Deck 18: Macroeconomics in an Open Economy

Question 1

The current account does not include which of the following?

A) net exports
B) net investment income
C) net transfers
D) U.S. holdings of foreign assets

Answer 1

U.S. holdings of foreign assets

Question 2

An increase in capital outflows from the United States will

A) decrease the balance on the financial account.
B) increase the balance on the financial account.
C) decrease the balance on the capital account.
D) increase the balance on the current account.

Answer 2

decrease the balance on the financial account.

Question 3

If Californians increase their purchases of Italian wine,assuming all else remains constant,this will ________ of the United States.

A) decrease the balance of trade
B) increase net exports
C) increase the current account balance
D) decrease the trade deficit
E) decrease the balance of payments

Answer 3

decrease the balance of trade

Question 4

Which of the following would increase net exports in the United States?

A) The United States purchases 500 silver necklaces from Mexico.
B) The government of Mexico purchases 500 Ford F-150 pickup trucks from the United States.
C) A Mexican citizen purchases 25 shares of stock in Ford Motor Company.
D) The U.S. government donates $5 million to Mexico to help victims of drought in Mexico.

Question 5

Based on the following information,what is the balance on the current account?
Exports of goods and services = $5 billion
Imports of goods and services= $3 billion
Net income on investments = -$2 billion
Net transfers = -$2 billion
Increase in foreign holdings of assets in the United States = $4 billion
Increase in U.S.holdings of assets in foreign countries = -$1 billion

A) -$2 billion
B) $1 billion
C) $3 billion
D) $4 billion

Question 6

Although based in the United States,McDonald's is a global company with about ________ of its sales coming from outside of the United States.

A) one-fourth
B) one-third
C) one-half
D) two-thirds

Question 7

Suppose the majority of the shares of Ford stock were sold to a Japanese firm.Assuming all else remains constant,this will

A) increase the balance of the U.S. financial account.
B) increase foreign direct investment in the United States.
C) increase the balance of the U.S. current account.
D) decrease net portfolio investment in the United States.
E) create a capital outflow in the United States.

Question 8

An open economy is an economy that has

A) interactions in trade or finance with other economies.
B) its own stock market.
C) governmental regulations regarding public information that is included in corporate finance reports.
D) governmental regulations regarding the number of hours retail establishments must remain open on a daily basis.

Question 9

Suppose China decides to sell a vast majority of their large holdings of U.S.Treasury bonds.If you are thinking of refinancing your house,how would China's action affect your decision to refinance?

A) You would want to refinance as soon as possible as interest rates should rise.
B) You would want to wait to refinance as interest rates should rise.
C) You would want to wait to refinance as interest rates should fall.
D) China's actions should not affect your decision to refinance in any way.

Question 10

Based on the following information,what is the balance on the financial account?
Exports of goods and services = $5 billion
Imports of goods and services = $3 billion
Net income on investments = -$2 billion
Net transfers = -$2 billion
Increase in foreign holdings of assets in the United States = $4 billion
Increase in U.S.holdings of assets in foreign countries = -$1 billion

A) $3 billion
B) $2 billion
C) $1 billion
D) -$1 billion

Question 11

An economy that has interactions in trade or finance with other economies is referred to as

A) an open economy.
B) a closed economy.
C) a trade-balanced economy.
D) a net foreign investment economy.

Question 12

Which of the following is not included in the balance of the financial account of the United States?

A) a purchase of Toyota stock by Ford
B) a purchase of GE stock by a firm in China
C) a purchase of U.S. car manufacturing plant by Toyota
D) a purchase of a German brewery by the U.S. company, Budweiser
E) a purchase of German financial services by Chase Manhattan bank

Question 13

The balance of trade is defined as

A) the difference between the balance of the current account and the balance of the capital account.
B) the difference between the value of the goods and services a country exports and the value of the goods and services a country imports.
C) the difference between the value of the goods a country exports and the value of the goods a country imports.
D) the difference between the balance of the current account and the balance of the financial account.

Question 14

The United States has a trade ________ with all its major trading partners and a trade ________ with every region of the world.

A) deficit; deficit
B) deficit; surplus
C) surplus; deficit
D) surplus; surplus
E) deficit; balance

Question 15

The balance of payments includes which three accounts?

