Question 1

When the United States acquires assets abroad, it is in essence borrowing money, and foreign debts to the United States decrease.

Accepted Answer

When the United States acquires assets abroad, it is actually investing money, which can lead to an increase in foreign debts to the United States.

Question 2

The open-economy government spending multiplier is smaller than the closed economy government spending multiplier.

Accepted Answer

In an open economy, some of the government spending leaks out through imports, reducing the overall impact on the economy. Therefore, the multiplier effect is smaller in an open economy compared to a closed economy where there are no leakages through imports.

Question 3

A decrease in the price level in the United States relative to the price level in Mexico causes an appreciation of the dollar against the peso.

Accepted Answer

A decrease in the price level in the United States relative to the price level in Mexico would make U.S. goods and services relatively cheaper compared to Mexican goods and services. Therefore, demand for U.S. goods and services would increase, leading to an increase in demand for dollars to purchase those goods and services. This increased demand for dollars would cause the value of the dollar to appreciate against the peso.

Question 4

When U.S. prices are rising relative to those in the rest of the world,

Accepted Answer

When U.S. prices rise relative to those in the rest of the world, U.S. goods become more expensive for foreigners, leading to a decrease in U.S. exports.

Question 5

An increase in Switzerland's interest rate and an increase in Switzerland's price level relative to U.S. price level have the same effect on the exchange rate between the two countries.

Accepted Answer

An increase in Switzerland's interest rate would likely appreciate the Swiss Franc against the U.S. dollar by attracting more foreign capital due to higher returns, while an increase in Switzerland's price level relative to the U.S. would likely depreciate the Swiss Franc against the U.S. dollar due to inflationary pressures, making Swiss goods more expensive compared to U.S. goods.

Question 6

The marginal propensity to import is the change in imports divided by the change in income.

Accepted Answer

The marginal propensity to import is a measure of the percentage of additional income that is spent on imports, so it is indeed calculated as the change in imports divided by the change in income.

Question 7

If the MPC is 0.95 and the MPM is 0.05, the open economy multiplier is 10.

Accepted Answer

The open economy multiplier is calculated as: 
1 / (MPM - MPC) 
Thus, in this case, 1 / (0.05 - 0.95) = 10.

Question 8

A depreciation in a country's currency will immediately reduce its trade deficit.

Accepted Answer

A currency depreciation may make a country's exports cheaper and more competitive, but it also makes imports more expensive. This may result in an increase in the trade deficit, rather than a reduction. Other factors, such as the elasticity of demand for imports and exports, also play a role in determining the effect of a currency depreciation on the trade deficit.

Question 9

Imports equal the MPM times income.

Accepted Answer

The equation for imports is MPM (marginal propensity to import) times income, which means that imports are directly proportionate to income.

Question 10

An excess supply of euros will cause a depreciation of the euro.

Accepted Answer

When there is an excess supply of euros in the foreign exchange market, it means that more people are trying to sell euros than buy them. This increased supply, without a corresponding increase in demand, will cause the value of the euro to fall or depreciate against other currencies.

Question 11

If the MPC is 0.8 and the MPM is 0.3, the open economy multiplier is 5.

Accepted Answer

The open economy multiplier is given by the formula 1 / (1 - MPC*(1-MPM)). Using the values given, we get: 1 / (1 - 0.8*(1-0.3)) = 2.5, not 5. Therefore, the statement is false.

Question 12

When the prices of a country's imports decrease, the prices of domestic goods may decrease. This occurs because

Accepted Answer

C) is correct because when the prices of imports decrease, consumers find imported goods more attractive price-wise and may opt for these cheaper imports over domestically produced goods. This substitution effect can lead to a decrease in the prices of domestic goods as domestic producers may lower prices to remain competitive.

Question 13

Declining economic activity abroad will increase U.S. exports.

Accepted Answer

Declining economic activity abroad means there is potentially less demand for U.S. exports, which would result in a decrease in exports rather than an increase.

Question 14

When U.S. prices are falling relative to those in the rest of the world,

Accepted Answer

When U.S. prices are falling relative to those in the rest of the world, it makes U.S.-made products relatively cheaper, which makes them more attractive to foreign buyers. As a result, U.S. exports tend to increase.

Question 15

If the $/yen exchange rate rises, then so does the value of the dollar.

Accepted Answer

The answer of If the $/yen exchange rate rises, then...

Question 16

The 2017 price level in Great Britain was relatively higher than the price level in the United States. Thus, a U.S. manufacturing facility looking to buy coal for its plant would most likely buy coal at home in the United States.

Accepted Answer

Since the price level in Great Britain is relatively higher than the price level in the United States, it is more likely that a U.S. manufacturing facility would buy coal at home in the United States. This is because buying coal overseas would likely be more expensive due to the higher price level in Great Britain.

Question 17

If the MPC is 0.75 and the MPM is 0.25, the open economy multiplier is 2.

Accepted Answer

The open economy multiplier can be calculated as follows:

Multipler = 1 / (1 - MPC + MPM + NX / Y)

Where NX/Y represents net exports as a percentage of GDP.

In this case, we are given that MPC = 0.75 and MPM = 0.25. We do not have information on net exports, so we will assume NX/Y = 0.

Multipler = 1 / (1 - 0.75 + 0.25 + 0)
Multipler = 1 / 0.5
Multipler = 2

Therefore, the open economy multiplier is indeed 2.

Question 18

The trade feedback effect is due to exports from one country causing that country to increase its imports.

Accepted Answer

The trade feedback effect is a real phenomenon where exports from a country can cause an increase in their imports. This happens when the exporting country earns foreign currency from their sales, which can then be used to purchase more goods and services from other countries.

Question 19

If the MPC is 0.75 and the MPM is 0.2, the open economy multiplier is 4.

Accepted Answer

The open economy multiplier is calculated as 1 / (1 - MPC + MPM), so with an MPC of 0.75 and an MPM of 0.2, the multiplier would be 1 / (1 - 0.75 + 0.2) = 1 / 0.45 = 2.22, not 4.

Question 20

Suppose that a(n) ________ in the price level of one country ________ prices in other countries. This, in turn, ________ the price level in the first country. This process is the price feedback effect.

Accepted Answer

An increase in the price level of one country will drive up prices in other countries, due to increased demand for exports from that country. This, in turn, will increase the price level in the first country, leading to a cycle of price increases. This process is known as the price feedback effect. The other options (A, B, and D) do not accurately describe this effect.

Quiz 19: Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates