Question 1

Which of the following best describes an open economy?

Accepted Answer

An economy that has interactions in trade or finance with other countries.

Question 2

The balance of payments for a country must always sum to zero because:

Accepted Answer

Any deficit or surplus in the current account is offset by the financial and capital accounts.

Question 3

Suppose the Canadian dollar depreciates relative to the euro. What is the most likely short-run effect on Canadian exports to Europe?

Accepted Answer

Canadian exports to Europe will increase because they become cheaper for Europeans.

Question 4

Which of the following is included in the current account of the balance of payments?

Accepted Answer

Net exports of goods and services.

Question 5

If Canada runs 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.

Question 6

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

Accepted Answer

$$S = I + NFI$$

Question 7

A country’s real exchange rate increases if:

Accepted Answer

Its nominal exchange rate rises and its price level rises faster than the foreign price level.

Question 8

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

Accepted Answer

The domestic currency depreciates, increasing net exports.

Question 9

What is the main disadvantage for a country that pegs its currency to another currency?

Accepted Answer

It may face destabilizing speculation if the peg is not credible.

Question 10

According to the theory of purchasing power parity, exchange rates should:

Accepted Answer

Adjust to equalize the price of identical goods in different countries.

Question 11

If the Canadian government runs a budget deficit, what is the likely effect on net foreign investment, all else equal?

Accepted Answer

Net foreign investment will decrease.

Question 12

Which of the following is NOT a reason why purchasing power parity may not hold perfectly in the real world?

Accepted Answer

All goods are perfectly tradable and there are no trade barriers.

Question 13

Suppose Canadian interest rates rise relative to those in Japan. What is the likely effect on the demand for Canadian dollars in the foreign exchange market?

Accepted Answer

Demand for Canadian dollars will increase.

Question 14

Which of the following best describes a managed float exchange rate system?

Accepted Answer

Exchange rates are determined by demand and supply, with occasional government intervention.

Question 15

If national saving in Canada is less than domestic investment, what must be true?

Accepted Answer

Net foreign investment is negative.

Question 16

Which of the following would cause the Canadian dollar to appreciate in the foreign exchange market?

Accepted Answer

An increase in demand for Canadian bonds by foreign investors.

Question 17

Which of the following is a plausible effect of a government budget deficit in an open economy?

Accepted Answer

It leads to higher interest rates, currency appreciation, and lower net exports.

Question 18

Which of the following is a channel through which globalization affected U.S. automakers during the Covid-19 pandemic?

Accepted Answer

It increased their reliance on global supply chains, leading to production halts when chips were unavailable.

Macroeconomics in an Open Economy: Study Notes (Chapter 14)

Study Guide - Practice Questions

Study Guide - Flashcards