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 exports and financing the difference by selling assets or borrowing.

Question 2

Which of the following best describes the difference between the current account and the financial account in the balance of payments?

Accepted Answer

The current account records net exports, net income on investments, and net transfers, while the financial account records purchases of assets abroad and foreign purchases of domestic assets.

Question 3

If the U.S. dollar appreciates relative to the euro, what is the most likely effect on U.S. exports and imports?

Accepted Answer

U.S. exports to Europe will decrease, and imports from Europe will increase.

Question 4

Suppose the U.S. government increases its budget deficit. According to the saving and investment equation $$S = I + NFI$$, what is a likely consequence for net foreign investment (NFI) and the current account?

Accepted Answer

Net foreign investment will fall (become more negative), and the current account deficit will increase.

Question 5

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 6

If national saving in an open economy is less than domestic investment, what must be true about net exports and net foreign investment?

Accepted Answer

Net exports and net foreign investment are both negative.

Question 7

A U.S. firm decides to build a factory in Mexico. How is this transaction recorded in the balance of payments?

Accepted Answer

As a capital outflow in the U.S. financial account (foreign direct investment).

Question 8

Suppose the Federal Reserve implements an expansionary monetary policy in an open economy. What is the likely effect on the exchange rate and net exports?

Accepted Answer

The exchange rate will fall (dollar depreciates), causing net exports to rise.

Question 9

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

Accepted Answer

Because every international transaction is recorded twice, once as a credit and once as a debit.

Question 10

If China consistently runs a current account surplus, what must be true about its net foreign investment and financial account?

Accepted Answer

Net foreign investment is positive, and the financial account is in deficit.

Question 11

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

Accepted Answer

$$S = I + NX$$

Question 12

Suppose the U.S. government imposes tariffs to reduce imports. What is the most likely short-run effect on the current account balance?

Accepted Answer

The current account balance will improve (deficit decreases).

Question 13

If the U.S. dollar depreciates against the Japanese yen, what is the likely effect on Toyota's profits from exporting cars to the United States?

Accepted Answer

Toyota's profits will increase because it will receive more yen per dollar.

Question 14

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

Accepted Answer

A U.S. citizen buys shares of a German company.

Question 15

If the U.S. increases government spending without increasing taxes, what is the likely effect on national saving and the current account, assuming all else equal?

Accepted Answer

National saving will fall, and the current account deficit will increase.

Question 16

Which of the following best describes an open economy?

Accepted Answer

An economy that interacts with other countries in trade or finance.

Question 17

Suppose the U.S. runs a trade deficit and finances it by selling Treasury bonds to foreign investors. How is this reflected in the balance of payments?

Accepted Answer

A current account deficit and a financial account surplus.

Question 18

If the U.S. economy becomes more open over time, what is the likely effect on the effectiveness of monetary and fiscal policy?

Accepted Answer

Monetary policy becomes more effective, while fiscal policy becomes less effective.

Question 19

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 demand for U.S. goods and services.

Question 20

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

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

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