Deck 14: Macroeconomics in an Open Economy

Question 1

A Canadian hospital 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.
E)increase the balance in the capital account.

Answer 1

decrease net exports.

Question 2

Suppose Norway decides to sell its large holdings of Canada bonds.If you are thinking of financing your new car, how would Norway's action affect your decision to refinance?

A)You would want to finance as soon as possible as interest rates should rise.
B)You would want to wait to finance as interest rates should rise.
C)You would want to wait to finance as interest rates should fall.
D)You would want to wait to finance as it will likely be easier to qualify for a loan.
E)Norway's actions should not affect your decision to refinance in any way.

Answer 2

You would want to finance as soon as possible as interest rates should rise.

Question 3

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.
E)the difference between the volume of goods sold to other countries and the volume of goods bought from other countries.

Answer 3

the difference between the value of the goods a country exports and the value of the goods a country imports.

Question 4

Many Canadian natural resource companies run mines in other countries. What impact would an expansionary monetary policy undertaken by the Bank of Canada have on these companies?

A)Expansionary monetary policy would encourage these firms to borrow abroad.
B)Expansionary monetary policy would make hiring in Canada easier for these firms.
C)Expansionary monetary policy would raise the tax bill for these firms.
D)Expansionary monetary policy would reduce the value of the profits earned in other countries.
E)Expansionary monetary policy will make it more difficult for these firms to raise funds in Canada.

Question 5

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 Canada = $4 billion
Increase in Canadian holdings of assets in foreign countries = -$1 billion

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

Question 6

The current account does not include which of the following?

A)exports of maple syrup to Vermont
B)income received by Canadians from foreign investments
C)transfers made to residents of other countries by Canadians
D)purchases of shares in Toyota by Canadians
E)imports of Kia cars from South Korea

Question 7

An increase in capital outflows from Canada 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.
E)increase the balance on the capital account.

Question 8

An open economy is an economy that has

A)interactions in trade or finance with other countries.
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.
E)imposes no tariffs on international trade.

Question 9

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

A)a purchase of Airbus stock by Bombardier
B)a purchase of Potash Corporation of Saskatchewan stock by a firm in China
C)a purchase of Canadian manufacturing plant by Toyota
D)a purchase of a German brewery by the Canadian company, Moosehead
E)a purchase of German financial services by Scotia Bank

Question 10

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)financial flows must be positive.
E)A and B are both correct.

Question 11

When Canada sends money to Syria to help refugees from the civil war, in what account is this transaction recorded?

A)the financial account
B)the capital account
C)the current account
D)the foreign exchange account
E)the balance of trade account

Question 12

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 Canada = $4 billion
Increase in Canadian holdings of assets in foreign countries = -$1 billion

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

Question 13

Suppose the majority of the shares of Bombardier stock were sold to an American firm.Assuming all else remains constant, this will

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

Question 14

If Ontarians increase their purchases of Italian wine, assuming all else remains constant, this will ________ of Canada.

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

Question 15

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

A)an increase in imports
B)an increase in the amount of money Canadian government sends in foreign aid to other countries
C)an increase in the balance of trade
D)an increase in the amount of income Canadian companies pay out to foreigners who own investments in Canada
E)an increase in Canada's stock of intellectual capital (patents)

Question 16

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
E)the capital account, the official settlements account, and the current account

Question 17

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.
E)Ford Motors purchases a patent from Toyota.

Question 18

Canada has a trade ________ with the U.S.and the U.K.and a trade ________ with its other major trading partners.

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

Question 19

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.
E)a market economy.

Question 20

Which of the following would increase net exports in Canada?

A)A Canadian purchases 500 silver necklaces from Mexico.
B)The government of Mexico purchases 500 Bombardier C Series aircraft from the Canada.
C)A Mexican citizen purchases 25 shares of stock in Bombardier.
D)The Canadian government donates $5 million to Mexico to help victims of drought in Mexico.
E)Blackberry sells several of its patents to Apple.

Question 21

Why is the balance of payments always zero?

Question 22

An increase in Canadian net foreign direct investment would occur if

A)Canadian citizens have increased the value of foreign stocks and bonds they own.
B)Canadian citizens have increased their building or purchasing of facilities in foreign countries.
C)net foreign investment increases.
D)net capital flows decrease.
E)Canadians import more from other countries.

Question 23

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.
E)China is the sole beneficiary of trade between the two countries.

Question 24

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

Question 25

When a foreign investor buys a bond issued in Canada,

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.
E)the balance on the capital account decreases.

Question 26

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

Question 27

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
E)-$204 billion

Question 28

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

Question 29

If foreign holdings of Canadian dollars increase, holding all else constant,

A)the balance on the Canadian financial account will increase.
B)the balance on the Canadian current account will increase.
C)the balance on the Canadian capital account will increase.
D)the Canadian balance of trade will increase.
E)the value of the Canadian dollar will decrease.

Question 30

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

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

Question 31

Canada has a closed economy.

Question 32

The balance of trade includes trade in

A)goods only.
B)services only.
C)both goods and services.
D)financial assets only.
E)fixed assets only.

Question 33

The capital account records

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.
E)transactions between national governments located in each country's capital.

