Deck 16: Open Economy Macroeconomics

Question 1

Last year when Laura attended a business conference in Berlin, the exchange rate was €0.7 for US$1. This year she plans to attend that same conference and notes that the exchange rate is €0.8 for US$1. Laura estimates that her lodging and meals will be _____ expensive than last year.

A) 13% more
B) 13% less
C) 87% more
D) 87% less

Answer 1

13% less

Question 2

In 2018, the United States had a trade _____ of about _____.

A) deficit; $622 billion
B) deficit; $502 billion
C) surplus; $50 billion
D) surplus; $520 billion

Answer 2

deficit; $622 billion

Question 3

The sum of all of the balance of payments accounts must equal zero.

Answer 3

True

Question 4

When a country uses a flexible exchange rate and its transactions increase the supply of its currency, the country's

A) products become more expensive to others.
B) currency depreciates.
C) currency appreciates.
D) trade deficit increases.

Question 5

In the foreign exchange market, pounds per dollar is on the y axis and quantity of dollars is on the x axis. If the interest rate in the United States rises above the rate in the United Kingdom at the same time that U.S. consumers want more British goods, then the dollar will _____, and the pound will _____ if the interest rate effect is larger.

A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate

Question 6

A gold standard is effectively

A) a fixed exchange rate.
B) a flexible exchange rate.
C) a managed exchange rate.
D) the only method to cure depressions.

Question 7

Ceteris paribus, if exchange rates are flexible and U.S consumers buy more foreign goods, the

A) dollar will depreciate.
B) supply of U.S. dollars in foreign exchange markets will decrease.
C) dollar will appreciate.
D) demand for U.S. dollars in foreign exchange markets will decrease.

Question 8

If the United States sends money to Haiti for disaster relief, it will be accounted for as a(n) account.

A) subtraction from the U.S. current
B) addition to the U.S. current
C) subtraction from the U.S. capital
D) addition to the U.S. capital

Question 9

(Table) The change in foreign-owned holdings is a net

A) decrease of $600 billion.
B) increase of $600 billion.
C) decrease of $650 billion.
D) increase of $650 billion.

Question 10

The balance of trade is included in the _____ account.

A) current
B) capital
C) surplus
D) deficit

Question 11

The $15 million the United States spent to dig village wells in Malawi is _____ account.

A) subtracted from the current
B) added to the current
C) subtracted from the capital
D) added to the capital

Question 12

The current account is the same as the balance of trade.

Question 13

Suppose the current exchange rates between the dollar and the British pound and the dollar and the yen are $2 = £1, and $0.01 = ¥1. The exchange rate between the pound and the yen is

A) £200 = ¥1.
B) £1 = ¥1.
C) £2 = ¥1.
D) £1 = ¥200.

Question 14

In recent years, China has helped make its currency _____ by _____ U.S. dollars.

A) stronger; buying
B) stronger; selling
C) weaker; buying
D) weaker; selling

Question 15

Which factor may adversely affect the ability of purchasing power parity to hold?

A) elimination of trade barriers
B) custom duties
C) availability of close substitutes
D) identical demand across countries

Question 16

An investment by a Malaysian company in a wine production plant in California is included in the _____ account.

A) current
B) financing
C) trade
D) capital

Question 17

If the dollar appreciates in terms of the euro, it is cheaper for Europeans to purchase U.S. goods.

Question 18

In the balance of payments accounts, the current account includes the purchase and sale of foreign currency.

Question 19

A change in the exchange rate affects aggregate demand but not aggregate supply.

Question 20

Robert Mundell discussed the problems of moving from a _____ to a _____.

A) flexible exchange rate system; fixed exchange rate system
B) fixed exchange rate system; flexible exchange rate system
C) gold standard; silver standard
D) silver standard; gold standard

Question 21

Fixed exchange rate policies reinforce fiscal policy effects.

Question 22

As the dollar appreciates against the yen, U.S. exports to Japan _____ and U.S. imports from Japan _____.

A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise

Question 23

Robert Mundell is BEST known for

A) game theory.
B) international economics.
C) interpreting Keynes for an American audience.
D) advocating monetarism as a cure for stagflation.

Question 24

If Eddie travels to New Zealand, his lodging and meals will be accounted for as a(n) _____ account.

