Deck 31: Open-Economy Macroeconomics: Basic Concepts

Question 1

Macroeconomic variables that describe an open economy's interactions in world markets include exchange rates, the trade balance and imports.

Answer 1

True

Question 2

Saving in the Australian economy shows up as investment in the Australian economy or as the Australian net foreign investment.

Answer 2

True

Question 3

Factors that might influence a country's exports, imports and net exports include the cost of transporting goods from country to country, and government international trade policies.

Answer 3

True

Question 4

Economists should be concerned about the possibility that the world's developing countries will use the world's savings to finance investment and growth, leaving the industrial countries with insufficient funds for their own capital accumulation.

Question 5

International trade has been much more significant for Australia than for many other nations.

Question 6

The Big Mac index shows the markets when the foreign exchange markets are not a fair reflection of the value of the currency, and ensures that there is change.

Question 7

Which of the following is not strongly affected by international trade?

A) Net foreign investment
B) Exchange rates
C) Domestic inflation
D) All of the above are strongly affected by international trade

Question 8

During every period of hyperinflation, the money supply and the price level increase rapidly, and the nominal exchange rate depreciates rapidly.

Question 9

If each country specialises in producing goods and services in which it has a comparative advantage, international trade:

A) can raise the standard of living in all trading countries
B) lowers the standard of living in all trading countries
C) leaves the standard of living unchanged
D) increases the political power of the trading countries

Question 10

International trade is based on the:

A) theory of absolute advantage
B) theory of resource advantage
C) theory of comparative advantage
D) theory of military advantage

Question 11

Increased foreign investment has trickle down effects, such as local job creation. Additionally it may result in outflows of dividends and interest payments.

Question 12

Ceteris paribus, an increase in the level of imports desired by a nation's households leads to a decrease in GDP.

Question 13

A closed economy is where an economy does not interact with other economies in the world.

Question 14

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners is known as net foreign investment.

Question 15

According to the World Bank, trade has been the only force that has enabled poorer countries to increase their uptake of technology.

Question 16

The real exchange rate depends on the nominal exchange rate and on the price difference between two countries measured in the local currencies.

Question 17

Arbitrage is the process of taking advantage of differences in prices in different markets.

Question 18

The outcome from the GFEC has been that poorer nations have not received the capital investment required to continue their growth.

Question 19

A person flying QANTAS from LA to Hawaii leads to an increase in the current account deficit.

Question 20

Purchasing-power parity theory suggests that one unit of any given currency should have the same real value in all countries.

Question 21

Net foreign investment measures:

A) foreign assets held by domestic residents
B) investment plus saving
C) the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners
D) none of the above

Question 22

If the exchange rate changes from 100 yen per dollar to 120 yen per dollar, then the yen has:

A) depreciated
B) appreciated
C) devalued
D) revalued

Question 23

The trade balance is:

A) domestically produced goods and services that are sold abroad
B) foreign-produced goods that are sold domestically
C) net exports
D) all goods and services available inside the country

Question 24

When David, an Australian, buys a box of chocolates produced in Belgium, Belgian net exports _____.

A) increase and Australian net exports are unaffected
B) increase and Australian net exports decrease
C) decrease and Australian net exports increase
D) none of the above

Question 25

Which of the following factors does not affect a country's exports, imports and net exports?

A) Transportation costs
B) The government's international trade policy
C) Exchange rates
D) All of the above affect exports, imports and net exports
E) None of the above affect a country's exports, imports and net exports

Question 26

If a government does not pay interest or principal on its debt when due, it is:

A) in default
B) a canny borrower
C) a rip-off artist
D) in escrow

Question 27

Net exports of a country are:

A) the same as exports
B) the value of imports minus the value of exports
C) the value of exports minus the value of imports
D) the same as imports

Question 28

If the nominal exchange rate is e, the domestic price is P and the foreign price is P*, then the real exchange rate is defined as:

A) e + P/
B) e(P*/P)
C) P e(P/P*)
D) e - P/P*

Question 29

If a country sells more goods and services abroad than it purchases from foreign countries, then its exports are:

