Deck 20: Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Question 1

The value of the dollar relative to the euro would increase if

A)the demand for dollars increases and the supply of euros increases.
B)the demand for dollars decreases and the supply of euros increases.
C)the supply of dollars increases and the demand for euros increases.
D)the supply of dollars increases and the demand for euros decreases.

Answer 1

A

Question 2

Any transaction that causes foreign exchange to leave a country is a

A)credit item in that country's balance of trade.
B)debit item in that country's balance of payments.
C)credit item in that country's balance of payments.
D)debit item in that country's balance of trade.

Answer 2

B

Question 3

When a country's exports of goods are less than its imports of goods in a given period,it has a

A)trade deficit.
B)capital account deficit.
C)trade surplus.
D)current account surplus.

Answer 3

A

Question 4

In 1971,most countries,including the United States,

A)returned to the gold standard.
B)adopted a new system of fixed exchange rates.
C)adopted a single,internationally accepted currency whose use is limited to international transactions.
D)gave up trying to fix exchange rates formally and began allowing them to be determined essentially by supply and demand.

Question 5

Which of the following is an item in the U.S.current account?

A)net investment income
B)the change in foreign private assets in the United States
C)the change in private U.S.assets abroad
D)the change in foreign government assets in the United States

Question 6

The difference between a country's merchandise exports and its merchandise imports is the

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

Question 7

The record of a country's transactions in goods,services,and assets with the rest of the world is its

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

Question 8

The price of one country's currency in terms of another country's currency is the

A)balance of trade.
B)exchange rate.
C)terms of trade.
D)currency valuation.

Question 9

Exports

A)bring foreign exchange,and thus they are registered as credit in the balance of payments.
B)bring foreign exchange,and thus they are registered as debit in the balance of payments.
C)cause foreign exchange to leave the country,and thus they are registered as credit in the balance of payments.
D)cause foreign exchange to leave the country,and thus they are registered as debit in the balance of payments.

Question 10

When a country's exports of goods are greater than its imports of goods in a given period,it has a

A)trade deficit.
B)capital account surplus.
C)trade surplus.
D)current account deficit.

Question 11

The balance of payments is divided into two major accounts,the

A)current account and the trade account.
B)current account and the capital account.
C)current account and the reserve account.
D)trade account and the capital account.

Question 12

An increase in the supply of dollars and an increase in the demand for Japanese yen

A)increases the value of the dollar.
B)increases the value of the yen.
C)increases the yen price of dollars.
D)does not change the exchange rate between dollars and yen.

Question 13

In the early part of the twentieth century,nearly all currencies

A)were backed by gold.
B)were held together by a system of fixed exchange rates in which the value of those currencies was set in relation to the British pound.
C)were held together by a system of fixed exchange rates in which the value of those currencies was set in relation to the U.S.dollar.
D)were held together by a system of flexible exchange rates in which the value of those currencies fluctuated in response to the relative supply of and demand for them.

Question 14

An increase in the supply of dollars and an increase in the demand for Japanese yen

A)increases the dollar price of yen.
B)decreases the dollar price of yen.
C)increases the yen price of dollars.
D)does not change the exchange rate between dollars and yen.

Question 15

Which of the following increases the price of the dollar relative to the Mexican peso?

A)an increase in the supply of dollars
B)an increase in the demand for pesos
C)an increase in the demand for dollars
D)a decrease in the supply of pesos

Question 16

A decrease in the supply of dollars and a decrease in the demand for Japanese yen

A)increases the value of the dollar.
B)increases the value of the yen.
C)increases the yen price of dollars.
D)does not change the exchange rate between dollars and yen.

Question 17

The agreements that were reached at the Bretton Woods conference in 1944 established a system

A)in which the values of currencies were fixed in terms of a specific number of ounces of gold,which in turn determined their values in international trading.
B)of floating exchange rates determined by the supply and demand of one nation's currency relative to the currency of other nations.
C)of essentially fixed exchange rates under which each country agreed to intervene in the foreign exchange market when necessary to maintain the agreed-upon value of its currency.
D)that prohibited governments from intervening in the foreign exchange markets.

Question 18

The value of the dollar relative to the euro would decrease if

A)the demand for dollars increases and the supply of euros increases.
B)the demand for dollars decreases and the supply of euros increases.
C)the supply of dollars increases and the demand for euros increases.
D)the supply of dollars increases and the demand for euros decreases.

Question 19

Which of the following decreases the price of the dollar relative to the British pound?