A) subtraction from the U.S. current
B) addition to the U.S. current
C) subtraction from the U.S. capital
D) addition to the U.S. capital

Question 25

The Big Mac index is an attempt to measure

A) purchasing power parity.
B) the real exchange rate.
C) the current account.
D) the capital account.

Question 26

In 2018, U.S. exports totaled about

A) $2,500 billion.
B) $2,200 trillion.
C) $2,700 billion.
D) $2,700 trillion.

Question 27

(Table: Balance of Payments) Which statement(s) is/are TRUE? I. The current account balance is equal to -$700 billion. II. The capital account balance is equal to $700 billion.
III) The statistical discrepancy must equal $100 billion.

A) I only
B) II only
C) I and II only
D) II and III only

Question 28

Suppose the exchange rate of U.S. dollars per British pound has changed from $1.90/£ to $1.50/£. This means that the

A) dollar depreciates from £0.67 pounds per $US to £0.53 per $US.
B) British pound appreciates against the dollar.
C) dollar cannot buy as much British goods as before.
D) dollar appreciates from £0.53 per $US to £0.67 per dollar.

Question 29

(Table) The balance of trade is

A) $500 billion.
B) -$650 billion.
C) -$500 billion.
D) $650 billion.

Question 30

Until the 1970s

A) all major currencies were allowed to float.
B) fixed exchange rates consistently led to economic prosperity.
C) most industrialized countries used some form of fixed exchange rate.
D) all international transactions were made with gold.

Question 31

Consider the U.S. dollar and the British pound. When the dollar price per the British pound rises

A) the dollar depreciates against the pound.
B) the pound depreciates against the dollar.
C) the dollar appreciates against the pound.
D) U.S. imports from Britain rise.

Question 32

Suppose the exchange rate has changed from $US1.40 per British pound to $US2.00 per British pound. This means that the

A) U.S. dollar depreciates from £0.71 per $US dollar to £0.50 per $U.S.
B) British pound depreciates against the U.S. dollar.
C) U.S. dollar can buy more British goods than before.
D) U.S. dollar appreciates from £0.50 per dollar to £0.71 per dollar.

Question 33

The balance of trade is the difference between exports of goods and services and imports of goods and services.

Question 34

(Table) For the balance of payments to be in balance, the

A) capital account must be $600 billion.
B) statistical discrepancy must be $100 billion.
C) statistical discrepancy must be $50 billion.
D) capital account must be $650 billion.

Question 35

Suppose the exchange rate for 1 euro is $1.40. Purchasing power parity exists if a fast-food meal in the United States costs $5, and in Paris, that same fast-food meal costs

A) 7 euros.
B) 3.57 euros.
C) 2.59 euros.
D) 3.43 euros.

Question 36

If 1 euro will buy $1.30

A) $1 will purchase 0.70 euro.
B) $1 will purchase 1.30 euro.
C) $1 will purchase 0.77 euro.
D) the real exchange rate equals one.

Question 37

On a graph of the foreign exchange market for U.S. dollars, with the horizontal axis measuring the quantity of dollars available for foreign exchange and the vertical axis measuring the exchange rate in euros per dollar, as the dollar appreciates against the euro, the _____ to the foreign exchange market would _____.

A) quantity of dollars supplied; decrease
B) supply of dollars; increase
C) supply of dollars; decrease
D) quantity of dollars supplied; increase

Question 38

In countries in which imports form a substantial part of household spending, major depreciations in the national currency can

A) produce significant declines in living standards.
B) increase consumption of foreign goods.
C) benefit workers at the expense of exporting firms.
D) hurt producers but benefit consumers.

Question 39

A nominal exchange rate

A) takes the price level of both countries into account.
B) is equal to e_r × [P_d/P_f].
C) is the price of one country's currency for another's.
D) is usually the same as the real exchange rate.

Question 40

(Table) The balance on income is

A) $50 billion.
B) $500 billion.
C) -$500 billion.
D) -$50 billion.

Question 41

An example of an item included in the current account is

A) the profits made by a South Korean company operating a plant in the United States.
B) the stock of Google held by a South Korean investor.
C) a South Korean company's deposits in Citibank.
D) a bond sold by Tesla Motors to a South Korean investor.

Question 42

Under a fixed exchange rate system, expansionary monetary policy is _____due to changes brought about through the _____ account.

