Question 1

An economy with a trade surplus must also have:

Accepted Answer

This follows from the accounting identity NX + KI = 0, where NX is net exports and KI is net capital inflows. A trade surplus implies a positive NX, so KI must be negative, meaning there is capital outflow.

Question 2

An economy with a trade deficit must also have:

Accepted Answer

A trade deficit means that the value of imports is greater than the value of exports. In order for this to happen, the country must be receiving more foreign currency than it is using to purchase foreign goods, creating a surplus of foreign currency. This surplus of foreign currency leads to positive net capital inflows, as foreign investors seek to invest their excess currency in the country.

Question 3

In an open economy,domestic investment equals:

Accepted Answer

In an open economy, investment can be funded by domestic saving as well as net capital inflows (i.e. capital flowing into the country from foreign investors). Therefore, domestic investment would equal domestic saving plus net capital inflows.

Question 4

If the United States has a $300 billion net capital inflow,then there must be a:

Accepted Answer

This follows from the accounting identity NX + KI = 0. Here, KI is net capital inflows of $300 billion and NX, net exports, must be -$300 billion.

Question 5

At each value of the domestic interest rate,decreases in the riskiness of domestic assets ______ capital inflows,______ capital outflows,and ______ net capital inflows.

Accepted Answer

Decreases in the riskiness of domestic assets increase capital inflows from foreign investors who seek higher returns with lower risk. However, domestic investors may reallocate their portfolios to foreign assets with higher returns, leading to a decrease in capital outflows. Overall, the net effect is an increase in net capital inflows.

Question 6

At each value of the domestic interest rate,increases in the riskiness of domestic assets ______ capital inflows,______ capital outflows,and ______ net capital inflows.

Accepted Answer

Increased riskiness of domestic assets induces investors domestic and foreign to desire foreign investments. This decreases capital inflows, increases capital outflows and decreases net capital inflows.

Question 7

In an open economy,an increase in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

Accepted Answer

An increase in capital inflows decreases the real interest rate. This, in turn, increases domestic investment.

Question 8

Net exports plus net capital inflows equal:

Accepted Answer

By definition, net exports represent the difference between exports and imports, while net capital inflows represent the difference between capital inflows and outflows. Therefore, net exports plus net capital inflows should equal zero, as any excess in one would be offset by a deficit in the other.

Question 9

If the United States has a $300 billion trade deficit,then there must be:

Accepted Answer

This follows from the accounting identity NX + KI = 0. Here, NX is net exports of -$300 billion and KI, net capital inflows, must be $300 billion.

Question 10

In an open economy with a given level of real interest rates and risk,a decrease in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate.

Accepted Answer

A decrease in real interest rates abroad will make it less attractive for investors to hold foreign assets, leading to an increase in capital inflows to the domestic economy. As a result, the increased demand for domestic assets will push up their prices, causing the equilibrium domestic real interest rate to decrease.

Question 11

Which of the following events will increase the domestic real interest rate in an open economy?

Accepted Answer

A decrease in domestic saving increases the domestic interest rate. This happens when the supply curve for investment funds shifts leftward.

Question 12

When the Chinese government buys U.S.government bonds,from the perspective of the United States,this is a(n):

Accepted Answer

When the Chinese government buys U.S. government bonds, they are essentially investing in the United States by providing a capital inflow. Therefore, the correct answer is (D) capital inflow.

Question 13

Which of the following events will decrease the domestic real interest rate in an open economy?

Accepted Answer

An increase in domestic saving shifts the supply curve of loanable funds rightward which decreases the equilibrium real interest rate.

Question 14

Holding constant risk and the real returns available abroad,lower domestic real interest rates ______ capital inflows,______ capital outflows,and ______ net capital inflows.

Accepted Answer

Lower domestic real interest rates make investors domestic and foreign less likely to invest in the domestic economy compared to foreign economies. This increases capital outflows and decreases net capital inflows.

Question 15

When a U.S.restaurant purchases French wine and the French wine company uses the proceeds to buy U.S.government debt,U.S.______ and there is a capital ______ to/from the United States.

