Question 1

Which of the following shows that any trade transaction must have a financial counterpart?
A) NCO = NX
B) NCO + I = NX
C) NX + NCO = Y
D) Y = NCO - I

Accepted Answer

NCO = NX indicates that the net capital outflow (NCO) equals the net exports (NX), highlighting the financial counterpart of trade transactions in an economy.

Question 2

A Canadian firm buys boomerangs from Australia and pays for it with Canadian dollars. What are the effects of this transaction?
A) Canadian net exports increase, and Canadian net capital outflow increases.
B) Canadian net exports increase, and Canadian net capital outflow decreases.
C) Canadian net exports decrease, and Canadian net capital outflow increases.
D) Canadian net exports decrease, and Canadian net capital outflow decreases.

Accepted Answer

When a Canadian firm buys goods from Australia, it is an import, which decreases Canadian net exports. Paying with Canadian dollars means capital is flowing out of Canada, decreasing net capital outflow.

Question 3

An American pharmacy buys drugs from a Canadian company and pays for them with American dollars. What are the effects of this transaction?
A) It increases American net exports and increases Canadian capital outflow.
B) It increases American net exports and decreases Canadian capital outflow.
C) It decreases American net exports and increases Canadian capital outflow.
D) It decreases American net exports and decreases Canadian capital outflow.

Accepted Answer

This transaction decreases American net exports because the United States is importing drugs from Canada. It increases Canadian capital outflow because the Canadian company is receiving American dollars, which it may invest or spend outside of Canada.

Question 4

An Indonesian flour mill buys wheat from Canada and pays for it with rupiah. What are the effects of this transaction?
A) Indonesian net exports increase, and Canadian net capital outflow increases.
B) Indonesian net exports increase, and Canadian net capital outflow decreases.
C) Indonesian net exports decrease, and Canadian net capital outflow increases.
D) Indonesian net exports decrease, and Canadian net capital outflow decreases.

Accepted Answer

The transaction involves an Indonesian firm buying a Canadian product, which means that Indonesia is importing from Canada. Therefore, Indonesian net exports decrease. Since the Indonesian firm is paying with rupiah, it means that it is exchanging its local currency for Canadian dollars to pay for the wheat. This exchange of currency leads to an increase in Canadian net capital outflow.

Question 5

Canada sells machinery to a South African company, which pays Canada with South African currency (the rand). What happens to Canadian net capital outflow from this transaction?
A) It increases because Canada acquires foreign assets.
B) It decreases because Canada acquires foreign assets.
C) It increases because Canada sells capital goods.
D) It decreases because Canada sells capital goods.

Accepted Answer

Canadian net capital outflow increases because Canada acquires foreign assets (the rand) in exchange for selling machinery.

Question 6

Paula, a citizen of Spain, decides to purchase bonds issued by Columbia instead of Canadian bonds, even though the Columbian bonds have a higher risk of default. What might be an economic reason for her decision?
A) Columbia has a lower inflation rate.
B) The Columbian bonds pay a higher rate of interest.
C) The Canadian government is more stable than the Columbian government.
D) Columbian bonds have shorter maturity periods than Canadian bonds.

Accepted Answer

Paula likely chose the higher-risk Columbian bonds because they pay a higher rate of interest, meaning she can potentially earn more money despite the added risk.

Question 7

Which of the following is an identity that always holds in an open economy?
A) NCO + C = NX
B) NCO = NX
C) NX - NCO = C
D) NX + NCO = Y

Accepted Answer

In an open economy, the equation NCO = NX always holds, where NCO represents net capital outflow and NX represents net exports. This is because any excess of domestic savings over domestic investment must be reflected in net lending to foreign countries (NCO), which in turn equals the net inflow of foreign savings, which is shown as net exports (NX). Therefore, NCO and NX are always equal in an open economy.

Question 8

A Canadian firm buys apples from New Zealand with Canadian currency. The New Zealand firm then uses this money to buy packaging equipment from a Canadian firm. How do these transactions affect net exports or net capital outflow?
A) They increase New Zealand net capital outflow and New Zealand net exports.
B) They increase New Zealand net exports but not New Zealand net capital outflow.
C) They increase New Zealand net capital outflow but not New Zealand net exports.
D) They increase neither New Zealand net exports nor New Zealand capital outflow.

Accepted Answer

The transactions are balanced: New Zealand exports apples and imports packaging equipment, so there's no net change in exports or capital outflow. The money flows out and then back into New Zealand, leaving net exports and net capital outflow unchanged.

