Question 1

Which of the following best describes an open economy?

Accepted Answer

A country that has interactions in trade or finance with other countries.

Question 2

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

Accepted Answer

The financial account must show a surplus of $500 billion.

Question 3

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

Accepted Answer

A German investor purchases U.S. Treasury bonds.

Question 4

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 dollar?

Accepted Answer

The dollar has appreciated against the yen.

Question 5

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

Accepted Answer

$$S = I + NX$$

Question 6

A stronger yen (Japanese currency) will most likely have which effect on Toyota’s profits from cars exported to the United States?

Accepted Answer

Decrease profits because cars become more expensive in dollars and yen received per dollar falls.

Question 7

If U.S. incomes rise, what is the likely effect on the supply of dollars in the foreign exchange market?

Accepted Answer

The supply of dollars will increase.

Question 8

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

Accepted Answer

Net exports will decrease.

Question 9

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

Accepted Answer

Because every transaction is offset by another transaction in the accounts.

Question 10

If the U.S. dollar depreciates against the euro, what is the expected effect on U.S. exports to Europe?

Accepted Answer

U.S. exports to Europe will increase.

Question 11

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

Accepted Answer

A U.S. company builds a factory in Mexico.

Question 12

If national saving in the U.S. is less than domestic investment, what must be true about net foreign investment?

Accepted Answer

Net foreign investment is negative.

Question 13

Which of the following would shift the demand curve for U.S. dollars to the right in the foreign exchange market?

Accepted Answer

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

Question 14

If the U.S. government increases its budget deficit, what is the likely effect on the exchange rate of the dollar?

Accepted Answer

The exchange rate will increase.

Question 15

Which of the following best describes the effect of expansionary monetary policy in an open economy?

Accepted Answer

It lowers interest rates, causing the currency to depreciate and net exports to rise.

Question 16

Suppose China runs a current account surplus with the United States. What must be true about its financial account with the U.S.?

Accepted Answer

China must run a financial account deficit.

Question 17

If the U.S. dollar appreciates against the Mexican peso, what is the expected effect on U.S. imports from Mexico?

Accepted Answer

U.S. imports from Mexico will become cheaper.

Question 18

Which of the following equations is true in an open economy?

Accepted Answer

$$Net\ exports = Net\ foreign\ investment$$

Question 19

If net foreign investment is positive, which of the following must be true (assuming the capital account and net transfers are zero)?

Accepted Answer

Domestic investment is less than national saving.

Question 20

How might a government budget deficit affect the trade balance?

Accepted Answer

A budget deficit raises interest rates, which raises exchange rates and reduces the trade balance.

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

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