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OpenEconomy Macroeconomics: Basic
A country’s balance of international trade is positive when
a. exports exceed imports.
b. exports plus investment exceed imports plus domestic saving.
c. imports exceed exports.
d. imports plus domestic saving exceed exports plus investment.
Which of the following would be recorded as an U.S. merchandise export?
a. An American tourist spends 10,000 francs on vacation in the south of France.
b. A machine shop in Ohio purchases a grinder made in Italy.
c. An American receives a $50 dividend check on stock she owns in a business in Germany.
d. France purchases a new jet fighter aircraft from the Boeing Company in the United States.
Which of the following is equivalent to the trade deficit?
b. net capital inflow
c. exports + imports
d. net exports – imports
If U.S. imports total $100 billion and U.S. exports total $150 billion, which of the following would
a. U.S. net exports equal –$50 billion
b. The U.S. has a trade surplus of $50 billion.
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c. The U.S. has a trade deficit of $100 billion.
d. The U.S. has a trade deficit of $50 billion.
What does a positive U.S. capital inflow signify?
b. That the government is running a budget deficit.
c. That more funds were invested in the United States by foreigners than the United States
d. That the United States is running a trade surplus.
International trade in financial assets
a. increases risk because little is known about firms in foreign lands.
b. increases risk because default risk is greater in foreign countries.
c. increases risk because of currency fluctuations.
d. reduces risk by allowing for increased diversification.
It must always be true that net capital outflow
a. is greater than net exports.
b. is less than net exports.
c. is equal to net exports.
d. equals 0.
If savings in Germany is $300 billion and investment in Germany is $550 billion, then
a. there must be net capital outflow of –$550 billion.
b. there must be net capital outflow of –$250 billion.
c. the German government must be running a $250 billion surplus.
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d. the German financial market must be experiencing a net capital outflow.
If interest rates in Canada rise above those in the rest of the world, then
a. the demand for Canadian dollars decreases.
b. exports from Canada to other countries increases.
c. imports into Canada from other countries decreases.
d. it raises Canada’s exchange rate and this may result in a deficit on Canada’s current account.
Foreign direct investment differs from foreign portfolio investment in that
a. direct investments involve stocks and bonds.
b. direct investments can only be made by the International Monetary Fund.
c. direct investments involve physical capital; portfolio investments involve financial capital
d. a government must be involved in direct investment, but portfolio investment can involve
Which of the following would be classified as a direct foreign investment?
a. a purchase of 100 shares of British Petroleum stock
b. a loan of $1 million to a Brazilian utilities firm
c. A loan of $1 million from the World Bank to Surinam
d. building a new Pizza Hut in St. Petersburg, Russia
Net capital outflow measures
a. the flow of goods and services between countries.
b. the flow of assets between countries.
c. government budget surpluses and deficits relative to those experienced in other countries.
d. the amount of physical capital built in foreign countries.
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U.S. trade deficits are a sign of
a. reduced national savings.
b. reduced production of manufactured goods.
c. an over reliance on the service economy.
d. high rates of unemployment in the U.S. economy.
The exchange rate is the
a. value of money.
b. quantity of dollars, yen, etc., that are traded on currency markets.
c. amount of foreign currency that is used to buy goods made in your country.
d. number of units of a foreign currency that can be bought with one unit of your own currency.
If you were told that the exchange rate was 1.5 U.S. dollars per 1 Canadian dollar (CDN), that
would mean that Canadians would have to spend __________ to by a $12 watch in New York City.
a. $18 CDN
b. $15 CDN
c. $1.5 CDN
d. $12 CDN
Currencies depreciate and appreciate all the time. Who gains and who loses when the Mexican
a. Americans holding Mexican pesos gain, U.S. tourists to Mexico lose.
b. U.S. exporters to Mexico gain, Americans holding pesos lose.
c. Mexican exporters gain, Mexican importers lose.
d. Mexican importers gain, Mexican exporters lose.
When Italy devalues its currency
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the dollars per Italian lira will increase.
the drain of U.S. reserves on Italian lira will fall.
U.S. exports to Italy will increase.
the price of imported Italian olive oil in the United States will fall.
When fewer U.S. dollars are needed to buy a unit of Japanese yen, the dollar
a. is devalued.
b. is inflated.
If one country has a lower inflation rate than other countries, its
a. currency tends to appreciate.
b. currency tends to depreciate.
c. real interest rate will be higher than in other countries.
d. nominal interest rate will be higher than in other countries.
In the long run, exchange rates
a. are determined by business cycle fluctuations.
b. are determined by movements of Eurodollars.
c. will adjust until the price of a bundle of goods is the same in both countries.
d. will reflect economic fluctuations in both countries.
Which of the following is a statement of the purchasing power parity theory of exchange rate
determination? The exchange rate will adjust in the
a. long run until the interest rate is roughly the same in both countries.
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b. long run until real GDP is roughly the same in both countries.
c. long run until the average price of goods is roughly the same in both countries.
d. short run until the average price of goods is roughly the same in both countries.
Suppose the same basket of goods costs $100 in the U.S. and 50 pounds in Britain. According to
PPP, if the prices do not change, what will be the exchange rate?
a. 2 dollars/pound
b. 4 dollars/pound
c. 5 dollars/pound
d. .5 dollars/pound
Which of the following is a reason why exchange rates may deviate from their purchasing power
parity values for many years?
a. Some goods are not tradable.
b. In some cases, a foreignproduced good is not a perfect substitute for a domesticallyproduced
version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.
If the U.S. price level is increasing by 3 percent annually and the Swiss price level is increasing by 5
percent annually, by what percent would the dollar price of francs need to change according to
purchasing power parity?
a. depreciate by 5 percent
b. appreciate by 3 percent
c. appreciate by 5 percent
d. depreciate by 2 percent
Arbitrage refers to
a. simultaneously buying and selling a currency in order to profit from a difference in
b. simultaneously buying and selling a currency in order to change the exchange rate.
c. buying a currency when its price is high and selling it when its price is low.
d. exchanging the domestic currency for a foreign currency.