Deck 18: Macroeconomics in an Open Economy

Question 1

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.

Answer 1

A

Question 2

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.

Answer 2

A

Question 3

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

Answer 3

C

Question 4

In 2014,global revenue for IBM was $2 billion lower when measured in dollars than when measured in local currencies.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 5

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 legal services by Chase Manhattan Bank

Question 6

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 7

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 8

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 9

Although based in the United States,IBM is a global company with more than ________ of its revenue earned outside of the United States.

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

Question 10

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 11

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.

Question 12

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 13

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 14

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

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

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

Question 17

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 18

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 19

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 20

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

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

Question 21

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 22

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 23

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 24

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 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

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

In 2014,global revenue for IBM was ________ when measured in local currencies than it was when measured in dollars.This occurred because the value of the U.S.dollar ________ relative to most other currencies.

A)higher;increased
B)lower;increased
C)higher;decreased
D)lower;decreased

Question 35

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 36

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 37

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

A)U.S.auto entrepreneur Elon Musk buys stock in Alibaba Group Holding Limited of Hangzhou,China.
B)Chinese Shenzen Airlines company buys a small U.S.midwest airline company,Air Chicago.
C)The U.S.company Walmart 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 38

The balance of trade includes trade in

A)goods only.
B)services only.
C)both goods and services.
D)neither goods nor services.

Question 39

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 40

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 41

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)None of the above will result in a trade surplus.

Question 42

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 43

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 44

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.

Question 45

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 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

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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.

Question 55

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 56

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 57

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 decrease the balance on the current account.

Question 58

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 59

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 60

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.

Question 61

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 62

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 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

Why is the balance of payments always zero?

Question 68

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 69

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

Question 70

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

Question 71

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

Question 72

The United States has a closed economy.

Question 73

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

Question 74

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 75

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 76

The current account balance equals the value of net exports.

Question 77

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

Question 78

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

Question 79

Table 18-1

Refer to Table 18-1.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 80

Net exports equals the balance of trade surplus.