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| Chapter 31: Open-Economy Macroeconomics: Basic Concepts |
1. A country’s
balance of international trade is positive when
a. exports exceed imports.
b. exports plus investment exceed imports plus domestic
saving.
c. imports exceed exports.
d. imports plus domestic saving exceed exports plus
investment.
2. Which of the
following would be recorded as an U.S. merchandise export?
a. An American tourist spends 10,000 francs on vacation in
the south of France.
b. A machine shop in Ohio purchases a grinder made in Italy.
c. An American receives a $50 dividend check on stock she
owns in a business in Germany.
d. France purchases a new jet fighter aircraft from the
Boeing Company in the United States.
3. Which of the
following is equivalent to the trade deficit?
a. imports/exports
b. net capital inflow
c. exports + imports
d. net exports – imports
4. If U.S. imports
total $100 billion and U.S. exports total $150 billion, which of the following
would be true?
a. U.S. net exports equal –$50 billion
b. The U.S. has a trade surplus of $50 billion.
c. The U.S. has a trade deficit of $100 billion.
d. The U.S. has a trade deficit of $50 billion.
5. What does a
positive U.S. capital inflow signify?
a. Nothing.
b. That the government is running a budget deficit.
c. That more funds were invested in the United States by
foreigners than the United States invested abroad.
d. That the United States is running a trade surplus.
6. International
trade in financial assets
a. increases risk because little is known about firms in
foreign lands.
b. increases risk because default risk is greater in foreign
countries.
c. increases risk because of currency fluctuations.
d. reduces risk by allowing for increased diversification.
7. It must always be
true that net capital outflow
a. is greater than net exports.
b. is less than net exports.
c. is equal to net exports.
d. equals 0.
8. If savings in
Germany is $300 billion and investment in Germany is $550 billion, then
a. there must be net capital outflow of –$550 billion.
b. there must be net capital outflow of –$250 billion.
c. the German government must be running a $250 billion
surplus.
d. the German financial market must be experiencing a net
capital outflow.
9. If interest rates
in Canada rise above those in the rest of the world, then
a. the demand for Canadian dollars decreases.
b. exports from Canada to other countries increases.
c. imports into Canada from other countries decreases.
d. it raises Canada’s exchange rate and this may result in a
deficit on Canada’s current account.
10. Foreign direct
investment differs from foreign portfolio investment in that
a. direct investments involve stocks and bonds.
b. direct investments can only be made by the International
Monetary Fund.
c. direct investments involve physical capital; portfolio
investments involve financial capital
d. a government must be involved in direct investment, but
portfolio investment can involve private firms.
11. Which of the
following would be classified as a direct foreign investment?
a. a purchase of 100 shares of British Petroleum stock
b. a loan of $1 million to a Brazilian utilities firm
c. A loan of $1 million from the World Bank to Surinam
d. building a new Pizza Hut in St. Petersburg, Russia
12. Net capital
outflow measures
a. the flow of goods and services between countries.
b. the flow of assets between countries.
c. government budget surpluses and deficits relative to
those experienced in other countries.
d. the amount of physical capital built in foreign
countries.
13. U.S. trade
deficits are a sign of
a. reduced national savings.
b. reduced production of manufactured goods.
c. an over reliance on the service economy.
d. high rates of unemployment in the U.S. economy.
14. The exchange rate
is the
a. value of money.
b. quantity of dollars, yen, etc., that are traded on
currency markets.
c. amount of foreign currency that is used to buy goods made
in your country.
d. number of units of a foreign currency that can be bought
with one unit of your own currency.
15. If you were told
that the exchange rate was 1.5 U.S. dollars per 1 Canadian dollar (CDN), that
would mean that Canadians would have to spend __________ to by a $12 watch in
New York City.
a. $18 CDN
b. $15 CDN
c. $1.5 CDN
d. $12 CDN
16. Currencies
depreciate and appreciate all the time. Who gains and who loses when the
Mexican peso depreciates?
a. Americans holding Mexican pesos gain, U.S. tourists to
Mexico lose.
b. U.S. exporters to Mexico gain, Americans holding pesos
lose.
c. Mexican exporters gain, Mexican importers lose.
d. Mexican importers gain, Mexican exporters lose.
17. When Italy
devalues its currency
a. the dollars per Italian lira will increase.
b. the drain of U.S. reserves on Italian lira will fall.
c. U.S. exports to Italy will increase.
d. the price of imported Italian olive oil in the United
States will fall.
18. When fewer U.S.
dollars are needed to buy a unit of Japanese yen, the dollar
a. is devalued.
b. is inflated.
c. appreciates.
d. depreciates.
19. If one country
has a lower inflation rate than other countries, its
a. currency tends to appreciate.
b. currency tends to depreciate.
c. real interest rate will be higher than in other
countries.
d. nominal interest rate will be higher than in other
countries.
20. In the long run,
exchange rates
a. are determined by business cycle fluctuations.
b. are determined by movements of Eurodollars.
c. will adjust until the price of a bundle of goods is the
same in both countries.
d. will reflect economic fluctuations in both countries.
21. Which of the
following is a statement of the purchasing power parity theory of exchange rate
determination? The exchange rate will adjust in the
a. long run until the interest rate is roughly the same in
both countries.
b. long run until real GDP is roughly the same in both
countries.
c. long run until the average price of goods is roughly the
same in both countries.
d. short run until the average price of goods is roughly the
same in both countries.
22. Suppose the same
basket of goods costs $100 in the U.S. and 50 pounds in Britain. According to
PPP, if the prices do not change, what will be the exchange rate?
a. 2 dollars/pound
b. 4 dollars/pound
c. 5 dollars/pound
d. .5 dollars/pound
23. Which of the
following is a reason why exchange rates may deviate from their purchasing
power parity values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect
substitute for a domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms
to agree on exchange prices.
d. Both a and b are correct.
24. If the U.S. price
level is increasing by 3 percent annually and the Swiss price level is
increasing by 5 percent annually, by what percent would the dollar price of
francs need to change according to purchasing power parity?
a. depreciate by 5 percent
b. appreciate by 3 percent
c. appreciate by 5 percent
d. depreciate by 2 percent
25. Arbitrage refers
to
a. simultaneously buying and selling a currency in order to
profit from a difference in exchange rates.
b. simultaneously buying and selling a currency in order to
change the exchange rate.
c. buying a currency when its price is high and selling it
when its price is low.
d. exchanging the domestic currency for a foreign currency.
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