Deck 32: Open-Economy Macroeconomic Models

Question 1

One year a country has negative net exports.The next year it still has negative net exports and imports have risen more than exports.

A)its trade surplus fell.
B)its trade surplus rose.
C)its trade deficit fell.
D)its trade deficit rose

Answer 1

D

Question 2

Foreign-produced goods and services that are purchased domestically are called

A)imports.
B)exports.
C)net imports.
D)net exports.

Answer 2

A

Question 3

Which of the following equations is correct?

A)S = I + C
B)S = I - NX
C)S = I + NCO
D)S = NX - NCO.

Answer 3

C

Question 4

Net capital outflow

A)is always greater than net exports.
B)is always less than net exports.
C)is always equal to net exports.
D)could be any of the above.

Question 5

An Italian company builds and operates a pasta factory in the United Arab Emirates.This is an example of Italian

A)foreign direct investment that increases Italian net capital outflow.
B)foreign direct investment that decreases Italian net capital outflow.
C)foreign portfolio investment that increases Italian net capital outflow.
D)foreign portfolio investment that decreases Italian net capital outflow.

Question 6

Net capital outflow is defined as the purchase of

A)foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
B)foreign assets by domestic residents minus the purchase of foreign goods and services by domestic residents.
C)domestic assets by foreign residents minus the purchase of domestic goods and services by foreign residents.
D)domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.

Question 7

If domestic residents of France purchase 1.2 trillion euros of foreign assets and foreigners purchase 1.5 trillion euros of French assets,then France's net capital outflow is

A)-.3 trillion euros,so it must have a trade deficit.
B)-.3 trillion euros,so it must have a trade surplus.
C).3 trillion euros,so it must have a trade deficit.
D).3 trillion euros,so it must have a trade surplus.

Question 8

A country's trade balance

A)must be zero.
B)must be greater than zero.
C)is greater than zero only if exports are greater than imports.
D)is greater than zero only if imports are greater than exports.

Question 9

If U.S.consumers increase their demand for apples from New Zealand,then other things the same New Zealand's

A)imports and net exports rise.
B)imports rise and net exports fall.
C)exports and net exports rise.
D)exports rise and net exports fall.

Question 10

When making investment decisions,investors

A)compare the real interest rates offered on different bonds.
B)compare the nominal,but not the real,interest rates offered on different bonds.
C)purchase the highest-priced bond available.
D)All of the above are correct.

Question 11

An Egyptian.firm opens a factory that produces camping equipment in Estonia.

A)This increases Egyptian net capital outflow and decreases Estonian net capital outflow.
B)This decreases Egyptian net capital outflow and increases Estonian net capital outflow.
C)This increases only Egyptian net capital outflow.
D)This increases only Estonian net capital outflow.

Question 12

Which type(s)of economies interact with other economies?

A)only closed economies
B)only open economies
C)closed economies and open economies
D)neither closed nor open economies

Question 13

If saving is greater than domestic investment,then

A)there is a trade deficit and Y > C + I + G.
B)there is a trade deficit and Y < C + I + G.
C)there is a trade surplus and Y > C + I + G.
D)there is a trade surplus and Y < C + I + G.

Question 14

Net exports measures the difference between a country's

A)income and expenditures.
B)sale of goods and services abroad and purchase of foreign goods and services.
C)sale of domestic assets abroad and purchase of foreign assets.
D)All of the above are correct.

Question 15

If Norway sold more goods and services abroad than it purchased from abroad,then it had

A)positive net exports which is a trade surplus.
B)positive net exports which is a trade deficit.
C)negative net exports which is a trade surplus.
D)negative net exports which is a trade deficit.

Question 16

If a country has Y > C + I + G,then

A)S > I and it has a trade surplus.
B)S > I and it has a trade deficit.
C)S < I and it has a trade surplus.
D)S < I and it has a trade deficit.

Question 17

If a country has a trade surplus

A)it has positive net exports and positive net capital outflow.
B)it has positive net exports and negative net capital outflow.
C)it has negative net exports and positive net capital outflow.
D)it has negative net exports and negative net capital outflow.

Question 18

A Swiss watchmaker opens a factory in the United States.This is an example of Swiss

A)exports.
B)imports.
C)foreign portfolio investment.
D)foreign direct investment.

Question 19

An open economy's GDP is always given by

A)Y = C + I + G.
B)Y = C + I + G + T.
C)Y = C + I + G + S.
D)Y = C + I + G + NX.

Question 20

A firm in China sells toys to a U.S.department store chain.Other things the same,these sales

A)increase U.S.net exports and decrease Chinese net exports.
B)decrease U.S.net exports and increase Chinese net exports.
C)increase U.S.and Chinese net exports.
D)decrease U.S.and Chinese net exports.

Question 21

If the real exchange rate is greater than 1,then the

A)nominal exchange rate x price > foreign price.The currency required to purchase a good at home would buy more then enough foreign currency to buy the same good overseas.
B)nominal exchange rate x price > foreign price.The currency required to purchase a good at home would not buy enough foregoing currency to buy the same good overseas.
C)nominal exchange rate x price < foreign price.The currency required to purchase a good at home would buy more then enough foreign currency to buy the same good overseas.
D)nominal exchange rate x price < foreign price.The currency required to purchase a good at home would not buy enough foreign currency to buy the same good overseas.