A) the current account, the financial account, and the capital account
B) the capital flows account, the financial account, and the trade account
C) the net investment account, the net exports account, and the net transfers account
D) the balance of trade account, the net foreign investment account, and statistical discrepancy

Question 16

When the United States sends money to Indonesia to help tsunami survivors,in what account is this transaction recorded?

A) the financial account
B) the capital account
C) the current account
D) the foreign exchange account

Question 17

An HMO hires radiology services from India to cut costs.If all else remains equal,this will

A) decrease net exports.
B) decrease the balance of trade.
C) increase the current account balance.
D) decrease the financial account.

Question 18

Which of the following would increase the current account balance of the United States?

A) an increase in imports
B) an increase in the amount of money the U.S. government sends in foreign aid to other countries
C) an increase in the balance of trade
D) an increase in the amount of income U.S. companies pay out to foreigners who own investments in the United States

Question 19

Which of the following transactions would be included in Japan's current account?

A) A Japanese citizen purchases 50 shares of Google stock.
B) An American citizen purchases 50 shares of Toshiba stock.
C) A Japanese citizen purchases a new Toyota made in Japan.
D) An American citizen purchases a new Toyota made in Japan.

Question 20

In August 2011,global revenues for McDonald's increased by 11.3 percent when measured in local currencies,but increased by only 5.4 percent when measured in dollars.The reason for this discrepancy is the value of the

A) euro decreased relative to the British pound.
B) British pound increased relative to the U.S. dollar.
C) U.S. dollar increased relative to most other currencies.
D) U.S. dollar decreased relative to the Japanese yen.

Question 21

Net foreign investment is equal to

A) capital inflows minus capital outflows.
B) foreign direct investment.
C) the balance of trade.
D) net foreign portfolio investment plus net foreign direct investment.

Question 22

A country which incurs a current account deficit will most likely have a financial or capital account surplus.

Question 23

The balance of trade includes trade in

A) goods only.
B) services only.
C) both goods and services.
D) neither goods not services.

Question 24

What is the relationship between the balance of trade and the current account balance?

Question 25

If the balance on the current account is $346 billion and the balance on the financial account is -$204 billion,what is the balance on the capital account,assuming no statistical discrepancy?

A) $550 billion
B) $142 billion
C) $0
D) -$142 billion

Question 26

When a foreign investor buys a bond issued in the United States,

A) the balance on the capital account increases.
B) the balance on the current account increases.
C) the balance on the financial account increases.
D) the balance of trade increases.

Question 27

Since 1999,the capital account has recorded

A) transactions that affect net capital flows in the economy.
B) relatively minor transactions, such as migrants' transfers, and sales and purchases of nonproduced, nonfinancial assets.
C) transactions that affect the balance of trade or the balance of services.
D) statistical discrepancy between the current account and the financial account.

Question 28

If the current account is in deficit and the capital account is zero,then

A) the financial account must be in surplus.
B) the balance of trade must be in surplus.
C) the balance of payments must be in surplus.
D) there is a capital outflow.
E) the balance of services must be in surplus.

Question 29

The United States usually exports ________ goods than it imports and exports ________ services than it imports.

A) more; more
B) more; fewer
C) fewer; more
D) fewer; fewer

Question 30

If foreign holdings of U.S.dollars increase,holding all else constant,

A) the balance on the U.S. financial account will increase.
B) the balance on the U.S. current account will increase.
C) the balance on the U.S. capital account will increase.
D) the U.S. balance of trade will increase.

Question 31

The current account balance equals the value of net exports.

Question 32

Which of the following is an example of foreign direct investment in China?

A) U.S. auto entrepreneur Carroll Shelby buys stock in the Chinese auto company, Chevy Automobile Company.
B) Chinese Shenzen Airlines company buys a small U.S. midwest airline company, Air Chicago.
C) The U.S. company Wal-Mart buys a warehouse in Shanghai.
D) The bank of China purchases U.S. Treasury bonds.
E) A U.S. foreign exchange speculator buys $200,000 worth of the Chinese currency the yuan.

Question 33

When net capital flows are positive,

A) capital inflows are greater than capital outflows.
B) net foreign investment is negative.
C) capital outflows are greater than capital inflows.
D) A and B are both correct.

Question 34

Which of the following would result in a trade surplus for the United States?

