Question 1

Which of the following best describes the balance of payments (BoP)?

Accepted Answer

The record of a country's trade with other countries in goods, services, and assets.

Question 2

Suppose the U.S. current account balance is $$-500$$ billion and the financial account balance is $$+500$$ billion. What is the balance of payments, and why?

Accepted Answer

$$0$$, because the sum of the current account and financial account must always equal zero.

Question 3

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

Accepted Answer

A U.S. firm purchases a factory in Germany.

Question 4

If the U.S. runs a trade deficit, what must be true about its net foreign investment (NFI)?

Accepted Answer

NFI is negative by the same amount as the trade deficit.

Question 5

Given the following data for a country: $$Y = 10{,}000$$, $$C = 6{,}000$$, $$I = 2{,}000$$, $$G = 1{,}500$$, $$NX = 500$$, $$T = 1{,}000. $$What is national saving ($$S$$)?

Accepted Answer

$$S = I + NX = 2{,}000 + 500 = 2{,}500$$

Question 6

If the nominal exchange rate between the U.S. dollar and the euro changes from $$1 = €1 to$$ $$1 = €1.20$$, what happens to the price of U.S. exports in Europe?

Accepted Answer

U.S. exports become more expensive in Europe.

Question 7

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

Accepted Answer

Any deficit in the current account must be offset by a surplus in the financial and capital accounts.

Question 8

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

Accepted Answer

National saving decreases, leading to lower domestic investment and/or lower net foreign investment.

Question 9

Which of the following is a likely effect of expansionary monetary policy in an open economy?

Accepted Answer

The domestic currency depreciates, causing net exports to rise and aggregate demand to increase.

Question 10

If the U.S. dollar appreciates relative to the Japanese yen, what is the most likely effect on U.S. imports from Japan?

Accepted Answer

U.S. imports from Japan will increase because Japanese goods become cheaper in dollar terms.

Question 11

Which of the following best describes the 'twin deficits' phenomenon?

Accepted Answer

A situation where a country experiences both a government budget deficit and a current account deficit.

Question 12

Which of the following would cause the demand for U.S. dollars in the foreign exchange market to increase?

Accepted Answer

An increase in foreign demand for U.S. goods and services.

Question 13

If the real exchange rate between the U.S. and the U.K. increases, what does this imply?

Accepted Answer

U.S. goods have become more expensive relative to U.K. goods.

Question 14

Which of the following is a reason why fiscal policy is less effective in an open economy than in a closed economy?

Accepted Answer

Some of the increased demand leaks out as imports, reducing the multiplier effect.

Question 15

Suppose the U.S. increases its interest rates relative to other countries. What is the likely effect on the exchange rate and net exports?

Accepted Answer

The U.S. dollar will appreciate, causing net exports to fall.

Question 16

Which equation correctly represents the saving and investment relationship in an open economy?

Accepted Answer

$$S = I + NFI$$

Question 17

A country with positive net foreign investment (NFI) is:

Accepted Answer

Investing more abroad than foreigners are investing in the country.

Question 18

Which of the following is an example of foreign direct investment?

Accepted Answer

A U.S. company builds a manufacturing plant in Mexico.

Question 19

If a country is experiencing a current account deficit, what must be true about its financial account?

Accepted Answer

The financial account must be in surplus by the same amount.

Macroeconomics in an Open Economy: Study Notes

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