Question 22

Purchasing-power parity describes the forces that determine

A)prices in the short run.
B)prices in the long run.
C)exchange rates in the short run.
D)exchange rates in the long run.

Question 23

Other things the same,if the real exchange rate appreciates,then net exports

A)increase and net capital outflow decreases.
B)decrease and net capital outflow increases.
C)and net capital outflow both increase.
D)and net capital outflow both decrease.

Question 24

The ability to profit by purchasing wheat in Egypt and selling it in China implies that the

A)nominal exchange rate is less than 1.
B)nominal exchange rate is greater than 1.
C)real exchange rate is less than 1.
D)real exchange rate is greater than 1.

Question 25

Which of the following does purchasing-power parity conclude should equal 1?

A)both the nominal and the real exchange rate.
B)the nominal exchange rate but not the real exchange rate
C)the real exchange rate but not the nominal exchange rate
D)neither the nominal exchange rate nor the real exchange rate

Question 26

If Thailand has a trade surplus,then

A)foreign countries purchase more Thai assets than Thailand purchases from them.This makes Thai saving greater than Thai domestic investment.
B)foreign countries purchase more Thai assets than Thailand purchases from them.This makes Thai saving smaller then Thai domestic investment.
C)foreign countries purchase fewer Thai assets than Thailand purchases from them.This makes Thai saving greater than Thai domestic investment.
D)foreign countries purchase fewer Thai assets than Thailand purchases from them.This makes Thai saving greater than Thai domestic investment.

Question 27

If a dinar buys more potatoes in Saudi Arabiathan in France,then

A)the real exchange rate is greater than 1; a profit might be made by buying potatoes in Saudi Arabia and selling them in France.
B)the real exchange rate is greater than 1; a profit might be made by buying potatoes in France.and selling them in Saudi Arabia.
C)the real exchange rate is less than 1; a profit might be made by buying potatoes in Saudi Arabia and selling them in France.
D)the real exchange rate is less than 1; a profit might be made by buying potatoes in France and selling them in Saudi Arabia.

Question 28

Which of the following statements is correct for an open economy with a trade surplus?

A)The trade surplus cannot last for very many years.
B)The trade surplus must be offset by negative net capital outflow.
C)The trade surplus implies that the country's national saving is greater than domestic investment.
D)None of the above is correct.

Question 29

An American hardware chain sells dollars to obtain Indian rupees.It then uses the rupees to buy electrical generators manufactured by an Indian firm.This exchange

A)increases U.S.net capital outflow because Indians obtain U.S.assets.
B)decreases U.S.net capital outflow because Indians obtain U.S.assets.
C)increases U.S.net capital outflow because the U.S.buys capital goods.
D)decreases U.S.net capital outflow because the U.S.buys capital goods.

Question 30

If you are vacationing in France and your currency depreciates relative to the euro,then

A)you can buy more euros.It will take less of your currency to buy a good that costs 50 euros.
B)you can buy more euros.It will take more of your currency to buy a good that costs 50 euros.
C)you can buy fewer euros.It will take less of your currency to buy a good that costs 50 euros.
D)you can buy fewer euros.It will take more of your currency to buy a good that costs 50 euros.

Question 31

If there is a trade deficit,then

A)saving is greater than domestic investment and Y > C + I + G.
B)saving is greater than domestic investment and Y < C + I + G.
C)saving is less than domestic investment and Y > C +I + G.
D)saving is less than domestic investment and Y < C + I + G.

Question 32

In an open economy,gross domestic product equals $1,950 billion,government expenditure equals $280 billion,investment equals $500,and net capital outflow equals $280 billion.What is consumption expenditure?

A)$280 billion
B)$780 billion
C)$890 billion
D)$1,170 billion

Question 33

The nominal exchange rate is the

A)nominal interest rate in one country divided by the nominal interest rate in the other country.
B)the ratio of a foreign country's interest rate to the domestic interest rate.
C)rate at which a person can trade the currency of one country for another.
D)the real exchange rate minus the inflation rate.

Question 34

The law of one price states that

A)a good must sell at the price fixed by law.
B)a good must sell at the same price at all locations.
C)a good cannot sell for a price greater than the legal price ceiling.
D)nominal exchange rates will not vary.

Question 35

If the U.S.real exchange rate appreciates,U.S.exports to Europe

A)and European exports to the U.S.both rise.
B)and European exports to the U.S.both fall.
C)rise,and European exports to the U.S.fall.
D)fall,and European exports to the U.S.rise.

Question 36

The nominal exchange rate is 4 Saudi Arabian riyals,8 Moroccan dirham,45 Indian rupee,or .6 British pounds per U.S.dollar.A double latte espresso and a cinnamon biscotti costs $6 in the U.S.,24 riyals in Saudi Arabia,40 Moroccan dirham in Morocco,250 Indian rupees in India,and 5 British pounds in Britain.According to these numbers,where is the real exchange rate between American and foreign goods the lowest?