Question 9

What do net exports measure?
A) income minus expenditure
B) exports minus imports
C) expenditure minus income
D) imports minus exports

Accepted Answer

Net exports measure the value of a country's exports minus the value of its imports. It is a component of a country's balance of trade and reflects the difference between the value of goods and services produced domestically and the value of goods and services consumed domestically.

Question 10

Martin, a Canadian citizen, uses some previously obtained Lithuanian currency (litas) to purchase a bond issued by a Lithuanian company. How does this transaction affect Canadian net capital outflow?
A) It increases Canadian net capital outflow by more than the value of the bond.
B) It increases Canadian net capital outflow by the value of the bond.
C) It does not change Canadian net capital outflow.
D) It decreases Canadian net capital outflow.

Accepted Answer

Using previously obtained Lithuanian currency to purchase a bond does not involve a new flow of funds out of Canada, so it does not affect Canadian net capital outflow.

Question 11

What imbalance does net capital outflow measure?
A) an imbalance between a country's production and expenditure
B) an imbalance between a country's investment and saving
C) an imbalance between a country's sale of goods and services abroad and buying of foreign goods and services
D) an imbalance between a country's sale of domestic assets abroad and domestic purchase of foreign assets

Accepted Answer

Net capital outflow measures the imbalance between a country's sale of domestic assets abroad and domestic purchase of foreign assets. This includes assets like bonds, stocks, and real estate, and reflects the flow of investment funds out of the country.

Question 12

If a Canadian manufacturer of linens purchases cotton from Egypt, what are the effects of this transaction?
A) Canadian net exports increase, and Canadian net capital outflow increases.
B) Canadian net exports increase, and Canadian net capital outflow decreases.
C) Canadian net exports decrease, and Canadian net capital outflow increases.
D) Canadian net exports decrease, and Canadian net capital outflow decreases.

Accepted Answer

When the Canadian manufacturer purchases cotton from Egypt, it is an import for Canada, which decreases Canadian net exports. To pay for the cotton, Canada might use foreign currency reserves or borrow, which decreases Canadian net capital outflow.

Question 13

Jill, a Canadian citizen, uses some previously obtained euros to purchase a bond issued by a French vineyard. How does this transaction affect Canadian net capital outflow?
A) It increases Canadian net capital outflow by more than the value of the bond.
B) It increases Canadian net capital outflow by the value of the bond.
C) It does not change Canadian net capital outflow.
D) It decreases Canadian net capital outflow.

Accepted Answer

Using previously obtained euros means Jill is not converting Canadian dollars to make the purchase, thus the transaction does not affect Canada's financial account, keeping the net capital outflow unchanged.

Question 14

A citizen of Saudi Arabia uses previously obtained Canadian dollars to purchase lamb from Canada. What are the effects of this transaction?
A) It increases Saudi net capital outflow and increases Canadian net exports.
B) It increases Saudi net capital outflow and decreases Canadian net exports.
C) It decreases Saudi net capital outflow and increases Canadian net exports.
D) It decreases Saudi net capital outflow and decreases Canadian net exports.

Accepted Answer

This transaction increases Canadian net exports because Canada is exporting goods (lamb) to Saudi Arabia. It decreases Saudi net capital outflow because the Saudi citizen is using previously obtained Canadian dollars, not engaging in a new capital outflow to acquire the currency for the transaction.

Question 15

A U.S. textbook publishing company sells texts to Canadian students. What are the effects of these sales?
A) U.S. net exports increase, and U.S. net capital outflow increases.
B) U.S. net exports increase, and U.S. net capital outflow decreases.
C) U.S. net exports decrease, and U.S. net capital outflow increases.
D) U.S. net exports decrease, and U.S. net capital outflow decreases.

Accepted Answer

The sale of textbooks to Canadian students is considered an export by the U.S. This means that U.S. net exports increase. However, since the U.S. is receiving payment for these exports, U.S. net capital outflow also increases.

Question 16

A Japanese firm buys lumber from Canada and pays for it with yen. What are the effects of this transaction?
A) Japanese net exports increase, and Canadian net capital outflow increases.
B) Japanese net exports increase, and Canadian net capital outflow decreases.
C) Japanese net exports decrease, and Canadian net capital outflow increases.
D) Japanese net exports decrease, and Canadian net capital outflow decreases.