A) hampered; capital
B) hampered; current
C) reinforced; capital
D) reinforced; current

Question 43

Most OPEC nations peg their currencies to the U.S. dollar to attract foreign investment.

Question 44

Suppose the exchange rate is €0.70 = $1. Then the exchange rate becomes €0.80 = $1. What can be said about the value of the dollar and the value of the euro?

A) The dollar has appreciated against the euro.
B) The dollar has depreciated against the euro.
C) If Americans travel to France, their dollars will not buy as much as before.
D) If Germans travel to the United States, their euros will buy more than before.

Question 45

Exchange rates are affected by each nation's relative position in the business cycle.

Question 46

Assume we have an economy currently in a recession with a flexible exchange rate system. In order to expand the economy, the central bank should

A) use expansionary fiscal policy.
B) use expansionary monetary policy.
C) try dollarization.
D) impose trade restrictions.

Question 47

If capital is perfectly mobile and a country has floating exchange rates, expansionary _____ policy will be _____, and contractionary _____ policy will be _____.

A) fiscal; reinforced; monetary; hampered
B) fiscal; hampered; monetary; reinforced
C) fiscal; reinforced; fiscal; hampered
D) monetary; hampered; monetary; reinforced

Question 48

Robert Mundell predicted

A) the breakdown of the Bretton Woods fixed exchange rate system only.
B) the adoption of a single currency by a group of countries only.
C) the development of the Big Mac index.
D) both the breakdown of the Bretton Woods fixed exchange rate system and the adoption of a single currency by a group of countries.

Question 49

When the United States has a current account deficit, it must

A) buy bonds from foreign countries to balance the account.
B) sell more exports to balance the account.
C) reduce its net transfers to balance the account.
D) be balanced with capital inflows from foreign countries.

Question 50

Most foreign exchange transactions are carried out

A) by tourists.
B) by importers.
C) for financial or speculative purposes.
D) by coin collectors.

Question 51

Consider the following scenario. Inflation in Argentina pushes the price of Argentine wine up 25%. Inflation in the United States pushes the price of California wine up 10%. If the exchange rate remains constant, the U.S. demand for wine from Argentina

A) decreases.
B) increases.
C) remains constant.
D) California wine is better than Argentine wine, so there never is a U.S. demand for wine from Argentina.

Question 52

If the domestic price level equals the foreign country's price level, the real exchange rate

A) equals one.
B) equals the nominal exchange rate.
C) exceeds the nominal exchange rate.
D) is less than the nominal exchange rate.

Question 53

The capital account includes payments for imports and exports of goods and services, incomes flowing into and out of the country, and net transfers of money.

Question 54

A country's _____ exchange rate is determined in international currency exchange markets.

A) nominal
B) fixed
C) flexible
D) real

Question 55

If the U.S. dollar appreciates by 10% against the British pound, but during that same time Britain has a 15% inflation rate, then British wool sweaters will appear _____ buyers.

A) less expensive to American
B) less expensive to British
C) to have the same price to British
D) more expensive to American

Question 56

Suppose Argentina has a 10% rate of inflation, while inflation is 3% in the United States. If exchange rates do not change

A) U.S. goods will have a disadvantage in the world market compared to Argentina.
B) Argentine goods will become more expensive in the United States.
C) since real exchange rates already take inflation into consideration, the inflation should have no effect on global trade.
D) goods made in Argentina will become cheaper because pesos have lost their value.

Question 57

The capital account summarizes the flow of money into and out of domestic and foreign assets.

Question 58

If there is a surplus of euros, then euros will

A) appreciate.
B) depreciate.
C) remain constant.
D) move to the gold standard.

Question 59

Suppose the interest rate in England is 5% and the interest rate in France is 7%. If the euro, France's currency, is expected to depreciate by 3% against the British pound

A) the euro-pound exchange rate will change as people will invest in other countries, such as the United States.
B) there will be no flow of funds from England to France because of the exchange rate uncertainty.
C) funds will flow from England to France.
D) funds will flow from France to England.

Question 60

(Table) The current account balance is

A) -$650 billion.
B) $500 billion.
C) -$500 billion.
D) $650 billion.

Question 61

Currency depreciation will contribute to inflationary pressure.