A) greater than its imports, and its net exports are negative
B) greater than its imports, and its net exports are positive
C) smaller than its imports, and its net exports are positive
D) smaller than its imports, and its net exports are negative

Question 30

An open economy's GDP is shown by:

A) Y = C + I + G + S
B) Y = C + I + G - NX
C) Y - C = I + G + NX
D) Y = C + I + G + T

Question 31

Positive net exports signal that the:

A) country has a closed economy
B) country buys more goods from other countries than it sells to other countries
C) country sells more goods abroad than it buys from other countries
D) country's tariffs are too low

Question 32

In an open economy:

A) Saving = Foreign saving + Net foreign investment
B) Saving = Domestic investment + Net foreign investment
C) Saving = Domestic saving + Foreign saving
D) Saving = Domestic saving + Net foreign investment

Question 33

If net exports are negative, the country has a:

A) trade deficit
B) trade surplus
C) trade balance
D) budget surplus

Question 34

If the exchange rate changes from 100 yen per dollar to 105 yen per dollar, then the dollar has:

A) depreciated
B) appreciated
C) devalued
D) revalued

Question 35

Which of the following represents the account identity?

A) NFI + I = NX
B) NFI = CAB
C) NX + NFI = Y
D) Y = NFI - NX

Question 36

Appreciation of a currency will lead to:

A) an increase in net exports
B) a reduction in net exports
C) no change in net exports
D) any of the above is equally likely

Question 37

While making investment decisions, investors compare:

A) the real interest rates offered on the bonds
B) the nominal interest rates offered on the bonds
C) the market prices of the bonds
D) all of the above
E) none of the above

Question 38

Which of the following statements about the trade balance is correct? The trade balance is:

A) the value of a country's exports minus the value of its imports
B) the value of a country's exports minus the value of its production
C) the value of a country's imports minus the value of its consumption
D) none of the above

Question 39

The real exchange rate is the:

A) domestic price of goods
B) value of net exports
C) rate at which a person can trade the currency of one country for the currency of another
D) rate at which domestic goods are traded for foreign goods

Question 40

The nominal exchange rate is the:

A) nominal interest rate in one country divided by the nominal interest rate in the other country
B) price of a good in one country divided by the price of the same good in another country
C) rate at which a person can trade the currency of one country for the currency of another
D) all of the above

Question 41

If purchasing-power parity holds, and a tonne of rice costs $200 in Australia and 15 000 yen in Japan, then the nominal exchange rate is:

A) 300 yen/$
B) 30 $/yen
C) 75 yen/$
D) 750 yen/$

Question 42

Purchasing-power parity describes the forces that determine:

A) exchange rates in the short run
B) exchange rates in the long run
C) prices in the long run
D) prices in the short run

Question 43

Which of the following statements is correct? In an open economy:

A) the country engages in trade but always has balanced trade
B) the country does not import at all and therefore always has a trade surplus
C) the country may have a deficit, surplus or zero balance in its trade balance
D) none of the above

Question 44

When Klaus, a Dutch tourist, buys an Akubra hat produced in Australia, Dutch net exports _____.

A) increase and Australian net exports decrease
B) decrease and Australian net exports increase
C) increase and Australian net exports are unaffected
D) none of the above

Question 45

National accounting identity in a closed economy is:

A) Saving = Domestic investment
B) Saving = Current account balance
C) Saving = Domestic investment + Net foreign investment
D) Saving = Domestic saving + Net foreign investment

Question 46

If the law of one price holds, and a tonne of rice costs $25 in Australia and 4000 yen in Japan, then the nominal exchange rate is:

A) 160 yen/$ and $.10/ yen
B) 1000 yen/$ and $1.00/ yen
C) 400 yen/$ and $.25/ yen
D) 160 yen/$ and $.01/ yen

Question 47

General price levels in any country change to:

A) balance demand for goods and supply of goods
B) balance demand for services and supply of services
C) balance demand for money and supply of money
D) balance demand for goods and services, and supply of goods and services

Question 48

When the money supply decreases:

A) the nominal exchange rate appreciates
B) the nominal exchange rate depreciates
C) the real exchange rate appreciates
D) the nominal exchange rate is unaffected