Accepted Answer

When the U.S. restaurant purchases French wine, it is considered an import from France. When the French wine company uses the proceeds to buy U.S. government debt, there is an inflow of capital from France to the United States. Therefore, imports increase (from France), and there is a capital inflow to the United States.

Question 16

When an American buys stock in a French company,from the perspective of the United States,this is a(n):

Accepted Answer

From the perspective of the United States, this was a domestic purchase of a foreign asset, or a capital outflow.

Question 17

When a U.S.oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from its sale of oil to the U.S.to buy transportation services from the U.S. ,U.S.net exports ______ and the capital inflow to the United States ______.

Accepted Answer

The answer of When a U.S.oil company purchases oil from...

Question 18

In an open economy with a given level of real interest rates and risk,an increase in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate.

Accepted Answer

An increase in real interest rates abroad will make investing in that country more attractive, hence leading to a decrease in capital inflows into the domestic economy. This will result in a decrease in the equilibrium domestic real interest rate as investors will demand a higher return to compensate for the reduced attractiveness of the domestic economy relative to other countries.

Question 19

In an open economy,the domestic real interest rate is determined by:

Accepted Answer

In an open economy, the domestic real interest rate is determined by the interaction of domestic saving, domestic investment, and net capital inflows. Domestic saving determines the supply of funds available for investment, while domestic investment and net capital inflows determine the demand for funds. The equilibrium real interest rate will be determined by the intersection of these two curves. Therefore, choice A is the best answer as it includes all three determinants of the domestic real interest rate.

Question 20

Holding constant risk and the real returns available abroad,higher domestic real interest rates ______ capital inflows,______ capital outflows,and ______ net capital inflows.

Accepted Answer

Higher domestic real interest rates make domestic assets more attractive to foreign investors, leading to an increase in capital inflows. However, at the same time, domestic investors will find it more profitable to invest abroad, leading to a decrease in capital outflows. The net effect will depend on the magnitude of these two effects, but in general, the increase in capital inflows is likely to be larger than the decrease in capital outflows, leading to a net increase in capital inflows.

Quiz 26: Exchange Rates, International Trade, and Capital Flows

An economy with a trade surplus must also have:

An economy with a trade deficit must also have:

In an open economy,domestic investment equals:

If the United States has a $300 billion net capital inflow,then there must be a:

At each value of the domestic interest rate,decreases in the riskiness of domestic assets capital inflows, capital outflows,and __ net capital inflows.

At each value of the domestic interest rate,increases in the riskiness of domestic assets capital inflows, capital outflows,and __ net capital inflows.

In an open economy,an increase in capital inflows the equilibrium domestic real interest rate and the quantity of domestic investment.

Net exports plus net capital inflows equal:

If the United States has a $300 billion trade deficit,then there must be:

In an open economy with a given level of real interest rates and risk,a decrease in real interest rates abroad will capital inflows and the equilibrium domestic real interest rate.

Which of the following events will increase the domestic real interest rate in an open economy?

When the Chinese government buys U.S.government bonds,from the perspective of the United States,this is a(n) :

Which of the following events will decrease the domestic real interest rate in an open economy?

Holding constant risk and the real returns available abroad,lower domestic real interest rates capital inflows, capital outflows,and __ net capital inflows.

When a U.S.restaurant purchases French wine and the French wine company uses the proceeds to buy U.S.government debt,U.S. and there is a capital to/from the United States.

When an American buys stock in a French company,from the perspective of the United States,this is a(n) :

When a U.S.oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from its sale of oil to the U.S.to buy transportation services from the U.S. ,U.S.net exports and the capital inflow to the United States .

In an open economy with a given level of real interest rates and risk,an increase in real interest rates abroad will capital inflows and the equilibrium domestic real interest rate.

In an open economy,the domestic real interest rate is determined by:

Holding constant risk and the real returns available abroad,higher domestic real interest rates capital inflows, capital outflows,and __ net capital inflows.