Question 1

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

Accepted Answer

The answer of If a country's net exports fall, then...

Question 2

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 has a trade surplus (selling more than buying), it accumulates a surplus of foreign currency. This surplus can be used to buy assets abroad, such as stocks, bonds, or real estate. Therefore, on net, the nation must be buying assets abroad.

Question 3

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 lower tariffs and increased access to foreign markets, have allowed U.S. businesses to expand their reach and increase their exports and imports. This has contributed to a larger percentage of the U.S. economy being devoted to international trade.

Question 4

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

Accepted Answer

A rational investor will not only consider the real interest rate but will also take into account the risks associated with the bond, such as credit risk and inflation risk. It is possible for a bond with a higher real interest rate to have a higher risk profile and therefore, may not be the optimal choice for the investor.

Question 5

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 6

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 German firm exchanges euros for dollars to buy goods from a U.S. firm, it increases the demand for dollars, leading to an increase in the exchange rate of the dollar. This increase in the exchange rate makes U.S. goods more expensive for foreign buyers, making exports less attractive. Therefore, U.S. net exports decrease. However, at the same time, the transaction leads to an increase in U.S. net capital outflow as dollars flow into the U.S. economy.

Question 7

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

Accepted Answer

Lower transportation costs make it more cost-effective to ship goods across longer distances, which has contributed to the increase in U.S. trade flows in recent decades.

Question 8

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 controlling operations in a foreign country, which includes building factories, acquiring companies or assets, and establishing subsidiaries. In this case, the German company is building an automobile factory in the United States, which qualifies as foreign direct investment.

Question 9

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

Accepted Answer

According to the World Bank, U.S. exports made up 12.4% of GDP in 2020.

Question 10

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

The answer of If Walmart buys $50 million worth of...

Question 11

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.

Question 12

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

Accepted Answer

A country can have a trade deficit (importing more than it exports) but still have a positive net inflow of capital if it attracts foreign investment or loans, offsetting the trade deficit.

Question 13

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

Accepted Answer

Both FDI and FPI involve investing in foreign assets, which increases U.S. residents' ownership of foreign assets and their claims on foreign income. This leads to an increase in U.S. net capital outflow, which is the difference between U.S. investments abroad and foreign investments in the U.S.

Question 14

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 15

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 16

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

Positive net capital outflow means that there is a net flow of funds from the domestic economy to foreign economies, which occurs when U.S. residents purchase more foreign assets than foreign residents purchase U.S. assets.

Question 17

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 18

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. to the foreign country, thus increasing U.S. net capital outflow.

Question 19

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

If a U.S. firm buys Chinese toys using previously obtained Chinese currency, it is not generating new demand for Chinese currency and hence not increasing U.S. net capital outflow. Additionally, since the U.S. is importing goods, the U.S. net exports decrease.

Question 20

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

Net capital outflow refers to the difference between the amount of domestic assets purchased by foreigners and the amount of foreign assets purchased by domestic residents. When this value is negative, it means that foreigners are purchasing more domestic assets than domestic residents are purchasing foreign assets, resulting in a net outflow of capital from the domestic economy.

Quiz 18: Open-Economy Macroeconomics: Basic Concepts