Question 49

The real exchange rate using the CPI measures:

A) the nominal exchange rate minus inflation
B) the price of a basket of goods and services available domestically relative to a basket of goods and services available abroad
C) the price of a basket of goods and services available domestically relative to a different basket of goods and services available domestically
D) the price of a domestic good relative to the same foreign good

Question 50

When a country's central bank increases the money supply:

A) the price level rises and the country's currency depreciates relative to other currencies in the world
B) the price level falls and the country's currency depreciates relative to other currencies in the world
C) the price level rises and the country's currency appreciates relative to other currencies in the world
D) the price level falls and the country's currency appreciates relative to other currencies in the world
E) the price level rises and the country's currency is unaffected

Question 51

The law of one price states that:

A) a good must sell at the price fixed by law
B) a good cannot sell for a price greater than the legal price ceiling
C) domestic producers of a good are guaranteed a subsidy by law
D) a good must sell at the same price at all locations

Question 52

What are the more important variables that affect net foreign investment?

Question 53

Which of the following statements about the current account and the capital account is correct?

A) The value of goods or services exported equals the value of the asset given up to pay for this import
B) The net value of the goods or services sold by a country and the net income it earns from overseas must equal the net value of the asset acquired
C) The international flow of goods and services and income, and the international flow of capital are two sides of the same coin
D) None of the above

Question 54

If the nominal exchange rate is 75 yen per dollar, and a Big Mac hamburger sells for $4 in Australia and for 200 yen in Japan, then the real exchange rate is:

A) 1.5
B) 11
C) 19
D) 50

Question 55

Balanced trade is:

A) a situation in which the value of a country's exports equals the value of its production
B) a situation in which the value of a country's exports equals the value of its imports
C) a situation in which the value of a country's imports equals the value of its consumption
D) none of the above

Question 56

Which of the following items may demonstrate limitations of the purchasing-power parity?

A) When certain goods are not easily tradeable
B) When goods are not perfect substitutes
C) Consumer preferences may change over time
D) All of the above.

Question 57

When the Big Mac in Egypt cost $US2.28, which is less than it does in converted US dollars, we can say it _____.

A) should not be measured
B) difficult to ascertain, as the currency is volatile
C) is undervalued
D) is overvalued

Question 58

The nominal exchange rate is the real exchange rate adjusted for the:

A) price level in the domestic country
B) price levels in the two countries
C) income level in the domestic country
D) income levels in the two countries
E) price level in the foreign country

Question 59

When the Big Mac in the Euro costs more than it does in converted US dollars we can say the currency _____.

A) should not be measured in this way
B) is difficult to value, as currencies are volatile
C) is undervalued
D) is overvalued

Question 60

If the nominal exchange rate is 70 yen per dollar, and a tonne of wheat sells for $100 in Australia, and for 14 000 yen in Japan, then the real exchange rate is:

A) 2
B) 0.7
C) 0.5
D) 20 000

Question 61

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is this not completely accurate?

Question 62

If a kilo of coffee costs $20 in Australia and 3000 yen in Japan, what is the nominal exchange rate according to the purchasing-power parity theory?

Question 63

How can one derive the identity that saving equals the sum of domestic investment and net foreign investment from the national income accounting identity?

Question 64

As the value of the Australian dollar rises, more and more people are buying goods from overseas on the internet and having them shipped to Australia. Does this mean purchasing power parity is more or less likely to hold for these goods?

Question 65

What would be the motives for foreign financial interests to invest in Australia in the i) short term and ii) long term?

Question 66

List five factors that may influence a country's demand for goods traded?

Question 67

Group the following according to whether they may affect the demand, supply or both the demand and supply of $A in the foreign exchange market?
a. A fall in the incomes of Australians
b. A fall in the inflation rate in Australia relative to the rates in other countries with which Australia trades
c. A fall in interest rates in Australia
d. An increase in the income of citizens of the United Kingdom

Question 68

According to the theory of purchasing-power parity, what will happen to a country's nominal exchange rate if the country has relatively high inflation?