Deck 31: Open-Economy Macroeconomics: Basic Concepts

Question 1

Increased foreign investment has trickle down effects, such as local job creation.Additionally it may result in outflows of dividends and interest payments.

Answer 1

True

Question 2

The Big Mac index shows the markets when the foreign exchange markets are not a fair reflection of the value of the currency, and ensures that there is change.

Answer 2

False

Question 3

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners is known as net foreign investment.

Answer 3

True

Question 4

If each country specialises in producing goods and services in which it has a comparative advantage, international trade:

A)can raise the standard of living in all trading countries
B)lowers the standard of living in all trading countries
C)leaves the standard of living unchanged
D)increases the political power of the trading countries

Question 5

A closed economy is where an economy does not interact with other economies in the world.

Question 6

During every period of hyperinflation, the money supply and the price level increase rapidly, and the nominal exchange rate depreciates rapidly.

Question 7

International trade is based on the:

A)theory of absolute advantage
B)theory of resource advantage
C)theory of comparative advantage
D)theory of military advantage

Question 8

According to the World Bank, trade has been the only force that has enabled poorer countries to increase their uptake of technology.

Question 9

Factors that might influence a country's exports, imports and net exports include the cost of transporting goods from country to country, and government international trade policies.

Question 10

Ceteris paribus, an increase in the level of imports desired by a nation's households leads to a decrease in GDP.

Question 11

The real exchange rate depends on the nominal exchange rate and on the price difference between two countries measured in the local currencies.

Question 12

The outcome from the GFEC has been that poorer nations have not received the capital investment required to continue their growth.

Question 13

A low rate of national saving is the primary cause of trade deficit.

Question 14

Macroeconomic variables that describe an open economy's interactions in world markets include exchange rates, the trade balance and imports.

Question 15

From the national income accounting identity, it follows that should national savings fall short of investment the country will have a trade surplus.

Question 16

The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short run, because many goods and services are non-traded and not all traded goods are standardised commodities.

Question 17

International trade has been much more significant for Australia than for many other nations.

Question 18

Which of the following is not strongly affected by international trade?

A)net foreign investment
B)exchange rates
C)domestic inflation
D)all of the above are strongly affected by international trade

Question 19

Purchasing power parity is the theory that nominal exchange rates are determined as necessary for the law of one price to hold.

Question 20

Saving in the Australian economy shows up as investment in the Australian economy or as the Australian net foreign investment.

Question 21

Which of the following represents the account identity?

A)NFI + I = NX
B)NFI = CAB
C)NX + NFI = Y
D)Y = NFI - NX

Question 22

A trade surplus occurs when:

A)exports exceed imports
B)imports exceed exports
C)tariffs exceed quotas
D)quotas exceed tariffs

Question 23

When an Australian exporter sells software to France and uses the proceeds to buy stock in a French company, Australian exports _____ and there is a capital _____ to/from Australia.

A)increase; outflow
B)increase; inflow
C)do not change; outflow
D)decrease; outflow

Question 24

An open economy's GDP is shown by:

A)Y = C + I + G + S
B)Y = C + I + G - NX
C)Y - C = I + G + NX
D)Y = C + I + G + T

Question 25

Net foreign investment measures:

A)foreign assets held by domestic residents
B)investment plus saving
C)the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners
D)none of the above

Question 26

The real exchange rate is the:

A)domestic price of goods
B)value of net exports
C)rate at which a person can trade the currency of one country for the currency of another
D)rate at which domestic goods are traded for foreign goods

Question 27

If net exports are negative, the country has a:

A)trade deficit
B)trade surplus
C)trade balance
D)budget surplus

Question 28

When a United States oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from its sale of oil to the United States to buy US government debt, US _____ and there is a capital _____ to/from the United States.

A)imports increase; outflow
B)imports decrease; inflow
C)imports increase; inflow
D)exports increase; outflow

Question 29

A country's balance on merchandise trade equals:

A)the value of tariffs less the number of quotas
B)the number of quotas less the value of tariffs
C)the value of exports minus the value of imports
D)the value of imports minus the value of exports

Question 30

If the nominal exchange rate is e, the domestic price is P and the foreign price is P*, then the real exchange rate is defined as:

A)e + P/
B)e(P*/P)
C)P e(P/P*)
D)e - P/P*

Question 31

If the exchange rate changes from 100 yen per dollar to 120 yen per dollar, then the yen has:

A)depreciated
B)appreciated
C)devalued
D)revalued

Question 32

Net exports of a country are:

A)the same as exports
B)balanced on merchandise trade
C)the trade gap
D)an international equilibrium

Question 33

The nominal exchange rate is the:

A)nominal interest rate in one country divided by the nominal interest rate in the other country
B)price of a good in one country divided by the price of the same good in another country
C)rate at which a person can trade the currency of one country for the currency of another
D)all of the above

Question 34

While making investment decisions, investors compare:

A)the real interest rates offered on the bonds
B)the nominal interest rates offered on the bonds
C)the market prices of the bonds
D)all of the above
E)none of the above

Question 35

The value of exports minus the value of imports in a period is called the:

A)budget balance
B)the value of a country's exports minus the value of its production
C)the value of a country's imports minus the value of its consumption
D)none of the above

Question 36

If a government does not pay interest or principal on its debt when due, it is:

A)in default
B)a canny borrower
C)a rip-off artist
D)in escrow

Question 37

Appreciation of a currency will lead to:

A)an increase in net exports
B)a reduction in net exports
C)no change in net exports
D)any of the above is equally likely

Question 38

If the exchange rate changes from 100 yen per dollar to 105 yen per dollar, then the dollar has:

A)depreciated
B)appreciated
C)devalued
D)revalued

Question 39

If a country sells more goods and services abroad than it purchases from foreign countries, then its exports are:

