Question 1

Suppose the United States runs a current account deficit of $500 billion in a given year. According to the balance of payments identity, what must be true about the financial account and why?

Accepted Answer

The financial account must show a surplus of $500 billion, because the U.S. is importing more than it is exporting and financing this by selling assets or borrowing.

Question 2

Which of the following best describes an open economy?

Accepted Answer

An economy that has interactions in trade or finance with other countries.

Question 3

If the nominal exchange rate between the U.S. dollar and the Japanese yen changes from $$1 = \100 to$$ $$1 = \120$$, what has happened to the value of the dollar relative to the yen?

Accepted Answer

The dollar has appreciated against the yen.

Question 4

Which of the following transactions would be recorded in the U.S. financial account?

Accepted Answer

A German investor purchases U.S. Treasury bonds.

Question 5

Suppose the U.S. government increases its budget deficit. According to the saving and investment equation, what is a likely consequence for net exports and the exchange rate?

Accepted Answer

Net exports will fall and the exchange rate will rise.

Question 6

Which of the following equations correctly represents the saving and investment relationship in an open economy?

Accepted Answer

$$S = I + NX$$

Question 7

If the U.S. dollar depreciates relative to the euro, what is the most likely short-run effect on U.S. real GDP?

Accepted Answer

U.S. real GDP will rise because exports become more competitive.

Question 8

A U.S. citizen purchases a new car manufactured in Japan. How is this transaction recorded in the U.S. balance of payments?

Accepted Answer

As a debit in the current account (import of goods).

Question 9

Which of the following would cause the demand for U.S. dollars in the foreign exchange market to increase, holding all else constant?

Accepted Answer

An increase in foreign investment in U.S. assets.

Question 10

If national saving in a country is less than domestic investment, what must be true about net foreign investment and the current account?

Accepted Answer

Net foreign investment is negative and the country is a net borrower.

Question 11

Which of the following best explains why the balance of payments must always sum to zero?

Accepted Answer

Because every transaction that affects the current account is offset by an equal and opposite transaction in the financial and capital accounts.

Question 12

Suppose the U.S. implements expansionary monetary policy by lowering interest rates. What is the likely effect on the exchange rate and net exports?

Accepted Answer

The dollar will depreciate and net exports will rise.

Question 13

Which of the following is an example of foreign direct investment (FDI)?

Accepted Answer

A Japanese firm builds a factory in the United States.

Question 14

If the U.S. government runs a budget deficit and finances it by selling bonds, what is the likely impact on interest rates, the exchange rate, and net exports?

Accepted Answer

Interest rates rise, the exchange rate rises, and net exports fall.

Question 15

Which of the following best describes the effect of a stronger domestic currency on a country's exports and imports?

Accepted Answer

Exports become more expensive and imports become cheaper.

Question 16

If China consistently runs a current account surplus with the United States, what must be true about its financial account with the United States?

Accepted Answer

China must run a financial account deficit of equal magnitude.

Question 17

Which of the following would NOT be included in the calculation of the U.S. current account?

Accepted Answer

A U.S. investor purchases a factory in Mexico.

Question 18

Suppose the U.S. increases tariffs on imported goods. What is the most likely short-run effect on the U.S. current account balance?

Accepted Answer

The current account balance will improve as imports decrease.

Question 19

If national saving is $$2 trillion, domestic investment is 2.5 $$trillion, and the capital account is zero, what is the value of net exports?

Accepted Answer

$$-0.5$$ trillion

Macroeconomics in an Open Economy: Balance of Payments, Exchange Rates, and Policy

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