A) Exports of goods = $450 billion Imports of goods = $400 billion Exports of services = $200 billion Imports of services = $250 billion
B) Exports of goods = $450 billion Imports of goods = $450 billion Exports of services = $200 billion Imports of services = $250 billion
C) Exports of goods = $450 billion Imports of goods = $460 billion Exports of services = $200 billion Imports of services = $100 billion
D) Exports of goods = $450 billion Imports of goods = $490 billion Exports of services = $200 billion Imports of services = $100 billion

Question 35

The United States has a closed economy.

Question 36

Explain how "net capital flows" are related to "net foreign investment," "net foreign direct investment," and "net foreign portfolio investment."

Question 37

If the balance of the current account in the United States is -$900 billion,which of the following is most likely to be true?

A) The balance on the financial account is positive.
B) The trade balance is positive.
C) Net foreign investment is positive.
D) The balance on the capital account is negative.

Question 38

An increase in United States net foreign direct investment would occur if

A) United States citizens have increased the value of foreign stocks and bonds they own.
B) United States citizens have increased their building or purchasing of facilities in foreign countries.
C) net foreign investment increases.
D) net capital flows decrease.

Question 39

China runs a current account surplus with the United States.Which of the following must be true about China's balance of payments with the United States?

A) It must run a financial account deficit.
B) Its balance of trade must be in deficit.
C) Its net exports must be negative.
D) Its balance of payments must run a deficit.

Question 40

Which of the following would increase the balance on the current account?

A) an increase in foreign direct investment
B) an increase in the amount of aid money the government sends abroad
C) an increase in imports
D) an increase in the balance of trade

Question 41

If there is currently a surplus of dollars,which of the following would you expect to see in the foreign exchange market?

A) The dollar will appreciate.
B) The dollar will depreciate.
C) There will be a decrease in the demand for dollars.
D) There will be a decrease in the supply of dollars.

Question 42

Figure 29-1

Refer to Figure 29-1.The appreciation of the euro is represented as a movement from ________.

A) D to A
B) D to C
C) B to C
D) A to C
E) A to B

Question 43

An increase in the demand for American-made goods will

A) increase the supply of dollars on the foreign exchange market.
B) decrease the supply of dollars on the foreign exchange market.
C) increase the demand for dollars on the foreign exchange market.
D) decrease the demand for dollars on the foreign exchange market.

Question 44

How does an increase in a country's exchange rate affect its balance of trade?

A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade.
B) An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade.
C) An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade.
D) An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade.

Question 45

Figure 29-1

Refer to Figure 29-1.Europe suffers a recession.Assuming all else remains constant,this would be represented as a movement from ________.

A) D to A
B) C to D
C) B to C
D) A to D
E) A to B

Question 46

Table 29-1

Refer to Table 29-1.Given the following exchange rates in the above table,what are the exchange rates stated as U.S.dollars per Mexican peso and U.S.dollars per British pound respectively?

A) 0.10 dollars per peso and 2.00 dollars per pound
B) 1.00 dollars per peso and 20.00 dollars per pound
C) 0.01 dollars per peso and 0.20 dollars per pound
D) 0.10 dollars per peso and 5.00 dollars per pound
E) 0.01 dollars per peso and 0.50 dollars per pound

Question 47

You're traveling in Ireland and are thinking about buying a new digital camera.You've decided you'd be willing to pay $125 for a new camera,but cameras in Ireland are all priced in euros.If the exchange rate is 0.85 euros per dollar,what's the highest price in euros you'd be willing to pay for a camera?

A) 105 euros
B) 106.25 euros
C) 110.15 euros
D) 147 euros

Question 48

Figure 29-1

Refer to Figure 29-1.The French fall in love with California wines and triple their purchases of this beverage.Assuming all else remains constant,this would be represented as a movement from ________.

A) B to A
B) C to D
C) B to C
D) A to D
E) A to B

Question 49

Explain why economies with financial account surpluses usually have current account deficits.

Question 50

Figure 29-1

Refer to Figure 29-1.Suppose that the U.S.government deficit causes interest rates in the United States to rise relative to those in the European Union.Assuming all else remains constant,how would this be represented?

