Deck 18: Macroeconomics in an Open Economy

Question 1

When net capital flows are negative,

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

Answer 1

capital inflows are less than capital outflows.

Question 2

A decrease in United States net foreign direct investment would occur if

A) U.S. citizens have decreased the value of foreign stocks and bonds they own.
B) U.S. citizens have decreased their building or purchasing of facilities in foreign countries.
C) net foreign investment decreases.
D) net capital flows increase.

Answer 2

U.S. citizens have decreased their building or purchasing of facilities in foreign countries.

Question 3

A Canadian oil company hires geological survey services from the United States.If all else remains equal,this will

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

Answer 3

increase net exports.

Question 4

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

A) An American party planner purchases 350 piñatas from Mexico.
B) The government of Mexico purchases 2,000 Dell laptop computers from the United States.
C) A Mexican citizen purchases 100 shares of stock in IBM.
D) The U.S. government donates $25 million to Mexico to help victims of a hurricane in Mexico.

Question 5

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

A) A German citizen purchases 100 shares of Texas Instruments stock.
B) An American citizen purchases 100 shares of BMW stock.
C) A German citizen purchases a new Volkswagen made in Germany.
D) An American citizen purchases a new Volkswagen made in Germany.

Question 6

Based on the following information,what is the balance on the current account?
Exports of goods and services = $12 billion
Imports of goods and services= $14 billion
Net income on investments = -$4 billion
Net transfers = -$1 billion
Increase in foreign holdings of assets in the United States = $6 billion
Increase in U.S.holdings of assets in foreign countries = -$3 billion

A) -$7 billion
B) -$3 billion
C) -$2 billion
D) $1 billion

Question 7

If New Yorkers decrease their purchases of French champagne,assuming all else remains constant,this will ________ of the United States.

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

Question 8

In August 2011,global revenues for McDonald's ________ when measured in local currencies than it did when measured in dollars.This occurred because the value of the U.S.dollar increased relative to most other currencies.

A) increased by more
B) decreased by more
C) increased by less
D) decreased by less

Question 9

When the United States sends money to the Philippines to help typhoon survivors,the transaction is recorded in

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

Question 10

Net foreign investment minus net foreign portfolio investment is equal to

A) capital outflows.
B) net foreign financial investment.
C) the balance of trade.
D) net foreign direct investment.

Question 11

The current account includes records of a country's

A) net exports.
B) net investment income.
C) net transfers.
D) All of the above are included in an economy's current account.

Question 12

An economy that does not have 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 13

The difference between the value of the goods a country exports and the value of the goods a country imports is the country's

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

Question 14

When a U.S.investor buys a bond issued in a foreign country,

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

Question 15

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

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

Question 16

Based on the following information,what is the balance on the financial account?
Exports of goods and services = $12 billion
Imports of goods and services = $14 billion
Net income on investments = -$4 billion
Net transfers = -$1 billion
Increase in foreign holdings of assets in the United States = $5 billion
Increase in U.S.holdings of assets in foreign countries = -$3 billion

A) $8 billion
B) $2 billion
C) $1 billion
D) -$1 billion

Question 17

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

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

Question 18

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

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

Question 19

The balance of payments includes all of the following accounts except

A) the current account.
B) the financial account.
C) the capital account.
D) the national debt account.

Question 20

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

Question 21

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

A) a decrease in foreign direct investment
B) a decrease in the amount of aid money the government sends abroad
C) a decrease in imports
D) None of the above will increase the balance on the current account.

Question 22

Figure 29-1

Refer to Figure 29-1. Which of the events below cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?

A) interest rates rise in England
B) interest rates rise in the United States
C) real income rises in the United States
D) real income falls in England

Question 23

What is the difference between net exports and the current account balance?

Question 24

Table 29-1

Refer to Table 29-1.Use the information in the table to prepare a balance of payments account and find the value of the statistical discrepancy.Assume that the balance on the capital account is zero.

Question 25

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

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

Question 26

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

A) Exports of goods = $725 billion Imports of goods = $790 billion
Exports of services = $350 billion
Imports of services = $260 billion
B) Exports of goods = $625 billion Imports of goods = $625 billion
Exports of services = $300 billion
Imports of services = $375 billion
C) Exports of goods = $550 billion Imports of goods = $575 billion
Exports of services = $275 billion
Imports of services = $300 billion
D) All of the above will result in a trade surplus.

Question 27

In recent decades the United States has incurred overall balance of payments deficits.

Question 28

Net exports equals the balance of trade surplus.

Question 29

Why is the U.S.trade deficit almost always larger than the U.S.current account deficit?

Question 30

If the balance on the current account in the United States is $750 billion,which of the following is most likely to be true?

