Question 1

If purchases of foreign assets by U.S. residents exceed purchases of U.S. assets by foreign residents, then U.S. net capital outflow is positive.

Accepted Answer

U.S. net capital outflow is a measure of the difference between U.S. residents investing in foreign countries and foreign residents investing in the United States. If U.S. residents purchase more foreign assets than foreign residents purchase U.S. assets, then the net capital outflow from the U.S. is positive.

Question 2

A country must have a positive net outflow of capital if it has a trade deficit.

Accepted Answer

A trade deficit means that a country is importing more than it is exporting, leading to a negative balance of trade. This does not necessarily mean that the country has a net outflow of capital, as other factors such as the inflow of foreign investment or remittances from abroad can offset the trade deficit.

Question 3

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 4

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 a foreign firm buys goods from a U.S. firm with dollars, this counts as a U.S. export and increases U.S. net exports. Additionally, when the German firm exchanges euros for dollars to obtain these dollars, this counts as a U.S. capital inflow, which also increases U.S. net capital outflow.

Question 5

For an economy as a whole, net exports must equal minus one times net capital outflow.

Accepted Answer

The answer of For an economy as a whole, net...

Question 6

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

This is because the money is not being used to purchase U.S. goods or invest in U.S. assets, which would increase net exports and net capital outflow. Instead, the money is being used to purchase U.S. bonds, which does not affect net exports or net capital outflow.

Question 7

If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net exports and U.S. net capital outflow decrease.

Accepted Answer

The answer of If a U.S. firm buys Chinese toys...

Question 8

By itself, when a Japanese bank purchases a bond issued by a U.S. corporation, U.S. net capital outflow rises.

Accepted Answer

When a Japanese bank purchases a bond issued by a U.S. corporation, it is considered a capital inflow for the U.S., as foreign money is coming into the country to buy the bond, not outflow.

Question 9

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

If a country is selling more goods and services to other countries than it is buying from them, it will have a surplus in its current account balance of payments. This surplus can lead to an increase in foreign currency reserves or an investment in assets abroad, such as buying foreign stocks or real estate. Therefore, on net, the country must be buying assets abroad.

Question 10

When net capital outflow is negative, it means that on net the value of domestic assets purchased by foreigners exceeds the value of foreign assets purchased by domestic residents.

Accepted Answer

When net capital outflow is negative, it means that the country is experiencing a capital inflow, or a net purchase of domestic assets by foreigners, which exceeds the country's purchases of foreign assets.

Question 11

Reductions in transportation costs help explain the increase in U.S. trade flows.

Accepted Answer

Lower transportation costs make it cheaper and more efficient for companies to move goods internationally, leading to increased trade flows.

Question 12

If a country's net exports fall, then its net capital outflow falls by the same amount.

Accepted Answer

Net exports (exports - imports) and net capital outflow (domestic savings - domestic investment) are both components of a country's balance of payments. A decrease in net exports would mean that there is less demand for the country's goods and services from foreign countries, which would also result in a decrease in the amount of foreign investment coming into the country, leading to a decrease in net capital outflow. Therefore, the two are inversely related.

Question 13

By itself, if a U.S. firm builds a new factory overseas, U.S. net capital outflow rises.

Accepted Answer

When a U.S. firm builds a new factory overseas, it involves an outflow of capital from the U.S., which increases the net capital outflow.

Question 14

When a company from Germany builds an automobile factory in the United States, the German firm has engaged in foreign direct investment.

Accepted Answer

Foreign direct investment refers to a company investing in and owning a foreign subsidiary or facility. Therefore, if a company from Germany, such as Volkswagen, builds an automobile factory in the United States, it is engaged in foreign direct investment.

Question 15

Both foreign direct investment and foreign portfolio investment by U.S. residents increase U.S. net capital outflow.

Accepted Answer

Both foreign direct investment and foreign portfolio investment involve U.S. residents investing funds abroad, which increases U.S. net capital outflow (i.e. the amount of U.S. assets owned by foreigners exceeds the amount of foreign assets owned by U.S. residents).

Question 16

U.S. exports make up less than 20 percent of GDP.

Accepted Answer

U.S. exports in 2020 were about 12.5 percent of GDP according to the World Bank.

Question 17

Reduced barriers to trade help explain an increase in U.S. exports and imports relative to GDP since 1950.

Accepted Answer

Reduced barriers to trade, such as NAFTA and the lowering of tariffs, have allowed for increased trade between the U.S. and other countries, leading to an increase in both exports and imports relative to GDP since 1950.

Question 18

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 19

A rational investor will always purchase the bond that pays the highest real interest rate.

Accepted Answer

A rational investor considers not only the real interest rate but also factors such as the bond's risk, maturity, liquidity, and tax implications. The highest real interest rate might come with higher risk or other undesirable characteristics.

Question 20

Net capital outflow is the purchase of domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.

Accepted Answer

Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.

Quiz 13: Open-Economy Macroeconomics: Basic Concepts