A)Saudi Arabia
B)Morocco
C)India
D)Britain

Question 37

Consider an identical basket of goods in both Algeria and India.For a given nominal exchange rate,in which case is it certain that the Algerian real exchange rate with India falls?

A)the price of the basket of goods rises in Algeria and India.
B)the price of the basket of goods rises in Algeria and falls in India.
C)the price of the basket of goods falls in Algeria and rises in India.
D)the price of the basket of goods falls in both India and Algeria.

Question 38

Other things the same,which of the following would both make you more willing to buy Italian goods?

A)the nominal exchange rate falls,the price of goods in Italy falls
B)the nominal exchange rate falls,the price of goods in Italy rises
C)the nominal exchange rate rises,the price of goods in Italy falls
D)the nominal exchange rate rises,the price of goods in Italy rises

Question 39

If the nominal exchange rate e is foreign currency per dollar,the domestic price is P,and the foreign price is P*,then the real exchange rate is defined as

A)e(P*/P).
B)e(P/P*).
C)e + P*/P.
D)e - P/P*.

Question 40

A Japan based company sells semiconductors to an Italian firm.The Japanese company uses all of the revenues from this sale to purchase automobiles from Italian firms.These transactions

A)increase both Japanese net exports and Japanese net capital outflow.
B)decrease both Japanese net exports and Japanese net capital outflow.
C)increase Japanese net exports and do not affect Japanese net capital outflow.
D)None of the above is correct.

Question 41

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.

Question 42

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

Question 43

If the dollar buys less cotton in Egypt than in the United States,then traders could make a profit by

A)buying cotton in the United States and selling it in Egypt,which would tend to raise the price of cotton in the United States.
B)buying cotton in the United States and selling it in Egypt,which would tend to raise the price of cotton in Egypt.
C)buying cotton in Egypt and selling it in the United States,which would tend to raise the price of cotton in Egypt.
D)buying cotton in Egypt and selling it in the United States,which would tend to raise the price of cotton in the United States.

Question 44

During a hyperinflation the real domestic value of a country's currency

A)falls and its nominal exchange rate depreciates.
B)falls and its nominal exchange rate appreciates.
C)rises and its nominal exchange rate depreciates.
D)rises and its nominal exchange rate appreciates.

Question 45

The theory of purchasing-power parity states that a unit of a country's currency should be able to buy the same quantity of goods in foreign countries as it does domestically.

Question 46

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

Question 47

A country with negative net exports has a trade surplus.

Question 48

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

Question 49

If P = domestic prices,P* = foreign prices,and e is the nominal exchange rate,which of the following is implied by purchasing-power parity?

A)P = e/P*
B)1 = e/P*
C)e = P*/P
D)None of the above is correct.

Question 50

If a country sells more goods and services abroad than it purchases abroad,it has positive net exports and a trade surplus.

Question 51

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.

Question 52

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

Question 53

According to purchasing power parity which of the following would happen if a country raised its money supply growth rate?

A)its nominal exchange rate would fall
B)its real exchange rate would fall
C)its real net exports would rise
D)All of the above would happen.

Question 54

Many economists believe that the theory of purchasing-power parity describes the forces that determine exchange rates in the long run.

Question 55

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

Question 56

If a country's imports exceed its exports it has a trade surplus.

Question 57

If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

A)1.05 If the value is less than this,it costs more dollars to buy a Big Mac in the U.S.than in the Euro area.
B)1.05 If the value is less than this,it costs fewer dollars to buy a Big Mac in the U.S.then in the Euro area.
C).95 If the value is less than this,it costs more dollars to buy a Big Mac in the U.S.than in the Euro area.
D).95 If the value is less than this,it costs fewer dollars to buy a Big Mac in the U.S.than in the Euro area.

Question 58

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S.currency must rise if the price levels in

A)foreign countries rise.
B)the United States rises.
C)both countries rise.
D)both countries fall.

Question 59

If purchasing power parity holds,when a country's central bank increases the money supply,its

A)price level rises and its currency appreciates relative to other currencies in the world.
B)price level rises and its currency depreciates relative to other currencies in the world.
C)price level falls and its currency appreciates relative to other currencies in the world.
D)price level falls and its currency depreciates relative to other currencies in the world.

Question 60

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

Question 61

When the central bank of some country prints large quantities of money,that county's currency loses value both in terms of the goods and services it buys and in terms of the amount of foreign currencies it can buy.

Question 62

Why are net exports and net capital outflow always equal?

Question 63

Derive the relation between savings,domestic investment,and net capital outflow using the national income accounting identity.

Question 64

What does purchasing-power parity imply about the real exchange rate?

Question 65

Other things the same,an increase in the foreign price level leads to an increase in the real exchange rate.

Question 66

List the factors that might influence a country's exports,imports,and trade balance.

Question 67

How do the nominal exchange rate and the real exchange rate differ?