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

Question 31

How does a decrease in value of a country's currency relative to other currencies affect its balance of trade?

A) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and reduces the balance of trade.
B) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and reduces the balance of trade.
C) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and increases the balance of trade.
D) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and increases the balance of trade.

Question 32

The purchase of foreign stocks and bonds by a U.S.brokerage firm is an example of capital inflows to the United States.

Question 33

Figure 29-1

Refer to Figure 29-1. Consider the market for U.S.Dollars against the British pound shown in the graph above. From this graph we can conclude that the dollar price of a British pound has ________ to ________ dollars per pound

A) decreased; 0.46
B) increased; 2.17
C) decreased; 2.00
D) increased; 0.50

Question 34

What is the relationship among the current account,the financial account,and the balance of payments?

Question 35

Net foreign investment is a measure of net capital outflows,equal to capital outflows minus capital inflows in a given period of accounting.

Question 36

In international exchange markets,a rise in interest rates in the United States will cause the demand for dollars to ________ and the supply of dollars to ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 37

If the balance on the current account is $842 billion and the balance on the financial account is -$603 billion,what is the balance on the capital account,assuming no statistical discrepancy?

A) $1,445 billion
B) $239 billion
C) $0
D) -$239 billion

Question 38

Suppose the majority of the shares of British Airways stock were sold to a firm in the United States. Assuming all else remains constant,this will

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

Question 39

Since 1999,the U.S.________ account has recorded relatively minor transactions,such as migrants' transfers,and sales and purchases of nonproduced,nonfinancial assets.

A) current
B) capital
C) financial
D) balance of trade account

Question 40

Ceteris paribus,a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to ________. I.e.,the dollar ________ in value against the yen.

A) increase; appreciates
B) increase; depreciates
C) decrease; depreciates
D) decrease; appreciates

Question 41

Table 29-2

If there is currently a shortage 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 an increase in the demand for dollars.
D) There will be an increase in the supply of dollars.

Question 42

Table 29-2

A decrease in the demand for American-made goods will

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

Question 43

Figure 29-2

You're traveling in Japan and are thinking about buying a new kimono.You've decided you'd be willing to pay $175 for a new kimono,but kimonos in Japan are all priced in yen.If the kimono you're looking at costs 14,000 yen,under which of the following exchange rates would you be willing to purchase the kimono? (Assume no taxes or duties are associated with the purchase.)

A) 24.5 yen per dollar
B) 65 yen per dollar
C) 80 yen per dollar
D) You would purchase the new kimono at any of the above exchange rates.

Question 44

Table 29-2

All else equal,a depreciation of the British pound relative to currencies such as the euro and the U.S.Dollar should ________ British exports and ________ imports to Great Britain.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 45

Table 29-2

Refer to Table 29-2. Given the following exchange rates in the above table,what are the exchange rates stated as U.S.dollars per Danish krone and U.S.dollars per EU euro respectively?

A) 0.20 dollars per krone and 1.43 dollars per euro
B) 2.00 dollars per krone and 7.14 dollars per euro
C) 0.02 dollars per krone and 0.70 dollars per euro
D) 0.05 dollars per krone and 1.30 dollars per euro

Question 46

Table 29-2

Currency traders expect the value of the dollar to rise.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 47

Figure 29-1

How does an increase in the relative price of a country's goods in terms of foreign goods,or real exchange rate,affect its balance of trade?

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

Question 48

Figure 29-3

Refer to Figure 29-3. The appreciation of the dollar is represented as a movement from

A) B to A.
B) D to C.
C) C to B.
D) C to A.

Question 49

Table 29-2

Which of the following would cause the dollar to depreciate?

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

Question 50

Figure 29-3

Refer to Figure 29-3. The depreciation of the euro is represented as a movement from

A) D to A.
B) C to D.
C) B to C.
D) B to A.

Question 51

Figure 29-2

Refer to Figure 29-2.Consider the market for U.S.dollars against the Japanese yen shown above. An event which could have caused the changes shown in the graph would be

A) an increase in U.S. real income.
B) speculators expect the dollar to depreciate in value in the near future.
C) an economic expansion in the United States
D) a decrease in Japanese interest rates.

Question 52

Table 29-2

All else equal,a depreciation of the British pound relative to currencies such as the euro and the U.S.Dollar should ________ the current account balance in great Britain and therefore ________ the financial account balance in Great Britain.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 53

Figure 29-2

You're traveling in Japan and are thinking about buying a new kimono.You've decided you'd be willing to pay $175 for a new kimono,but kimonos in Japan are all priced in yen.If the exchange rate is 89 yen per dollar,what is the highest price in yen you'd be willing to pay for a kimono? (Assume no taxes or duties are associated with the purchase.)

