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 the overall balance of payments?

Accepted Answer

The financial account must show a surplus of $500 billion, and the balance of payments will be zero.

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 short-term flows of funds, while the financial account records long-term flows such as purchases of assets.

Question 3

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

Accepted Answer

U.S. exports will decrease and imports will increase.

Question 4

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

Accepted Answer

$$S = I + NX$$

Question 5

A U.S. company builds a factory in Vietnam. How is this transaction recorded in the U.S. balance of payments?

Accepted Answer

As a debit in the U.S. financial account (capital outflow).

Question 6

Suppose the U.S. government increases its budget deficit. According to the twin deficits hypothesis, what is the likely effect on the current account and the exchange rate?

Accepted Answer

The current account deficit will increase and the exchange rate will rise.

Question 7

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

Accepted Answer

Net exports are negative and net foreign investment is negative.

Question 8

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 9

If the United States experiences an increase in income, leading to higher imports from Japan, what will happen in the foreign exchange market for dollars and yen?

Accepted Answer

The supply of dollars will increase and the exchange rate (yen per dollar) will fall.

Question 10

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

Accepted Answer

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

Question 11

Suppose the Federal Reserve implements an expansionary monetary policy. What is the likely short-run effect on the U.S. exchange rate and net exports?

Accepted Answer

The exchange rate will fall and net exports will rise.

Question 12

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 13

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

Accepted Answer

Net foreign investment is positive.

Question 14

Which of the following policies would be most likely to reduce the U.S. current account deficit, according to the study materials?

Accepted Answer

Increasing government subsidies for domestic manufacturing.

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

U.S. goods become more expensive relative to European goods.

Question 18

Which of the following best describes an open economy?

Accepted Answer

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

Question 19

If the U.S. runs a negative net foreign investment, what does this indicate about its saving and investment?

Accepted Answer

National saving is less than domestic investment.

Question 20

Which of the following is a likely consequence of a persistent pattern where developing countries lend large amounts of savings to developed countries, as described by Ben Bernanke?

Accepted Answer

Developing countries will miss opportunities for higher returns on capital.

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

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