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 balance (ignoring the capital account)?

Accepted Answer

The financial account balance must be $500 billion (surplus).

Question 2

Which of the following best describes an open economy?

Accepted Answer

An economy that interacts 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 financial account of the U.S. balance of payments?

Accepted Answer

A German investor purchases U.S. Treasury bonds.

Question 5

Given the saving and investment equation $$S = I + NX$$, if net exports ($$NX) $$are negative, what does this imply about national saving and domestic investment?

Accepted Answer

National saving is less than domestic investment.

Question 6

Suppose the U.S. government runs a large budget deficit. According to macroeconomic theory, what is a likely effect on the exchange rate and net exports?

Accepted Answer

The exchange rate will increase and net exports will fall.

Question 7

If the U.S. dollar appreciates against the euro, what is the expected impact on U.S. exports to Europe and imports from Europe?

Accepted Answer

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

Question 8

Toyota assembles cars in both Japan and the United States. If the yen strengthens against the dollar, which of the following is most likely to occur?

Accepted Answer

Toyota's profits from U.S. sales of cars made in Japan will decrease.

Question 9

Which equation correctly represents the relationship between net exports and net foreign investment in an open economy?

Accepted Answer

$$NX = NFI$$

Question 10

If a country has negative net foreign investment, what does this indicate about its capital flows?

Accepted Answer

Capital inflows exceed capital outflows.

Question 11

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 investment in U.S. assets.

Question 12

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

Accepted Answer

The dollar will depreciate and net exports will increase.

Question 13

Which of the following is NOT a component of the current account in the balance of payments?

Accepted Answer

Purchases of foreign assets by domestic residents.

Question 14

If national saving in the U.S. is $$2 trillion, domestic investment is 2.5 $$trillion, and the capital account is zero, what is the value of net foreign investment?

Accepted Answer

$$-0.5$$ trillion

Question 15

Which of the following best explains why the balance of payments must always sum to zero (ignoring the capital account)?

Accepted Answer

Because any deficit in the current account is offset by a surplus in the financial account.

Question 16

If the U.S. government increases tariffs on imported goods, what is the most likely effect on the current account balance?

Accepted Answer

The current account balance will increase.

Question 17

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

Accepted Answer

A German company builds a factory in the United States.

Question 18

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

Accepted Answer

China must run a financial account deficit.

Question 19

Which of the following would NOT shift the demand curve for U.S. dollars in the foreign exchange market?

Accepted Answer

A change in the exchange rate itself.

Question 20

In an open economy, which policy is generally more effective at increasing aggregate demand: expansionary monetary policy or expansionary fiscal policy? Briefly explain why.

Accepted Answer

Expansionary monetary policy, because it also increases net exports through exchange rate effects.

Macroeconomics Study Guide: International Linkages, Exchange Rates, and Policy in an Open Economy

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