Question 1

A Canadian firm buys sardines from Morocco and pays for them with Canadian dollars. Which of the following correctly identifies 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 firm buys sardines from Morocco, it is an import, which decreases Canadian net exports. Since the firm pays with Canadian dollars, it results in a capital inflow to Canada, decreasing net capital outflow.

Question 2

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

Accepted Answer

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

Question 3

Suppose Canada sells chocolate to the United States. Which of the following correctly identifies 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 chocolate to the U.S., the U.S. imports increase, leading to a decrease in U.S. net exports. Since the U.S. is buying from abroad, it implies a capital inflow, thus decreasing net capital outflow.

Question 4

Tony, a Canadian citizen, uses some previously obtained Portuguese currency (escudo) to purchase a bond issued by a Portuguese 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

The transaction does not change Canadian net capital outflow because Tony is using previously obtained foreign currency, not exchanging Canadian dollars for foreign currency.

Question 5

A Canadian firm buys apples from New Zealand with Canadian currency. The Canadian 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 answer of A Canadian firm buys apples from New...

Question 6

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 as it takes into account the effects of inflation on the returns. Comparing nominal interest rates alone does not provide an accurate picture of the actual returns on an investment. Purchasing the highest-priced or highest-interest bonds may not necessarily result in the best investment decisions.

Question 7

A British pharmacy buys drugs from a Canadian company and pays for them with British pounds. Which of the following correctly identifies the effects of this transaction?
A)It increases British net exports and increases Canadian capital outflow.
B)It increases British net exports and decreases Canadian capital outflow.
C)It decreases British net exports and increases Canadian capital outflow.
D)It decreases British net exports and decreases Canadian capital outflow.

Accepted Answer

The transaction involves the British pharmacy importing drugs, which decreases British net exports. The payment in British pounds means that Canadian capital outflow increases as the Canadian company receives foreign currency.

Question 8

A Russian flour mill buys wheat from Canada and pays for it with rubles. Which of the following correctly identifies the effects of this transaction?
A)Russian net exports increase, and Canadian net capital outflow increases.
B)Russian net exports increase, and Canadian net capital outflow decreases.
C)Russian net exports decrease, and Canadian net capital outflow increases.
D)Russian net exports decrease, and Canadian net capital outflow decreases.

Accepted Answer

The answer of A Russian flour mill buys wheat from...

Question 9

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 10

A Canadian firm opens a factory that produces camping equipment in Albania. Which of the following correctly identifies 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

When a Canadian firm invests in a factory in Albania, it represents an outflow of capital from Canada to Albania, increasing Canadian net capital outflow. Conversely, it does not affect Albanian net capital outflow directly, so Albanian net capital outflow decreases relative to the inflow.

Question 11

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 12

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 = C

Accepted Answer

In an open economy, the national income and output can be used for consumption, investment or net exports. Net exports refer to the difference between exports and imports. On the other hand, net capital outflow (NCO) reflects the difference between capital outflow and capital inflow. In an open economy, the national income and output can either be used for domestic consumption (C) or for exports (NX) and net capital outflow (NCO). Therefore, NCO must be equal to NX, making option B the correct answer. The other options do not accurately reflect this relationship between national income and output, consumption, and net exports or net capital outflow.

Question 13

A citizen of Saudi Arabia uses previously obtained Canadian dollars to purchase apples from Canada. Which of the following correctly identifies 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

The transaction decreases Saudi net capital outflow because the Saudi citizen is using foreign currency (Canadian dollars) to purchase goods, not investing abroad. It increases Canadian net exports because Canada is exporting apples.

Question 14

A Japanese firm buys lumber from Canada and pays for it with yen. Which of the following correctly identifies 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

The answer of A Japanese firm buys lumber from Canada...

Question 15

Which of the following does net capital outflow measure?
A)an imbalance between a country's income 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 difference between a country's purchase of foreign assets and the purchase of domestic assets by foreigners. It is the flow of capital from a country to foreign countries. Therefore, option D is the correct answer. Options A, B, and C describe other concepts such as trade balance, national saving, and current account balance, respectively.

Question 16

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

Accepted Answer

The fact that the Chilean bonds pay a higher rate of interest is an economic reason for Catherine's decision, despite the higher risk of default. The other options (A, C, and D) do not directly explain her decision to buy Chilean bonds over Canadian bonds.

Question 17

If a U.S. textbook publishing company sells texts to Canadian students, which of the following correctly identifies 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 answer of If a U.S. textbook publishing company sells...

Question 18

Which of the following do net exports measure?
A)an imbalance between a country's income and expenditures
B)an imbalance between a country's sale of goods and services abroad and purchase of foreign goods and services
C)an imbalance between a country's sale of domestic assets abroad and purchase of foreign assets
D)imports minus exports

Accepted Answer

Net exports directly measure the difference between a country's sales of goods and services to other countries (exports) and purchases of goods and services from other countries (imports). The imbalance between these two values is used to calculate a country's net exports.

Question 19

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

Accepted Answer

When Canada receives South African rand, it acquires foreign currency, which is considered a foreign asset, thus increasing Canadian net capital outflow.

Question 20

If a Canadian shirt-maker purchases cotton from Egypt, which of the following correctly identifies 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 shirt-maker purchases cotton from Egypt, it is an import, which decreases Canadian net exports. The payment for the cotton involves capital outflow from Canada to Egypt, decreasing Canadian net capital outflow.

Quiz 12: Open-Economy Macroeconomics: Basic Concepts

A Canadian firm buys sardines from Morocco and pays for them with Canadian dollars. Which of the following correctly identifies the effects of this transaction?

A Venezuelan firm purchases earth-moving equipment from a Canadian company and pays for it with domestic currency. Which of the following correctly identifies the effects of this transaction?

Suppose Canada sells chocolate to the United States. Which of the following correctly identifies the effects of this transaction?

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

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

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

A British pharmacy buys drugs from a Canadian company and pays for them with British pounds. Which of the following correctly identifies the effects of this transaction?

A Russian flour mill buys wheat from Canada and pays for it with rubles. Which of the following correctly identifies the effects of this transaction?

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

A Canadian firm opens a factory that produces camping equipment in Albania. Which of the following correctly identifies 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?

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

A citizen of Saudi Arabia uses previously obtained Canadian dollars to purchase apples from Canada. Which of the following correctly identifies the effects of this transaction?

A Japanese firm buys lumber from Canada and pays for it with yen. Which of the following correctly identifies the effects of this transaction?

Which of the following does net capital outflow measure?

Catherine, a citizen of Spain, decides to purchase bonds issued by Chile instead of Canadian bonds, even though the Chilean bonds have a higher risk of default. Which of the following might be an economic reason for her decision?

If a U.S. textbook publishing company sells texts to Canadian students, which of the following correctly identifies the effects of these sales?

Which of the following do net exports measure?

Canada sells machinery to a South African company, which pays Canada with South African currency (the rand) . Which of the following best describes the consequences of this transaction?

If a Canadian shirt-maker purchases cotton from Egypt, which of the following correctly identifies the effects of this transaction?