Question 1

When a French vineyard establishes a distribution center in the U.S., U.S. net capital outflow
A)increases because the foreign company makes a portfolio investment in the U.S.
B)declines because the foreign company makes a portfolio investment in the U.S.
C)increases because the foreign company makes a direct investment in capital in the U.S.
D)declines because the foreign company makes a direct investment in capital in the U.S.

Accepted Answer

When a French vineyard establishes a distribution center in the U.S., it is making a direct investment in capital in the U.S., which decreases U.S. net capital outflow.

Question 2

Which of the following is correct?
A)NCO = NX
B)NCO + I = NX
C)NX + NCO = Y
D)Y = NCO - I

Accepted Answer

The answer of Which of the following is correct?
A)NCO =...

Question 3

Which of the following is always correct?
A)Y - I = NCO
B)NCO = NX
C)NX = I
D)All of the above are correct.

Accepted Answer

The answer of Which of the following is always correct?
A)Y...

Question 4

A U.S. firm buys apples from New Zealand with New Zealand dollars it got in exchange for U.S. dollars. New Zealand residents then use these dollars to purchase oranges from the U.S. Which of the following increases?
A)New Zeland's net capital outflow and New Zeland's net exports
B)only New Zeland's net exports
C)only New Zeland's net capital outflow
D)neither New Zeland's net exports nor New Zeland's capital outflow

Accepted Answer

The transactions cancel each other out: the U.S. firm's purchase of apples increases New Zealand's net exports, but the subsequent purchase of oranges by New Zealand residents decreases it, resulting in no net change. Similarly, there is no net change in New Zealand's net capital outflow.

Question 5

If a country has a trade surplus then A)S > I and Y > C + I + G. B)S > I and Y < C + I + G. C)S < I and Y > C + I + G. D)S < I and Y < C + I + G.

Accepted Answer

A trade surplus means that a country is exporting more goods and services than it is importing. This means that the country's savings (S) exceed its investment (I). Additionally, if the country is producing more goods for export, its GDP (Y) will be greater than its total consumption (C), investment (I), and government spending (G). Therefore, option A is correct.

Question 6

A U.S. company uses U.K. pounds it already owned to purchase bonds issued by a company in the U.K. Which of these countries has an increase in net capital outflow?
A)The U.S. and the U.K.
B)The U.S. but not the U.K.
C)The U.K. but not the U.S.
D)Neither the U.S. nor the U.K.

Accepted Answer

The answer of A U.S. company uses U.K. pounds it...

Question 7

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.

Accepted Answer

In an open economy, there is international trade and therefore there can be a trade surplus or deficit. Therefore, the GDP formula for an open economy includes net exports (NX) in addition to consumption (C), investment (I), and government spending (G). Thus, option D, Y = C + I + G + NX, is the correct formula for an open economy's GDP.

Question 8

Citizens in India buy music from the U.S. To do so they use Indian rupees to purchase U.S. dollars. If U.S. citizens hold these rupees rather than spending them, what happens to U.S. net exports and U.S. net capital outflows?
A)both U.S. net exports and U.S. net capital outflow rise
B)both U.S. net exports and U.S. net capital outflow fall
C)U.S. net exports rise and U.S. net capital outflow fall
D)U.S. net exports fall and U.S. net capita outflow rise

Accepted Answer

When U.S. citizens hold onto the rupees instead of spending them, it means that the U.S. is exporting more than it is importing, leading to an increase in net exports. Simultaneously, since the U.S. is not using those rupees to invest back into India, the net capital outflow from the U.S. also rises.

Question 9

When Microsoft establishes a distribution center in France, U.S. net capital outflow
A)increases because Microsoft makes a portfolio investment in France.
B)decreases because Microsoft makes a portfolio investment in France.
C)increases because Microsoft makes a direct investment in capital in France.
D)decreases because Microsoft makes a direct investment in capital France.

Accepted Answer

When Microsoft establishes a distribution center in France, it involves making a direct investment in capital in France. This means that funds are flowing out of the U.S. economy and into the French economy, resulting in an increase in U.S. net capital outflow.

Question 10

Which of the following is correct?
A)NCO + C = NX
B)NCO = NX
C)NX - NCO = C
D)NX + NCO = C

Accepted Answer

The answer of Which of the following is correct?
A)NCO +...

Question 11

Which of the following equations is correct?
A)S = I + C
B)S = I - NX
C)S = I + NCO
D)S = NX - NCO.

Accepted Answer

The answer of Which of the following equations is correct?
A)S...

Question 12

Which of the following equations is correct?
A)Y = C + I + G + NCO
B)NX = NCO
C)NCO = S - I
D)All of the above are correct.

Accepted Answer

A) Y = C + I + G + NX is the national income accounting equation which says that total output (Y) is equal to consumption (C), investment (I), government spending (G), and net exports (NX).
B) NX = exports (X) - imports (M), and NCO = net capital outflow (NCO) - net foreign investment (NFI). Combining these two equations gives NX = NCO, which means that net exports are equal to net capital outflow.
C) NCO is equal to the difference between savings (S) and investment (I). This equation is derived from the national income accounting identity, which says that Y = C + I + G + NX. By rearranging the terms, we get NX = Y - C - G - I, which can be rewritten as NCO = S - I, where S = Y - C - G is national savings.