Question 34

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

A)Canadian entrepreneur Kevin O'Leary buys stock in the Chinese auto company, Cherry Automobile Company.
B)Chinese Shenzen Airlines company buys a small Canadian airline company, Porter.
C)The Canadian company George Weston Ltd buys a warehouse in Shanghai.
D)The Bank of China purchases Canadian government bonds.
E)A Canadian foreign exchange speculator buys $200,000 worth of the Chinese currency, the yuan.

Question 35

The current account balance equals the value of net exports.

Question 36

If the balance of the current account in Canada is -$90 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.
E)The Canadian dollar will appreciate.

Question 37

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 38

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
E)an increase in the stock of Canadian patents

Question 39

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.
E)the current account balance.

Question 40

Canada 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 41

When Canada sends money to Haiti to help hurricane survivors, the transaction is recorded in

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

Question 42

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

A)A German citizen purchases 100 shares of Boeing stock.
B)A Canadian citizen purchases 100 shares of BMW stock.
C)A German citizen purchases a new Volkswagen made in Germany.
D)An Canadian citizen purchases a new Volkswagen made in Germany.
E)BMW purchases a patent from Ford.

Question 43

A decrease in capital outflows from Canada 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.
E)increase the balance on the current account.

Question 44

If Québecers decrease their purchases of French champagne, assuming all else remains constant, this will

A)increase Canada's balance of trade.
B)decrease Canada's net exports.
C)decrease Canada's current account balance.
D)increase Canada's trade deficit.
E)increase Canada's balance of payments.

Question 45

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.
E)a mixed economy.

Question 46

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 47

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.
E)net national savings.

Question 48

In 2015, the value of IBM's global profits ________, because the US dollar ________ in value relative to most other currencies.

A)fell; rose
B)rose; rose
C)fell; fell
D)rose; fell

Question 49

A Canadian oil company hires geological survey services from the United States.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.
E)decrease the capital account balance.

Question 50

If foreign holdings of Canadian dollars decrease, holding all else constant,

A)the balance on the Canadian financial account will decrease.
B)the balance on the Canadian current account will decrease.
C)the balance on the Canadian capital account will decrease.
D)the Canadian balance of trade will decrease.
E)the statistical discrepancy will increase.

Question 51

When net capital flows are negative,

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

Question 52

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.
E)statistical discrepancy.

Question 53

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

A)a decrease in imports
B)a decrease in the amount of money the Canadian government sends in foreign aid to other countries
C)a decrease in the balance of trade
D)a decrease in the amount of income Canadian companies pay out to foreigners who own investments in Canada
E)a decrease in the amount of aid Canadians send to foreign countries

Question 54

Based in the United States, IBM 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
E)three-quarters

Question 55

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

Question 56

Based on the following information, what is the balance of 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 Canada = $5 billion
Increase in Canadian holdings of assets in foreign countries = -$3 billion

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

Question 57

The current account includes records of a country's

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

Question 58

Based on the following information, what is the balance of 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 Canada = $6 billion
Increase in Canadian holdings of assets in foreign countries = -$3 billion

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

Question 59

A decrease in Canadian net foreign direct investment would occur if

A)Canadian citizens have decreased the value of foreign stocks and bonds they own.
B)Canadian citizens have decreased their building or purchasing of facilities in foreign countries.
C)net foreign investment decreases.
D)net capital flows increase.
E)will reduce the balance on the capital account.

Question 60

Which of the following would decrease net exports in Canada?

A)A Canadian party planner purchases 350 piñatas from Mexico.
B)The Televisa company in Mexico City purchases 200 episodes of children's programming from Nelvana in Toronto.
C)A Mexican citizen purchases 100 shares of stock in BlackBerry.
D)The Canadian government donates $2.5 million to Mexico to help victims of a hurricane in Mexico.
E)Bombarier buys patents for aircraft engines from Airbus.

Question 61

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

Question 62

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

Question 63

If the nominal exchange rate between the Canadian dollar and the American 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)5
D)$2.75
E)$2.81

Question 64

The purchase of foreign stocks and bonds by a Canadian brokerage firm is an example of capital inflows to Canada.

Question 65

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 66

Which of the following would result in positive net exports for Canada?

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 67

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)66 euros per dollar
C)0)76 euros per dollar
D)0)87 euros per dollar
E)0)92 euros per dollar

Question 68

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.
E)A country's exchange rate has no affect on its balance of trade.

Question 69

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)$842 billion
C)$239 billion
D)$0
E)-$239 billion

Question 70

If the balance on the current account in Canada is $75 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.
E)The balance of trade is negative.

Question 71

Why would the Canadian trade deficit be larger than the Canadian current account deficit?

Question 72

Net exports equals the balance of trade surplus.

Question 73

Table 14.1
Refer to Table 14.1.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 74

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)a sale of Canadian natural resource rights
E)None of the above will increase the balance on the current account.

Question 75

When a Canadian 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.
E)the statistical discrepancy decreases.

Question 76

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

Question 77

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)143.75 euros
E)147 euros

Question 78

The balance of payments can only be zero if Canada has incurred overall balance of payments deficits.

Question 79

The Canadian ________ account records 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
E)official settlements

Question 80

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

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