A)a decrease in the supply of dollars
B)a decrease in the demand for pounds
C)an increase in the demand for dollars
D)an increase in the supply of dollars

Question 20

Imports

A)bring foreign exchange,and thus they are registered as credit in the balance of payments.
B)bring foreign exchange,and thus they are registered as debit in the balance of payments.
C)cause foreign exchange to leave the country,and thus they are registered as credit in the balance of payments.
D)cause foreign exchange to leave the country,and thus they are registered as debit in the balance of payments.

Question 21

A U.S.individual buys shares in a Swiss company.This transaction will be entered as

A)a credit in the U.S.current account.
B)a debit in the U.S.current account.
C)a credit in the U.S.capital account.
D)a debit in the U.S.capital account.

Question 22

A current account deficit implies a capital account surplus.

Question 23

Included in the U.S.current account is interest that U.S.residents receive on overseas assets.

Question 24

An Italian citizen buys a U.S.bond.This transaction will be entered as

A)a credit in the U.S.current account.
B)a credit in the U.S.capital account.
C)a debit in the U.S.current account.
D)a debit in the U.S.capital account.

Question 25

When foreign assets in the United States increase,

A)the United States residents are reducing their debt to the rest of the world.
B)the United States residents are increasing their debt to the rest of the world.
C)foreign residents debt to the United States residents also decrease.
D)the United States residents are reducing their stock of assets.

Question 26

A U.S.firm builds a factory in South Africa.This will be entered as a

A)debit in the U.S.capital account.
B)debit in the U.S.current account.
C)credit in the U.S.capital account.
D)credit in the U.S.current account.

Question 27

Which of the following statements is TRUE?

A)An increase in exports causes a balance of payments surplus.
B)A decrease in exports causes a balance of payments deficit.
C)A decreases in imports causes a balance of payments surplus.
D)The balance of payments is always in balance.

Question 28

In the United States,which of the following is NOT directly determined by U.S.income?

A)consumption
B)income tax revenue
C)exports
D)imports

Question 29

When United States residents acquire assets abroad,they are in essence

A)borrowing money,and foreign debts to the United States decrease.
B)borrowing money,and foreign debts to the United States increase.
C)lending money,and foreign debts to the United States decrease.
D)lending money,and foreign debts to the United States increase.

Question 30

A current account deficit means that foreigners do not like our goods.

Question 31

The current international monetary system is based on a gold standard.

Question 32

Until the mid-1970s the United States consistently ran

A)current account deficits and capital account surpluses.
B)current account surpluses and capital account deficits.
C)deficits in both the current account and the capital account.
D)surpluses in both the current account and the capital account.

Question 33

Related to the Economics in Practice on p.691: ________ occur when a country's imports of goods and services outweigh its exports.

A)Federal deficits
B)Trade gaps
C)Currency appreciations
D)Currency depreciations

Question 34

When an American buys an asset abroad,the transaction

A)is registered as a credit in the capital account,and it decreases private U.S.assets abroad.
B)is registered as a debit in the current account,and it decreases private U.S.assets abroad.
C)is registered as a credit in the capital account,and it increases private U.S.assets abroad.
D)is registered as a debit in the capital account,and it increases private U.S.assets abroad.

Question 35

The overall sum of all the entries in the balance of payments must be zero.

Question 36

The record of a country's transactions in goods,services,and assets with the rest of the world is its balance of trade.

Question 37

When a foreigner buys shares in a U.S.company,the transaction

A)is registered as a credit in the capital account,and it decreases foreign private assets in the United States.
B)is registered as a debit in the current account,and it decreases private U.S.assets abroad.
C)is registered as a credit in the capital account,and it increases foreign private assets in the United States.
D)is registered as a debit in the capital account,and it increases private U.S.assets abroad.

Question 38

When an American buys a factory in China,the transaction is registered a credit in the U.S.capital account.

Question 39

When foreign assets in the United States decrease,

A)the United States residents are reducing their debt to the rest of the world.
B)the United States residents are increasing their stock of assets.
C)the United States residents are increasing their debt to the rest of the world.
D)foreign residents debts to the United States residents also increase.

Question 40

Which of the following statements is TRUE?

A)A country runs a capital account deficit if it imports more than it exports.
B)If the current account is in surplus,the capital account must be in deficit.
C)The overall sum of all the entries in the balance of payments must be positive.
D)A country runs a current account surplus if it sells more of its assets abroad than it buys abroad.

Question 41

Refer to the information provided in Figure 20.1 below to answer the questions that follow. Figure 20.1
Refer to Figure 20.1.If the economy is open and the government increases spending by 15,the new equilibrium output is

A)81.25.
B)100.
C)112.50.
D)125.

Question 42

Refer to the information provided in Figure 20.1 below to answer the questions that follow. Figure 20.1
Refer to Figure 20.1.What is the MPM in this economy?