A) 1.97 yen
B) 330.75 yen
C) 15,575 yen
D) 19,425 yen

Question 54

Table 29-2

When the market value of the dollar falls 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 decreased.
D) the supply of dollars has decreased.

Question 55

Figure 29-2

If the nominal exchange rate between the American dollar and the New Zealand dollar is 1.36 New Zealand dollars per American dollar,how many American dollars are required to buy a product that costs 3.50 New Zealand dollars?

A) $2.14
B) $2.24
C) $2.57
D) $4.76

Question 56

Table 29-2

If the demand for the yen increases relative to the dollar,which of the following would occur?

A) The dollar will appreciate.
B) The yen will depreciate.
C) The dollar will depreciate.
D) The demand for the dollar will increase.

Question 57

Table 29-2

How will an interest rate increase in the United States affect equilibrium in the market for dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per U.S.dollar.)

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 58

Table 29-2

Currency traders expect the dollar to depreciate.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 depreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined.

Question 59

Table 29-2

When Americans decrease 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 60

Table 29-2

Which of the following will 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) All of the above will shift the demand for the euro to the right.

Question 61

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

A) Aggregate demand will increase as exports increase and imports decrease.
B) Aggregate demand will increase as imports increase and exports decrease.
C) Aggregate demand will decrease as imports increase and exports decrease.
D) Aggregate demand will decrease as exports increase and imports decrease.

Question 62

Assuming no change in the nominal exchange rate,how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)

A) The real exchange rate will rise.
B) The real exchange rate will fall.
C) The real exchange rate will be unaffected.
D) The impact on the real exchange rate cannot be predicted.

Question 63

Figure 29-3

Refer to Figure 29-3. Suppose that the U.S.government deficit decreases,causing interest rates in the United States to fall 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 64

An increase in capital inflows will

A) increase net foreign investment.
B) increase capital outflows.
C) decrease capital outflows.
D) increase the value of the domestic currency.

Question 65

Figure 29-3

Refer to Figure 29-3. Italians cut back on smoking and cut their demand for American cigarettes in half.Assuming all else remains constant,this would be represented as a movement from

A) B to A.
B) D to C.
C) B to C.
D) A to D.

Question 66

Figure 29-3

Refer to Figure 29-3. Europe experiences an economic boom.Assuming all else remains constant,this would be represented as a movement from

A) D to A.
B) D to C.
C) C to B.
D) B to A.

Question 67

If the exchange rate changes from $0.08 = 1 mexican peso to $0.09 = 1 mexican peso,then

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

Question 68

If the dollar depreciates against the Indian rupee,

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

Question 69

The relative price of a country's goods and services in terms of foreign goods and services is the real exchange rate.

Question 70

The deepening of the financial crisis in the fall of 2008

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

Question 71

Assuming the United States is the "domestic" country,if the real exchange rate between the United States and Russia decreases from 28 to 23,

A) the prices of U.S. goods and services have decreased by 5% relative to Russia.
B) the prices of U.S. goods and services have increased by 25.5% relative to Russia.
C) the prices of U.S. goods and services have decreased by 18% relative to Russia.
D) the prices of U.S. goods and services have increased by 22% relative to Russia.

Question 72

If the price level in the United States is 110,the price level is 135 in Mexico,and the nominal exchange rate is 12.5 pesos per dollar,what is the real exchange rate from the U.S.perspective?

A) 8.8
B) 10.2
C) 10.8
D) 11.4

Question 73

A real appreciation of the dollar is caused by either a nominal appreciation of the dollar,a rise in the foreign price level,or a fall in the U.S.price level.

Question 74

A rise in the dollar price of the Chinese yuan signals an appreciation of the yuan and a depreciation of the dollar.

Question 75

When exchange rates are ________,we say that the country's exchange rate is fixed.

A) determined in the market
B) set by a country's central bank
C) determined by supply and demand
D) relatively stable

Question 76

If a country has a ________ exchange rate,its central bank must buy and sell its holdings of currencies to maintain a given exchange rate.

A) floating
B) flexible
C) fixed
D) all of the above

Question 77

If the exchange rate changes from $2.00 = 1 euro to $1.98 = 1 euro then

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

Question 78

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

A) a depreciation of the franc
B) an appreciation of the dollar
C) a decrease in the price level in the United States
D) a decrease in the price level in Switzerland

Question 79

The price of ________ in terms of ________ is referred to as the real exchange rate.

A) foreign goods; foreign services
B) domestic goods; the domestic currency
C) domestic goods; domestic services
D) domestic goods; foreign goods

Question 80

Figure 29-3

Refer to Figure 29-3. Currency speculators believe that the value of the euro will decrease 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.