Accepted Answer

Japanese net exports decrease because they are importing lumber from Canada, which counts as an import, reducing their net exports. Canadian net capital outflow increases because they are receiving yen in exchange for their exports, which increases their foreign assets.

Question 17

Suppose Canada sells goose down parkas to the United States. What are the effects of this transaction?
A) U.S. net exports increase, and U.S. net capital outflow increases.
B) U.S. net exports increase, and U.S. net capital outflow decreases.
C) U.S. net exports decrease, and U.S. net capital outflow increases.
D) U.S. net exports decrease, and U.S. net capital outflow decreases.

Accepted Answer

When Canada sells goose down parkas to the United States, it counts as an import for the U.S., which decreases U.S. net exports. The U.S. pays for these imports, which means money flows out of the country, decreasing U.S. net capital outflow.

Question 18

When making investment decisions, which of the following are investors most likely to do?
A) They compare the real interest rates offered on different bonds.
B) They compare the nominal, but not the real, interest rates offered on different bonds.
C) They purchase the highest-priced bond available.
D) They purchase the highest-interest bonds available.

Accepted Answer

Investors are most likely to compare the real interest rates offered on different bonds. Real interest rates take inflation into account and provide a better measure of the true return on an investment. Comparing nominal interest rates can be misleading if inflation rates differ between bonds. Purchasing the highest-priced bond or highest-interest bond may not necessarily result in the highest returns, as these factors do not take inflation into account.

Question 19

A Norwegian firm purchases earth-moving equipment from a Canadian company and pays for it with domestic currency. What are the effects of this transaction?
A) It increases Canadian net exports and increases Norwegian net capital outflow.
B) It increases Canadian net exports and decreases Norwegian net capital outflow.
C) It decreases Canadian net exports and increases Norwegian net capital outflow.
D) It decreases Canadian net exports and decreases Norwegian net capital outflow.

Accepted Answer

The answer of A Norwegian firm purchases earth-moving equipment from...

Question 20

A Canadian firm opens a factory that produces climbing equipment in Austria. What are the effects of this transaction?
A) Canadian net capital outflow increases, and Albanian net capital outflow decreases.
B) Canadian net capital outflow decreases, and Albanian net capital outflow increases.
C) Only Canadian net capital outflow increases.
D) Only Albanian net capital outflow increases.

Accepted Answer

The answer of A Canadian firm opens a factory that...

Quiz 12: Open-Economy Macroeconomics: Basic Concepts

Which of the following shows that any trade transaction must have a financial counterpart?

A Canadian firm buys boomerangs from Australia and pays for it with Canadian dollars. What are the effects of this transaction?

An American pharmacy buys drugs from a Canadian company and pays for them with American dollars. What are the effects of this transaction?

An Indonesian flour mill buys wheat from Canada and pays for it with rupiah. What are the effects of this transaction?

Canada sells machinery to a South African company, which pays Canada with South African currency (the rand) . What happens to Canadian net capital outflow from this transaction?

Paula, a citizen of Spain, decides to purchase bonds issued by Columbia instead of Canadian bonds, even though the Columbian bonds have a higher risk of default. What might be an economic reason for her decision?

Which of the following is an identity that always holds in an open economy?

A Canadian firm buys apples from New Zealand with Canadian currency. The New Zealand firm then uses this money to buy packaging equipment from a Canadian firm. How do these transactions affect net exports or net capital outflow?

What do net exports measure?

Martin, a Canadian citizen, uses some previously obtained Lithuanian currency (litas) to purchase a bond issued by a Lithuanian company. How does this transaction affect Canadian net capital outflow?

What imbalance does net capital outflow measure?

If a Canadian manufacturer of linens purchases cotton from Egypt, what are the effects of this transaction?

Jill, a Canadian citizen, uses some previously obtained euros to purchase a bond issued by a French vineyard. How does this transaction affect Canadian net capital outflow?

A citizen of Saudi Arabia uses previously obtained Canadian dollars to purchase lamb from Canada. What are the effects of this transaction?

A U.S. textbook publishing company sells texts to Canadian students. What are the effects of these sales?

A Japanese firm buys lumber from Canada and pays for it with yen. What are the effects of this transaction?

Suppose Canada sells goose down parkas to the United States. What are the effects of this transaction?

When making investment decisions, which of the following are investors most likely to do?

A Norwegian firm purchases earth-moving equipment from a Canadian company and pays for it with domestic currency. What are the effects of this transaction?

A Canadian firm opens a factory that produces climbing equipment in Austria. What are the effects of this transaction?