A)greater than its imports, and its net exports are negative
B)greater than its imports, and its net exports are positive
C)smaller than its imports, and its net exports are positive
D)smaller than its imports, and its net exports are negative

Question 40

Positive net exports signal that the:

A)country has a closed economy
B)country buys more goods from other countries than it sells to other countries
C)country sells more goods abroad than it buys from other countries
D)country's tariffs are too low

Question 41

If purchasing-power parity holds, and a tonne of rice costs $200 in Australia and 15 000 yen in Japan, then the nominal exchange rate is:

A)300 yen/$
B)30 $/yen
C)75 yen/$
D)750 yen/$

Question 42

Purchasing-power parity describes the forces that determine:

A)exchange rates in the short run
B)exchange rates in the long run
C)prices in the long run
D)prices in the short run

Question 43

If the law of one price holds, and a tonne of rice costs $25 in Australia and 4000 yen in Japan, then the nominal exchange rate is:

A)160 yen/$ and $.10/ yen
B)1000 yen/$ and $1.00/ yen
C)400 yen/$ and $.25/ yen
D)160 yen/$ and $.01/ yen

Question 44

The nominal exchange rate is the real exchange rate adjusted for the:

A)price level in the domestic country
B)price levels in the two countries
C)income level in the domestic country
D)income levels in the two countries
E)price level in the foreign country

Question 45

If the nominal exchange, defined as the number of units of domestic currency per unit of foreign currency, decreases, then the domestic currency has (been considered):

A)appreciated
B)depreciated
C)overvalued
D)undervalued

Question 46

When an Australian buys stock in a French company, from the perspective of Australia this is a(n):

A)import
B)export
C)balance on merchandise trade
D)capital outflow

Question 47

When the Big Mac in Egypt cost $US₂.28, which is less than it does in converted US dollars, we can say it _____.

A)should not be measured
B)is difficult to ascertain, as the currency is volatile
C)is undervalued
D)is overvalued

Question 48

Which of the following statements is correct? In an open economy:

A)the country engages in trade but always has balanced trade
B)the country does not import at all and therefore always has a trade surplus
C)the country may have a deficit, surplus or zero balance in its trade balance
D)none of the above

Question 49

Which of the following statements about the current account and the capital account is correct?

A)The value of goods or services exported equals the value of the asset given up to pay for this import
B)The net value of the goods or services sold by a country and the net income it earns from overseas must equal the net value of the asset acquired
C)The international flow of goods and services and income, and the international flow of capital are two sides of the same coin
D)None of the above

Question 50

The real exchange rate is the:

A)rate at which currencies of various nations are traded for each another
B)price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency
C)quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market
D)rate at which two currencies can be traded for each other

Question 51

What is the relationship between purchasing power parity and transport costs?

Question 52

When a country's central bank increases the money supply:

A)the price level rises and the country's currency depreciates relative to other currencies in the world
B)the price level falls and the country's currency depreciates relative to other currencies in the world
C)the price level rises and the country's currency appreciates relative to other currencies in the world
D)the price level falls and the country's currency appreciates relative to other currencies in the world
E)the price level rises and the country's currency is unaffected

Question 53

When the money supply decreases:

A)the nominal exchange rate appreciates
B)the nominal exchange rate depreciates
C)the real exchange rate appreciates
D)the nominal exchange rate is unaffected

Question 54

Balanced trade is:

A)a situation in which the value of a country's exports equals the value of its production
B)a situation in which the value of a country's exports equals the value of its imports
C)a situation in which the value of a country's imports equals the value of its consumption
D)none of the above

Question 55

Which of the following items may demonstrate limitations of the purchasing-power parity?

A)when certain goods are not easily tradeable
B)when goods are not perfect substitutes
C)consumer preferences may change over time
D)all of the above.

Question 56

The law which states that the price of identical goods should be the same across national boundaries when converted to a common currency value through the exchange rate is called the::

A)law of one price
B)law of demand
C)law of supply
D)law of pegged currencies

Question 57

General price levels in any country change to:

A)balance demand for goods and supply of goods
B)balance demand for services and supply of services
C)balance demand for money and supply of money
D)balance demand for goods and services, and supply of goods and services

Question 58

When the Big Mac in the euro costs more than it does in converted US dollars we can say the currency _____.

A)should not be measured in this way
B)is difficult to value, as currencies are volatile
C)is undervalued
D)is overvalued

Question 59

An economy with a current account deficit must also have

A)a current account deficit
B)a budget surplus
C)a budget deficit
D)positive net capital inflows

Question 60

If the nominal exchange rate is 75 yen per dollar, and a Big Mac hamburger sells for $4 in Australia and for 200 yen in Japan, then the real exchange rate is:

A)1.5
B)11
C)19
D)50

Question 61

According to the theory of purchasing-power parity, what will happen to a country's nominal exchange rate if the country has relatively high inflation?

Question 62

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is this not completely accurate?

Question 63

Group the following according to whether they may affect the demand, supply or both the demand and supply of $A in the foreign exchange market?
a.a fall in the incomes of Australians
b.a fall in the inflation rate in Australia relative to the rates in other countries with which Australia trades
c.a fall in interest rates in Australia
d.an increase in the income of citizens of the United Kingdom

Question 64

As the value of the Australian dollar rises, more and more people are buying goods from overseas on the internet and having them shipped to Australia.Does this mean purchasing power parity is more or less likely to hold for these goods?

Question 65

Explain why net exports equal aggregate saving minus investment.

Question 66

What would be the motives for foreign financial interests to invest in Australia in the i) short term and ii) long term?

Question 67

How can one derive the identity that saving equals the sum of domestic investment and net foreign investment from the national income accounting identity?

Question 68

Explain the relationship between exchange rates and purchasing power parity.