Question 1

If a country has a trade deficit then

Accepted Answer

A) S > I and Y > C + I + G. B) S > I and Y C + I + G. D) S < I and Y < C + I + G.

Question 2

Which of the following is an example of U.S. foreign portfolio investment?

Accepted Answer

A)  Disney builds a new amusement park near Barcelona, Spain. 
B)  A U.S. citizen buys bonds issued by the British government. 
C)  A Dutch hotel chain opens a new hotel in the United States. 
D)  A citizen of Singapore buys a bond issued by a U.S. corporation.

Question 3

If a country has negative net capital outflows, then its net exports are

Accepted Answer

A)  positive and its saving is larger than its domestic investment. 
B)  positive and its saving is smaller than its domestic investment. 
C)  negative and its saving is larger than its domestic investment. 
D)  negative and its saving is smaller than its domestic investment.

Question 4

An increase in U.S. sales of movies to other countries raises U.S.

Accepted Answer

A)  exports and so raises the U.S. trade balance. 
B)  exports and so reduces the U.S. trade balance. 
C)  imports and so raises the U.S. trade balance. 
D)  imports and so reduces the U.S. trade balance.

Question 5

The purchase of U.S. government bonds by Egyptians is an example of

Accepted Answer

A)  U.S. imports. 
B)  U.S. exports. 
C)  foreign portfolio investment by Egyptians. 
D)  foreign direct investment by Egyptians.

Question 6

If a country's government reduced corruption and reformed its tax system so that businesses found operating there less risky, it's likely that this country's

Accepted Answer

A)  net exports and net capital outflows would increase. 
B)  net exports would increase and its net capital outflows would decrease. 
C)  net exports and net capital outflow would decrease. 
D)  net exports would decrease and its net capital outflow would increase.

Question 7

Suppose the real exchange rate is 1.25 pounds of bananas in Guatemala per pound of bananas in the U.S. If a pound of bananas in the U.S. costs $.50, and the exchange rate is 10 Guatemalan Quetzals per dollar, what is the price of bananas in Guatemala?

Accepted Answer

A)  2.50 Quetzals per pound 
B)  4.00 Quetzals per pound 
C)  5.75 Quetzals per pound 
D)  6.25 Quetzals per pound

Question 8

One year a country has positive net exports. The next year it still has positive but larger net exports

Accepted Answer

A)  its trade surplus fell. 
B)  its trade surplus rose. 
C)  its trade deficit fell. 
D)  its trade deficit rose

Question 9

If purchasing-power parity between France and the U.S. holds, but then U.S. prices rise,

Accepted Answer

A)  the real exchange rate is above its purchasing-power parity value. An increase in the nominal exchange rate can move it back. 
B)  the real exchange rate is above its purchasing-power parity value. A decrease in the nominal exchange rate can move it back. 
C)  the real exchange rate is below its purchasing-power parity value. An increase in the nominal exchange rate can move it back. 
D)  the real exchange rate is below its purchasing-power parity value. A decrease in the nominal exchange rate can move it back.

Question 10

According to purchasing power parity, the nominal exchange rate between the U.S. and another country should equal the price level of foreign goods divided by the price level of U.S. goods.

Accepted Answer

A) True 
 B)False

Question 11

Last year a country sold $500 billion euros worth of goods to foreigners and had a trade deficit of $100 billion euros. What was the value of its imports?

Accepted Answer

The answer of Last year a country sold $500 billion...

Question 12

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

Accepted Answer

A)  20 florin 
B)  40 florin 
C)  60 florin 
D)  80 florin

Question 13

A Big Mac in Japan costs 400 yen while it costs $4.50 in the U.S.. The nominal exchange rate is 100 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity?

Accepted Answer

A)  the price of Big Macs in the U.S. falls, the nominal exchange rate falls 
B)  the price of Big Macs in the U.S. falls, the nominal exchange rate rises 
C)  the price of Big Macs in the U.S. rises, the nominal exchange rate falls 
D)  the price of Big Macs in the U.S. rises, the nominal exchange rate rises

Question 14

In France a loaf of bread costs 3 euros. In Great Britain a loaf of bread costs 4 pounds. If the exchange rate is .9 pounds per euro, what is the real exchange rate?

Accepted Answer

A)  4/2.7 loaves of British bread per loaf of French bread 
B)  3.6/3 loaves of British bread per loaf of French bread 
C)  3/3.6 loaves of British bread per loaf of French bread 
D)  2.7/4 loaves of British bread per loaf of French bread

Question 15

If the American company Stryker builds and operates a new factory in France,

Accepted Answer

A)  it engages in foreign direct investment. By itself this action lowers U.S. net capital outflow. 
B)  it engages in foreign direct investment. By itself this action raises U.S. net capital outflow. 
C)  it engages in foreign portfolio investment. By itself this action lowers U.S. net capital outflow. 
D)  it engages in foreign portfolio investment. By itself this action raises U.S. net capital outflow.

Question 16

Which of the following is an example of U.S. foreign direct investment and by itself increases U.S. net capital outflow?

Accepted Answer

A)  A Swedish bank buys a bond issued by the U.S. government. 
B)  A German company builds a car factory in the U.S. 
C)  A U.S. mutual fund purchases stock issued by a corporation in Bolivia. 
D)  A U.S. grocery chain builds and operates a new warehouse in Honduras.

Question 17

If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is

Accepted Answer

A)  $100 billion and the U.S. has a trade surplus. 
B)  $100 billion and the U.S has a trade deficit. 
C)  -$100 billion and the U.S. has a trade surplus. 
D)  -$100 billion and the U.S. has a trade deficit.

Question 18

The nominal exchange rate is 90 Pakistani rupees per dollar. The price of a shirt in Pakistan is 1800 rupees. The same shirt sells for $25 in the U.S.
A. What is the real exchange rate? Show your work.
B. Can arbitragers make a profit?
C. If your answer to C is yes, where would they buy and where would they sell?

Accepted Answer

The answer of The nominal exchange rate is 90 Pakistani...

Question 19

A British grocery chain uses previously obtained U.S. dollars to purchase oranges from the United States. This transaction

Accepted Answer

A)  increases British net capital outflow, and increases U.S. net exports. 
B)  increases British net capital outflow, and decreases U.S. net exports. 
C)  decreases British net capital outflow, and increases U.S. net exports. 
D)  decreases British net capital outflow, and decreases U.S. net exports.

Question 20

If the Mexican nominal exchange rate does not change, but prices rise faster in Mexico than in all other countries, then the Mexican real exchange rate

Accepted Answer

A)  does not change. 
B)  rises. 
C)  declines. 
D)  There is not enough information to answer the question

Exam 18: Open-Economy Macroeconomics: Basic Concepts