Question 62

If the U.S. dollar depreciates, then U.S. exports become _____ expensive abroad and foreign goods become _____ expensive in the United States.

A) less; less
B) less; more
C) more; more
D) more; less

Question 63

If American farmers sell corn to a Russian grain dealer, then the _____ account is _____.

A) current; debited
B) current; credited
C) capital; debited
D) capital; credited

Question 64

The United States had a _____ account _____ of about $488.5 billion in 2018.

A) current; deficit
B) current; surplus
C) capital; deficit
D) trade; surplus

Question 65

If a Japanese mutual fund buys a share of stock on the New York Stock Exchange, it will be accounted for as a(n) _____ account.

A) subtraction from the U.S. current
B) addition to the U.S. current
C) subtraction from the U.S. capital
D) addition to the U.S. capital

Question 66

The current account summarizes the flow of money into and out of domestic and foreign assets.

Question 67

Assume that capital is not perfectly mobile and substitutable and that the interest rate in the United States is currently 5%, which includes a 1% risk premium associated with continued high budget deficits. Investors expect the euro to rise against the dollar by 2% and thus demand a _____ in the _____.

A) higher return equal to 7%; United States
B) higher return equal to 7%; European Union
C) lower return equal to 3%; United States

Question 68

Under the gold standard, if a country imported more than it exported, the

A) deficit had to be covered with its inventory of gold.
B) deficit was balanced with a surplus in its capital account.
C) deficit was balanced by increasing the money supply.
D) trade deficit would have to be balanced with a fiscal budget surplus.

Question 69

In a country that follows a policy of using a _____ exchange rate, the government determines the exchange rates, then adjusts macroeconomic policies to maintain these rates.

A) nominal
B) fixed
C) flexible
D) real

Question 70

If there is an increase in demand for U.S. goods, the U.S. dollar will _____. If there is increased inflation in the United States, the U.S. dollar will _____.

A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; depreciate
D) depreciate; appreciate

Question 71

The portion of the current account that compares imports with exports is called the

A) import-export equation.
B) foreign demand component.
C) net trade calculation.
D) balance of trade.

Question 72

The buying and selling of foreign currency is

A) foreign exchange.
B) foreign trade.
C) the balance of payments.
D) the capital account.

Question 73

_____ is the price of one country's currency in terms of another country's currency, with the price levels of both countries taken into account.

A) The nominal exchange rate
B) The real exchange rate
C) Purchasing power parity
D) The fixed exchange rate

Question 74

Suppose U.S. monetary authorities increase the money supply in order to lower interest rates and stimulate the economy. Which scenario is plausible?

A) The higher money supply will cause unemployment to fall, encouraging more immigrants to come to the United States and bring their funds, which further increases the money supply.
B) The resulting inflation will cause the dollar to appreciate, encouraging Americans to buy more domestic goods.
C) The larger money supply will attract borrowers from abroad who will come to the United States and increase aggregate demand.
D) The lower interest rates will cause investors to take their funds to other countries, thereby partially offsetting the increase in the domestic money supply.

Question 75

If the exchange rate is US$1.28/euro, it takes _____ to buy 1 euro and it takes _____ to buy $1.

A) $0.78; €1.28.
B) $1; €1.28.
C) $1.28; €0.78.
D) $1.28; €1.

Question 76

Wages earned by a Haitian nanny working in the United States that are sent home to support her own children in Haiti are still added to the U.S. current account because the services were rendered in the United States.

Question 77

As long as assets are perfectly substitutable, an increase in the interest rate in France relative to Canada will cause

A) capital to move from Canada to France.
B) capital to move from France to Canada.
C) an interest rate decrease in Canada.
D) nothing to happen because the assets are perfectly substitutable.

Question 78

The real exchange rate is defined as the nominal rate times the inflation rate.

Question 79

Which occurrence will lead to increased imports and decreased exports, ultimately resulting in currency depreciation for the U.S. dollar?

A) rising interest rates in the United States
B) increased preferences for U.S. products in the United States
C) U.S. income growth less than that of other countries
D) decreasing prices in the United States

Question 80

The capital account includes

A) investments by foreign companies in U.S. plants.
B) profits repatriated to foreign countries from foreign-owned U.S. plants.
C) profits repatriated to U.S. companies from U.S.-owned plants in foreign countries.
D) investments in U.S. companies by U.S. companies.