A)0.2
B)0.25
C)0.6
D)cannot be determined from the graph

Question 43

The balance of trade is part of the current account which is part of the balance of payments.

Question 44

The open economy multiplier will decrease if

A)the MPC decreases.
B)the MPM decreases.
C)either the MPM or the MPC decreases.
D)the MPM increases.

Question 45

If the MPM is 0.1,then a $3,500 increase in income will

A)increase imports by $35,000.
B)increase imports by $350.
C)increase exports by $35,000.
D)increase exports by $350.

Question 46

The level of U.S.exports depends directly on

A)the level of income in the United States.
B)the size of the spending multiplier in other countries.
C)the size of the spending multiplier in the United States.
D)the level of income in other countries.

Question 47

Planned aggregate expenditure in an open economy equals

A)C + I + G - IM.
B)C + I + G + EX.
C)C + I + G + EX + IM.
D)C + I + G + EX - IM.

Question 48

If planned aggregate expenditures are $300 billion,consumption is $180 billion,investment is $75 billion,government spending is $45 billion,there is a

A)trade surplus of $300 billion.
B)trade surplus of $600 billion.
C)trade deficit of $300 billion.
D)trade balance.

Question 49

If the MPS is 0.25 and the MPC is 0.6,then the MPM

A)is 0.85.
B)is 0.35.
C)is 0.15
D)cannot be determined from the given information.

Question 50

Algebraically,the relationship between imports and income can be written as

A)IM = Y/m.
B)Y = mIM.
C)IM = m/Y.
D)IM = mY.

Question 51

If planned aggregate expenditures are $400 billion,consumption is $120 billion,investment is $60 billion,government spending is $70 billion,there is a

A)trade surplus of $150 billion.
B)trade surplus of $250 billion.
C)trade deficit of $650 billion.
D)trade balance.

Question 52

The open economy multiplier is

A)1/[1 - (MPC - MPM)].
B)1/[1 - MPC - MPM].
C)1/[1 - (MPM - MPC)].
D)MPM/[1 - (MPC - MPM)].

Question 53

If planned aggregate expenditures are $240 billion,consumption is $140 billion,investment is $70 billion,government spending is $50 billion,there is a

A)trade deficit of $10 billion.
B)trade surplus of $20 billion.
C)trade deficit of $20 billion.
D)trade balance.

Question 54

If an economy's MPC is 0.95 and the MPM is 0.15,then an increase in government spending of $1,000 will increase income by

A)$1,000.
B)$4,500.
C)$5,000.
D)$8,000.

Question 55

If income increases by $450,we know that the change in

A)consumption,saving,and imports is greater than $450.
B)consumption,saving,and imports equals $450.
C)consumption and saving is greater than $450.
D)consumption,saving,imports,and exports is less than $450.

Question 56

Refer to the information provided in Figure 20.1 below to answer the questions that follow. Figure 20.1
Refer to Figure 20.1.The open economy multiplier is

A)1.25.
B)2.
C)4.
D)8.

Question 57

The marginal propensity to consume domestic goods is the

A)MPC - MPM.
B)MPC + MPM.
C)MPC - MPS.
D)MPC + MPS.

Question 58

Refer to the information provided in Figure 20.1 below to answer the questions that follow. Figure 20.1
Refer to Figure 20.1.What is the MPC in this economy?

A)0.5
B)0.75
C)0.8
D)cannot be determined from the graph

Question 59

If an economy's MPC is 0.8 and the MPM is 0.05,then an increase in government spending of $2,000 will increase income by

A)$5,500.
B)$8,000.
C)$10,000.
D)$20,000.

Question 60

Refer to the information provided in Figure 20.1 below to answer the questions that follow. Figure 20.1
Refer to Figure 20.1.If the economy is closed and the government increases spending by 15,the new equilibrium output is

A)150.
B)175.
C)180.
D)200.

Question 61

If two countries don't trade with each other,an increase in the price level in one country

A)increases the price level in the other country.
B)decreases the price level in the other country.
C)increases the price level in the other country then decreases it.
D)does not affect the price level in the other country.

Question 62

Which of the following statements is true?

A)The larger a nation's marginal propensity to consume,the smaller the open-economy multiplier.
B)The smaller a nation's marginal propensity to import,the smaller the open-economy multiplier.
C)The larger a nation's marginal propensity to export,the smaller the open-economy multiplier.
D)The larger a nation's marginal propensity to import,the smaller the open-economy multiplier.

Question 63

Assume that a $1.00 increase in exports increases GDP by $3.00,and a $1.00 increase in income increases import spending by $0.15.In this case,a $1,000 million increase in exports will increase net exports by

A)$550 million.
B)$700 million.
C)$1,000 million.
D)$1,350 million.