A) Supply would decrease, demand would decrease and the economy moves from B to C to D.
B) Supply would increase, demand would decrease and the economy moves from C to B to A.
C) Supply would decrease, demand would increase and the economy moves from A to D to C.
D) Supply would increase, demand would increase and the economy moves from D to A to B.

Question 51

Figure 29-1

Refer to Figure 29-1.Currency speculators believe that the value of the euro will increase relative to the dollar.Assuming all else remains constant,how would this be represented?

A) Supply would decrease, demand would decrease and the economy moves from B to C to D.
B) Supply would increase, demand would decrease and the economy moves from C to B to A.
C) Supply would decrease, demand would increase and the economy moves from A to D to C.
D) Supply would increase, demand would increase and the economy moves from D to A to B.

Question 52

If the dollar appreciates against the Mexican peso,

A) Mexican imports to the U.S. become more expensive.
B) U.S. exports to Mexico become less expensive.
C) U.S. exports to Mexico become more expensive.
D) The value of Mexican imports to the United States does not change.

Question 53

When the market value of the dollar rises relative to other currencies around the world,we say that

A) the dollar has appreciated.
B) the dollar has depreciated.
C) the demand for dollars has increased.
D) the supply of dollars has increased.

Question 54

Currency traders expect the value of the dollar to fall.What effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market?

A) Demand for dollars will increase, and supply of dollars will decrease.
B) Demand for dollars will increase, and supply of dollars will increase.
C) Demand for dollars will decrease, and supply of dollars will increase.
D) Demand for dollars will decrease, and supply of dollars will decrease.

Question 55

You're traveling in Ireland and are thinking about buying a new digital camera.You've decided you'd be willing to pay $125 for a new camera,but cameras in Ireland are all priced in euros.If the camera you're looking at costs 115 euros,under which of the following exchange rates would you be willing to purchase the camera? (Assume no taxes or duties are associated with the purchase.)

A) 0.56 euros per dollar
B) 0.89 euros per dollar
C) 0.92 euros per dollar
D) You would purchase the new camera at any of the above exchange rates.

Question 56

Currency traders expect the dollar to appreciate.What impact will this have on equilibrium in the foreign exchange market?

A) The dollar will appreciate, and the equilibrium quantity of dollars will decrease.
B) The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease.
C) The dollar will appreciate, and the equilibrium quantity of dollars will increase.
D) The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined.

Question 57

Which of the following would cause the dollar to appreciate?

A) an increase in the demand for dollars
B) a decrease in the demand for dollars
C) an increase in the supply of dollars
D) an increase in the demand for imports from foreign countries

Question 58

Figure 29-1

Refer to Figure 29-1.The depreciation of the dollar is represented as a movement from ________.

A) B to A
B) D to C
C) B to C
D) A to C
E) A to B

Question 59

If the nominal exchange rate between the American dollar and the Canadian dollar is 0.89 Canadian dollars per American dollar,how many American dollars are required to buy a product that costs 2.5 Canadian dollars?

A) $1.32
B) $2.23
C) $2.75
D) $2.81

Question 60

Why is the balance of payments always zero?

Question 61

Which of the following will not shift the demand for the euro to the right?

A) an increase in interest rates in the European Union
B) an increase in incomes in countries that buy goods from the European Union
C) expectations among speculators that the price of the euro will rise in the future
D) a decrease in the demand for European goods

Question 62

Assume the United States is the "domestic" country and China is the "foreign" country.Which of the following might increase the real exchange rate between the United States and China?

A) an appreciation of the yuan
B) a depreciation of the dollar
C) an increase in the price level in the United States.
D) an increase in the price level of China

Question 63

If the price level in the United States is 110,the price level is 120 in Mexico,and the nominal exchange rate is 140 pesos per dollar,what is the real exchange rate from the U.S.perspective?

A) 94
B) 115
C) 128
D) 153

Question 64

An appreciating yen makes Japanese products

A) more expensive in foreign markets.
B) less expensive in foreign markets.
C) more expensive in the Japanese market.
D) more expensive in both foreign markets and the Japanese market.

Question 65

An expansionary monetary policy in the United States should

A) decrease the foreign currency price of U.S. exports.
B) cause the dollar to appreciate.
C) decrease the dollar price of imports.
D) decrease net exports.

