Question 1

A nation with a trade surplus will necessarily have saving that is greater than domestic investment.

Accepted Answer

A trade surplus indicates that a country exports more than it imports, leading to an inflow of foreign currency. This surplus can result in higher national savings compared to domestic investment, as the excess funds from exports are saved or invested abroad.

Question 2

If Walmart buys $50 million worth of consumer goods from China and sells them in the U.S., and China uses the $50 million to purchase U.S. bonds, U.S. net exports and U.S. net capital outflow both fall.

Accepted Answer

When Walmart buys goods from China, it increases U.S. imports. When China uses the proceeds to buy U.S. bonds, it increases U.S. capital inflows. Both of these transactions reduce U.S. net exports and U.S. net capital outflow.

Question 3

To increase domestic investment, a country must increase its saving.

Accepted Answer

The answer of To increase domestic investment, a country must...

Question 4

The large trade deficits in the U.S. during the 1990's were primarily associated with a rise in domestic investment spending rather than a rise in the budget deficit.

Accepted Answer

During the 1990s, the large trade deficits in the U.S. were mainly linked to an increase in domestic investment spending, particularly in the technology sector, rather than a significant rise in the government's budget deficit. This period was characterized by robust economic growth and relatively low federal budget deficits compared to the size of the economy, with the budget even reaching a surplus by the end of the decade.

Question 5

From 2008 to 2012 both U.S. saving and U.S. investment fell.

Accepted Answer

During the Great Recession, both U.S. saving and investment rates declined due to economic uncertainty and reduced consumer and business spending.

Question 6

The increase in the trade deficit in the 1980's reflected a decrease in national saving that is associated with an increase in the government budget deficit.

Accepted Answer

The increase in the trade deficit during the 1980s was indeed associated with a decrease in national saving, which was partly due to an increase in the government budget deficit. When the government spends more than it collects in taxes, it borrows from the private sector or from foreign entities, which can reduce the amount of savings available for investment. This decrease in national saving can lead to a higher trade deficit as the country imports more than it exports.

Question 7

If the exchange rate is 80 yen per dollar, then a hotel room in Tokyo that costs 25,000 yen costs $200.

Accepted Answer

To find the cost in dollars, divide the yen price by the exchange rate: 25,000 yen / 80 yen per dollar = $312.50.

Question 8

Other things the same, if U.S. net capital outflow rises, so does U.S. saving.

Accepted Answer

Net capital outflow is the difference between saving and domestic investment. If net capital outflow rises, it means that either saving has increased or domestic investment has decreased, but it does not necessarily mean that saving itself has risen.

Question 9

When U.S. national saving rises, domestic investment also necessarily rises.

Accepted Answer

An increase in U.S. national saving does not necessarily lead to an increase in domestic investment. The relationship depends on various factors, including interest rates, economic conditions, and the global financial market. Increased savings can lead to higher investment, but it can also result in increased capital outflows to foreign investments.

Question 10

If a nation is selling more goods and services to foreigners than it is buying from them, then on net it must be buying assets abroad.

Accepted Answer

When a nation sells more goods and services to foreigners than it buys from them, it runs a trade surplus. The excess funds from the surplus are often used to buy foreign assets, leading to an investment abroad.

Question 11

In an open economy national saving equals domestic investment plus net capital outflow.

Accepted Answer

In an open economy, national saving is equal to the sum of domestic investment and net capital outflow, reflecting the fact that any saving not used for domestic investment can be used to acquire assets abroad (net capital outflow).

Question 12

If the exchange rate is 12.5 pesos per U.S. dollar, it is also 1/12.5 U.S. dollars per peso.

Accepted Answer

The reciprocal of the exchange rate (1 divided by 12.5) gives the value of 1 peso in terms of U.S. dollars, which is 1/12.5 U.S. dollars per peso.

Question 13

If a nation is selling more goods and services to foreigners than it is buying from them, then on net it must be selling assets abroad.

Accepted Answer

If a nation is selling more goods and services to foreigners than it is buying from them, it has a trade surplus, not necessarily selling assets abroad. This means it is earning more from exports than it spends on imports, which can increase its foreign reserves or be invested in foreign assets, but doesn't imply a net sale of domestic assets to foreigners.

Question 14

If a country's trade surplus falls, its net capital outflow rises.

Accepted Answer

A country's trade surplus falling does not necessarily mean its net capital outflow rises. Trade surplus is the difference between a country's exports and imports, while net capital outflow is the difference between domestic investments abroad and foreign investments in the domestic economy. These two are related but not directly proportional; changes in one do not automatically lead to specific changes in the other.

Question 15

It is possible for a country to have domestic investment that exceeds national saving.

Accepted Answer

This situation occurs when a country finances its investment by borrowing from abroad, leading to a scenario where domestic investment is greater than national saving.

Question 16

If the price of a good in the U.S. is $10, the exchange rate is 2 units of foreign currency per dollar, and the foreign price of the same good is 30 units of foreign currency, then the real exchange rate is 2/3.

Accepted Answer

The real exchange rate is calculated as (foreign price / domestic price) * nominal exchange rate. Here, it is (30 / 10) * 2 = 6, and the real exchange rate is 2/3 when comparing the cost in foreign currency to the cost in domestic currency.

Question 17

In an open economy, national saving can be less than investment.

Accepted Answer

In an open economy, national saving can be less than investment because the shortfall in saving can be met through borrowing from abroad or attracting foreign investment.

Question 18

A Turkish firm exchanges lira (Turkish currency) for dollars. It then uses these dollars to purchase computers from the U.S. These actions decrease U.S. net capital outflow and increase U.S. net exports.

Accepted Answer

The exchange of lira for dollars and subsequent purchase of computers from the U.S. would increase U.S. net exports due to the sale of goods abroad, but it would not affect U.S. net capital outflow, which pertains to U.S. investments abroad minus foreign investments in the U.S.

Question 19

If a German firm buys goods from a U.S. firm with dollars it obtains by exchanging euros for dollars, both U.S. net exports and U.S. net capital outflow increase.

Accepted Answer

When the German firm buys U.S. goods, it increases U.S. net exports. The exchange of euros for dollars by the German firm represents a capital inflow to the U.S., which increases U.S. net capital outflow.

Question 20

Other things the same, an increase in the nominal exchange rate raises the real exchange rate.

Accepted Answer

An increase in the nominal exchange rate, holding domestic and foreign price levels constant, effectively makes foreign goods more expensive relative to domestic goods, thus raising the real exchange rate.

Quiz 31: Open-Economy Macroeconomics: Basic Concepts