Question 64

If exchange rates are fixed,then an increase in Canada's export prices causes

A)U.S.import prices to fall.
B)U.S.import prices to rise.
C)Canadian import prices to fall.
D)Canadian import prices to rise.

Question 65

U.S.exports tend to increase when

A)economic activity abroad is decreasing.
B)foreign GDPs are falling.
C)U.S.prices are falling compared to those in the rest of the world.
D)the U.S.dollar is strong compared to foreign currencies.

Question 66

The trade feedback effect includes all of the following steps EXCEPT

A)an increase in U.S.economic activity stimulates U.S.imports.
B)an increase in foreign imports stimulates U.S.exports.
C)an increase in U.S.exports stimulates U.S.economic activity.
D)an increase in foreign income stimulates U.S.imports.

Question 67

Which of the following is likely to increase the exports of a country?

A)an increase in income in the domestic country
B)a decrease in income in the domestic country
C)a decrease in income in foreign countries
D)an increase in income in foreign countries

Question 68

Economic activity increases in Western Europe,and this causes economic activity to increase in the United States.This is an example of

A)the price feedback effect.
B)the trade feedback effect.
C)the export feedback effect.
D)the import feedback effect.

Question 69

U.S.exports tend to increase when

A)economic activity abroad is increasing.
B)foreign GDPs are falling.
C)U.S.prices are rising compared to the rest of the world.
D)the value of the dollar rises.

Question 70

The trade feedback effect illustrates the fact that

A)an increase in U.S.economic activity leads to a decrease in the economic activity of other countries.
B)U.S.imports depress the imports of other countries.
C)imports and exports are unrelated to one another.
D)imports affect exports and exports affect imports.

Question 71

Japan imports over 90% of its consumption of oil.If the price of oil increases,Japan's

A)aggregate demand curve shifts to the right.
B)aggregate supply curve shift to the right.
C)aggregate supply curve shifts to the left.
D)aggregate planned expenditures increase.

Question 72

The tendency for an increase in the economic activity of one country to lead to a worldwide increase in economic activity is the

A)multiplier effect.
B)trickle-down effect.
C)trade feedback effect.
D)spontaneous growth effect.

Question 73

A $100 million increase in government spending causes

A)an equal amount of change in equilibrium output in an open and a closed economy.
B)a larger change in an open economy than in a closed economy.
C)a larger change in a closed economy than in an open economy.
D)a larger change in a closed economy than in an open economy if the MPM is zero.

Question 74

The open-economy multiplier ________ the closed-economy multiplier.

A)is larger than
B)equals
C)is smaller than
D)It can be smaller or larger than the closed-economy multiplier,depending on the size of MPM and MPC.

Question 75

Which of the following is/are likely to affect the demand for imports?

A)the relative prices of domestically produced and foreign-produced goods
B)the after-tax real wage
C)interest rates
D)all of the above

Question 76

The U.S.and Japan heavily trade with each other.Which of the following is TRUE?

A)U.S.prices increase ⇒ U.S.exports increase ⇒ Japanese prices decrease.
B)U.S.prices increase ⇒ U.S.imports increase ⇒ Japanese prices increase.
C)U.S.prices decrease ⇒ U.S.imports increase ⇒ Japanese prices increase.
D)U.S.prices decrease ⇒ U.S.exports decrease ⇒ Japanese prices increase.

Question 77

The U.S.and Canada heavily trade with each other.Which of the following is TRUE?

A)Canadian prices increase ⇒ Canadian exports increase ⇒ U.S.prices decrease.
B)Canadian prices increase ⇒ Canadian exports decrease ⇒ U.S.prices increase.
C)Canadian prices decrease ⇒ Canadian exports decrease ⇒ U.S.prices decrease.
D)Canadian prices decrease ⇒ Canadian exports decrease ⇒ U.S.prices increase.

Question 78

U.S.exports tend to decrease when

A)economic activity abroad is increasing.
B)foreign GDPs are rising.
C)U.S.prices are rising relative to those in the rest of the world.
D)the U.S dollar is weak compared to foreign currencies.

Question 79

An increased growth rate in Malaysia has increased the Malaysian demand for U.S.-produced coal.Malaysia increases its imports of U.S.-produced coal by $20 million.U.S.net exports will

A)increase by $20 million.
B)increase by less than $20 million.
C)increase by more than $20 million.
D)increase by $20 million or more.

Question 80

U.S.exports tend to decrease when

A)economic activity abroad is decreasing.
B)foreign GDPs are rising.
C)U.S.prices are low relative to those in the rest of the world.
D)the inflation rate in the United States is lower than the inflation rates in other countries.