately improves the trade balance.
B) first improves, but then worsens the trade balance.
C) eventually improves the trade balance.
D) has no effect on the trade balance.
E) has ambiguous effects on the trade balance.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-4

20) A real appreciation will initially cause an increase in output when which of the following
holds?
A) Net exports are initially negative.
B) Net exports are initially positive.
C) the Marshall-Lerner condition
D) the J-Curve effect
E) Net exports are initially zero.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-5

Copyright © 2015 Pearson Canada Inc. 7-5

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

21) The existence of the J-curve suggests that a real appreciation will cause:
A) a final increase in net exports.
B) an initial reduction in net exports.
C) an initial increase in economic activity.
D) an initial decrease in economic activity.
E) ambiguous effects on NX.
Answer: C
Diff: 2 Type: MC
Skill: Recall
Section Ref.: 7-4

22) Suppose there is an increase in the budget deficit. In an open economy, which of the
following will occur as a result of this increase in the budget deficit?
A) Private saving decreases.
B) The trade balance worsens.
C) Investment increases.
D) Public saving increases.
E) Consumption increases.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-3

23) An open economy with a high saving rate (private and public) must have:
A) high investment or a trade surplus.
B) low investment or a trade surplus.
C) a trade surplus only.
D) high investment only.
E) low investment only.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-3

24) Policy coordination is difficult because each country:

A) prefers that other countries increase taxes.
B) prefers to be the one to increase demand.
C) prefers to be the one to decrease its money supply.
D) prefers to be the one to increase taxes.
E) prefers that other countries increase their demand.
Answer: E
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-3

Copyright © 2015 Pearson Canada Inc. 7-6

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

25) The demand for domestic goods will be equal to the domestic demand for goods when:
A) G - T = 0.
B) X = εQ.
C) εQ = 0.
D) S = I.
E) X = 0.
Answer: B
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-2

26) Suppose net exports are positive (NX > 0) for a country. Given this information, we know
that:
A) a budget surplus exists.
B) a budget deficit exists.
C) demand for domestic goods will be equal to the domestic demand for goods.
D) demand for domestic goods will be greater than the domestic demand for goods.
E) demand for domestic goods will be less than the domestic demand for goods.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-2

27) Suppose net exports are negative (NX < 0) for a country. Given this information, we know
that:
A) demand for domestic goods will be greater than the domestic demand for goods.
B) demand for domestic goods will be less than the domestic demand for goods.
C) demand for domestic goods will be equal to the domestic demand for goods.
D) a budget surplus exists.
E) a budget deficit exists.
Answer: B
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-2

28) Suppose net exports are zero for a country. Given this information, we know that:
A) a budget surplus exists.
B) demand for domestic goods will be equal to the domestic demand for goods.
C) demand for domestic goods will be less than the domestic demand for goods.
D) demand for domestic goods will be greater than the domestic demand for goods.
E) a budget deficit exists.
Answer: B
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-2

Copyright © 2015 Pearson Canada Inc. 7-7

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

29) A reduction in which of the following variables will cause a reduction in domestic demand?
A) domestic income
B) the real exchange rate
C) foreign income
D) the nominal exchange rate
E) interest rate
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

30) An increase in which of the following variables will have NO direct effect on domestic
demand?
A) domestic income
B) taxes
C) the interest rate (r)
D) the real exchange rate
E) government spending
Answer: D
Diff: 2 Type: MC
Skill: Recall
Section Ref.: 7-1

31) Suppose Policy makers want to increase NX and keep Y constant. Which of the following
policies would most likely achieve this?
A) a real depreciation
B) an increase in the real exchange rate and a tax increase
C) an increase in government spending
D) an increase in government spending and an increase in the real exchange rate
E) an increase in government spending and an appreciation of the real exchange rate
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-4

32) Assume a country is closed. Given this information, which of the following must occur?
A) S = I.
B) A budget surplus exists.
C) Demand for domestic goods will be less than the domestic demand for goods.
D) Demand for domestic goods will be greater than the domestic demand for goods.
E) Demand for domestic goods will be equal to the domestic demand for goods.
Answer: E
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-8

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

33) In an open economy, a reduction in domestic demand has:

A) a larger effect on output than in a closed economy and a negative effect on the trade balance.
B) a larger effect on output than in a closed economy and a positive effect on the trade balance.
C) a smaller effect on output than in a closed economy and a negative effect on the trade balance.
D) a smaller effect on output than in a closed economy and a positive effect on the trade balance.
E) a smaller effect on output than in a closed economy and a no effect on the trade balance.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

34) An increase in the marginal propensity to import will cause:

A) the ZZ line to become steeper and a given change in government spending (G) to have a
smaller effect on domestic output.
B) the ZZ line to become flatter and a given change in government spending (G) to have a larger
effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending (G) to have a
larger effect on domestic output.
D) the ZZ line to become flatter and a given change in government spending (G) to have a
smaller effect on domestic output.
E) the ZZ line to become flatter and a given change in government spending (G) to have no
effect on domestic output.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

35) A reduction in the marginal propensity to import will cause:

A) the ZZ line to become flatter and a given change in government spending (G) to have a
smaller effect on domestic output.
B) the ZZ line to become steeper and a given change in government spending (G) to have a
larger effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending (G) to have a
smaller effect on domestic output.
D) the ZZ line to become flatter and a given change in government spending (G) to have a larger
effect on domestic output.
E) the ZZ line to become flatter and a given change in government spending (G) to have no
effect on domestic output.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-9