Question 13

If a country has Y > C + I + G, then it has
A)positive net capital outflow and positive net exports.
B)positive net capital outflow and negative net exports.
C)negative net capital outflow and positive net exports.
D)negative net capital outflow and negative net exports.

Accepted Answer

In an open economy, the national income identity is Y = C + I + G + NX, where Y is national income, C is consumption, I is investment, G is government spending, and NX is net exports. If Y > C + I + G, then NX must be positive, indicating positive net exports. Positive net exports imply that a country exports more than it imports, which corresponds to lending to the rest of the world or positive net capital outflow.

Question 14

A German company exchanges euros for dollars from U.S. residents and then uses the dollars to buy U.S. products to sell in Germany. U.S. residents who exchanged their dollars for euros use the euros to buy bonds issued by Spanish corporations. At this point
A)both U.S. net exports and U.S. net capital outflows have risen.
B)both U.S. net exports and U.S. net capital outflow have fallen.
C)U.S. net exports have risen and U.S. net capital outflow have fallen.
D)U.S. net exports have fallen and U.S. net capital outflow have risen.

Accepted Answer

The German company's purchase of U.S. products increases U.S. net exports. The U.S. residents' purchase of Spanish bonds increases U.S. net capital outflow.

Question 15

Which of the following equations is always correct in an open economy?
A)I = Y - C
B)I = S
C)I = S - NCO
D)I = S + NX

Accepted Answer

The answer of Which of the following equations is always...

Question 16

A U.S. purchase of oil from overseas paid for with foreign currency it already owned
A)increases U.S. net exports, and increases U.S. net capital outflow.
B)increases U.S. net exports, and decreases U.S. net capital outflow.
C)decreases U.S. net exports, and increases U.S. net capital outflow.
D)decreases U.S. net exports, and decreases U.S. net capital outflow.

Accepted Answer

The purchase of oil from overseas decreases U.S. net exports (exports- imports). As the oil is paid for with foreign currency already owned by the U.S., there is no need to sell U.S. currency to purchase the oil, meaning there is no increase in U.S. net capital outflow (purchases of foreign assets- foreign purchases of U.S. assets). In fact, there may even be a decrease in U.S. net capital outflow if the transaction helps to reduce the amount of foreign currency held by the U.S., leading to less need to invest in foreign assets.

Question 17

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.

Accepted Answer

The answer of If saving is greater than domestic investment,...

Question 18

When the Sykes Corporation (an American company) buys shares of Audi stock (a German company) for its pension fund, U.S. net capital outflow
A)increases because an American company makes a portfolio investment in Germany.
B)declines because an American company makes a portfolio investment in Germany.
C)increases because an American company makes a direct investment in Germany.
D)declines because an American company makes a direct investment in Germany.

Accepted Answer

When the Sykes Corporation buys shares of Audi stock, it is making a portfolio investment in a foreign company (Audi) and sending funds overseas. Therefore, U.S. net capital outflow increases.

Question 19

A U.S. firm opens a factory that produces camping equipment in Estonia.
A)This increases U.S. net capital outflow and decreases Estonian net capital outflow.
B)This decreases U.S. net capital outflow and increases Estonian net capital outflow.
C)This increases only U.S. net capital outflow.
D)This increases only Estonian net capital outflow.

Accepted Answer

When a U.S. firm invests in a factory in Estonia, it is an example of U.S. capital flowing out to another country, thus increasing U.S. net capital outflow. Conversely, it decreases Estonian net capital outflow as it is receiving foreign investment.

Question 20

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.

Accepted Answer

The answer of Net capital outflow
A)is always greater than net...

Quiz 18: Open-Economy Macroeconomic Models

When a French vineyard establishes a distribution center in the U.S., U.S. net capital outflow

Which of the following is correct?

Which of the following is always correct?

A U.S. firm buys apples from New Zealand with New Zealand dollars it got in exchange for U.S. dollars. New Zealand residents then use these dollars to purchase oranges from the U.S. Which of the following increases?

If a country has a trade surplus then

A U.S. company uses U.K. pounds it already owned to purchase bonds issued by a company in the U.K. Which of these countries has an increase in net capital outflow?

An open economy's GDP is always given by

Citizens in India buy music from the U.S. To do so they use Indian rupees to purchase U.S. dollars. If U.S. citizens hold these rupees rather than spending them, what happens to U.S. net exports and U.S. net capital outflows?

When Microsoft establishes a distribution center in France, U.S. net capital outflow

Which of the following is correct?

Which of the following equations is correct?

Which of the following equations is correct?

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

A German company exchanges euros for dollars from U.S. residents and then uses the dollars to buy U.S. products to sell in Germany. U.S. residents who exchanged their dollars for euros use the euros to buy bonds issued by Spanish corporations. At this point

Which of the following equations is always correct in an open economy?

A U.S. purchase of oil from overseas paid for with foreign currency it already owned

If saving is greater than domestic investment, then

When the Sykes Corporation (an American company) buys shares of Audi stock (a German company) for its pension fund, U.S. net capital outflow

A U.S. firm opens a factory that produces camping equipment in Estonia.

Net capital outflow