Question 66

If the exchange rate changes from $1.45 = 1 euro to $1.37 = 1 euro,then

A) both the euro and dollar have appreciated.
B) both the euro and dollar have depreciated.
C) the euro has appreciated and the dollar has depreciated.
D) the euro has depreciated and the dollar has appreciated.

Question 67

When exchange rates are not determined in the market but are instead set by a country's central bank,we say that the country's exchange rate is

A) flexible.
B) fixed.
C) a nominal exchange rate.
D) a real exchange rate.

Question 68

Hugo Chavez,Venezuela's president,proposed that the independence of the Venezuelan central bank be eliminated.Given the research on the relationship between central bank independence and inflation,we should expect this event to cause inflation to ________ and the real exchange rate to ________ between the two counties.(Assume the nominal exchange does not change,and that the United States is the domestic country).

A) rise in Venezuela relative to the United States; fall
B) fall in Venezuela relative to the United States; fall
C) rise in Venezuela relative to the United States; rise
D) fall in Venezuela relative to the United States; rise

Question 69

The deepening of the financial crisis in the fall of 2008 and spring of 2009

A) decreased the value of the dollar relative to most other foreign currencies.
B) increased the value of the dollar relative to most other foreign currencies.
C) did not significantly change the value of the dollar relative to most other foreign currencies.
D) had no impact on the values of any currencies.

Question 70

Assuming the United States is the "domestic" country,if the real exchange rate between the United States and France increases from 1.5 to 1.8,

A) the prices of U.S. goods and services have increased by 53% relative to France.
B) the prices of U.S. goods and services have increased by 3% relative to France.
C) the prices of U.S. goods and services have decreased by 16% relative to France.
D) the prices of U.S. goods and services have increased by 20% relative to France.

Question 71

What effect does a depreciation of the dollar have on real GDP in the United States in the short run?

A) Real GDP will fall.
B) Real GDP will rise.
C) Real GDP will be unaffected by the depreciation of the dollar.
D) Real GDP will be unchanged, but nominal GDP will rise.

Question 72

If the exchange rate changes from $2.00 = £1 to $2.01 = £1 then

A) the dollar has depreciated.
B) the dollar has appreciated.
C) the British pound has depreciated.
D) the British pound has stayed constant in value.

Question 73

If the dollar appreciates,how will aggregate demand in the United States be affected?

A) Aggregate demand will shift to the right as exports increase.
B) Aggregate demand will shift to the right as imports increase.
C) Aggregate demand will shift to the left as imports increase.
D) Aggregate demand will shift to the left as exports increase.

Question 74

If a country has a fixed exchange rate,

A) the equilibrium exchange rate in that market does not respond to changes in supply and demand for currency.
B) central banks have more control over real GDP in the economy.
C) central banks must buy and sell their holdings of currencies to maintain a given exchange rate.
D) the exchange rate is allowed to fluctuate in response to changes in the supply and demand for currency.

Question 75

Overall since 2002,the U.S.dollar has ________ relative to other currencies.

A) gained value
B) lost value
C) maintained its value
D) erratically gained and lost value every year

Question 76

How will contractionary monetary policy in Japan affect the demand and supply of the yen in the foreign exchange market?

A) The demand for the yen will fall, and the supply of the yen will increase.
B) The demand for the yen will increase, and the supply of the yen will fall.
C) The demand for the yen will fall, and the supply of the yen will fall.
D) The demand for the yen will increase, and the supply of the yen will increase.

Question 77

When Americans increase their demand for Japanese goods,

A) the demand for dollars will rise, and the demand for yen will rise.
B) the demand for dollars will fall, and the demand for yen will rise.
C) the supply of dollars will rise, and the demand for yen will rise.
D) the supply of dollars will fall, and the demand for yen will fall.

Question 78

How will an interest rate decrease in the United States affect equilibrium in the foreign exchange market?

A) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined.
B) The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined.
C) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase.
D) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase.

Question 79

An increase in capital inflows will

A) increase net foreign investment.
B) increase capital outflows.
C) decrease capital outflows.
D) increase the equilibrium exchange rate.

Question 80

The recession of 2007-2009 decreased the demand for imports in Japan,which caused the ________ curve for the yen to ________,increasing the exchange rate and the value of the yen.

A) supply; right
B) supply; left
C) demand; right
D) demand; left