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

36) An increase in the marginal propensity to import will cause:

A) the multiplier to increase and a given change in government spending (G) to have a smaller
effect on domestic output.
B) the multiplier to decrease and a given change in government spending (G) to have a larger
effect on domestic output.
C) the multiplier to decrease and a given change in government spending (G) to have a smaller
effect on domestic output.
D) the multiplier to increase and a given change in government spending (G) to have a larger
effect on domestic output.
E) the multiplier to decrease and a given change in government spending (G) to have no effect
on domestic output.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

37) A reduction in the marginal propensity to import will cause:

A) the multiplier to decrease and a given change in government spending (G) to have a smaller
effect on domestic output.
B) the multiplier to increase and a given change in government spending (G) to have a larger
effect on domestic output.
C) the multiplier to decrease and a given change in government spending (G) to have a larger
effect on domestic output.
D) the multiplier to increase and a given change in government spending (G) to have a smaller
effect on domestic output.
E) the multiplier to decrease and a given change in government spending (G) to have no effect
on domestic output.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

38) In a large country, the effect of a given change in government spending:

A) on output is small and the effect on the trade balance is small.
B) on output is small and the effect on the trade balance is large.
C) on output is large and the effect on the trade balance is small.
D) on output is large and the effect on the trade balance is large.
E) on output is large and the effect on the trade balance is ambiguous.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-10

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

39) In a small country, the effect of a given change in government spending:

A) on output is small and the effect on the trade balance is large.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is small.
D) on output is large and the effect on the trade balance is small.
E) on output is large and the effect on the trade balance is ambiguous.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-1

40) We will generally observe that the more open an economy:

A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the
trade position.
C) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on
the trade position.
D) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
E) the smaller the effect of fiscal policy on output and no effect of fiscal policy on the trade
position.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-4

41) We will generally observe that the less open an economy:

A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the
trade position.
C) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on
the trade position.
D) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
E) the smaller the effect of fiscal policy on output and no effect of fiscal policy on the trade
position.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-4

Copyright © 2015 Pearson Canada Inc. 7-11

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

42) When a group of countries is in recession, coordination of policies to increase domestic

demand simultaneously can help them, at least in theory, to get out of it because the coordinated
increase in demand leads to:
A) increases in exports and decreases in imports in each country.
B) decreases in exports and increases in imports in each country.
C) no changes in the trade balance of each country.
D) increases in both exports and imports in each country.
E) trade deficits in each country.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Section Ref.: 7-1

43) Suppose the Marshall-Lerner condition does NOT hold. A real appreciation will tend to
cause:
A) an increase in NX and an increase in Y.
B) a reduction in NX and a reduction in Y.
C) an increase in NX and a reduction in Y.
D) a reduction in NX and an increase in Y.
E) an increase in NX and no change in Y.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-4

44) Suppose the Marshall-Lerner condition does NOT hold. A real depreciation will tend to
cause:
A) an increase in NX and a reduction in Y.
B) a reduction in NX and a reduction in foreign output (Y*).
C) an increase in NX and an increase in Y.
D) a reduction in NX and an increase in domestic output (Y).
E) a reduction in NX and a reduction in domestic output (Y).
Answer: E
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-4

45) The J-curve illustrates the effects of:

A) Y* on NX.
B) a real depreciation on NX.
C) Y on NX.
D) Y on imports.
E) a real depreciation on Y*.
Answer: B
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 7-5

Copyright © 2015 Pearson Canada Inc. 7-12

 Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

46) Suppose policy makers want to increase Y and increase NX. Which of the following policies
would most likely achieve this?
A) an increase in government spending and a reduction in the real exchange rate
B) a real depreciation
C) a reduction in the real exchange rate
D) an increase in government spending
E) a real appreciation
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-4

47) Suppose policy makers want to increase Y and keep NX constant. Which of the following
policies would most likely achieve this?
A) a real depreciation
B) an increase in government spending
C) an increase in government spending and a depreciation of the real exchange rate
D) an increase in government spending and an appreciation of the real exchange rate
E) a reduction in the real exchange rate
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 7-4

Use the following information to answer the question(s) below.

C = 500 + 0.5YD G = 400; T = 500 r = 0.05

I = 550 - 2000r + 0.2Y Q = 0.3Y - 100ε X = 0.2Y* + 100ε

48) Assume ε = 1. The domestic equilibrium output (YE) is:

A) 1000.
B) 1250.
C) 1700.
D) 2000.
E) 2500.
Answer: E
Diff: 3 Type: MC
Skill: Applied
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-13

Test Bank for Macroeconomics, Fifth Canadian Edition, 5/E 5th Edition Olivier Blanchard, Dav

Macroeconomics, 5ce
Chapter 7: The Goods Market in an Open Economy

49) Assume ε = 1 and suppose that the foreign output Y* increases by 900. The new domestic
equilibrium output and the new Net Exports level are, respectively:
A) 2000, 260.
B) 2800, 260.
C) 2800, -260.
D) 2500, 260.
E) 2000, -260.
Answer: C
Diff: 3 Type: MC
Skill: Applied
Section Ref.: 7-1

50) Assume ε = 0.8 and Y* = 1000. The new domestic equilibrium output is:
A) 2000.
B) 2250.
C) 2500.
D) 2674.
E) 2746.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Section Ref.: 7-1

Copyright © 2015 Pearson Canada Inc. 7-14

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