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 U.S. dollar appreciates against the euro, what is the likely effect 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 4

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 5

Given the saving and investment equation $S = I + NFI$, if net foreign investment (NFI) is 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 increases its budget deficit. What is the most likely effect on the exchange rate and net exports, according to the study materials?

Accepted Answer

The exchange rate will increase and net exports will fall.

Question 7

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

Accepted Answer

$NX = NFI$

Question 8

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

Accepted Answer

As a capital outflow in the financial account.

Question 9

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 10

Which of the following would cause the demand for U.S. dollars in the foreign exchange market to increase?

Accepted Answer

An increase in U.S. interest rates relative to foreign interest rates.

Question 11

Suppose the U.S. government implements expansionary fiscal policy in an open economy. What is a likely consequence for net exports?

Accepted Answer

Net exports will decrease due to higher interest rates and a stronger dollar.

Question 12

Which of the following best describes the nominal exchange rate?

Accepted Answer

The price of a country's currency in terms of another country's currency.

Question 13

If the U.S. dollar depreciates against the Japanese yen, what is the likely effect on U.S. exports to Japan?

Accepted Answer

U.S. exports to Japan will become cheaper for Japanese buyers.

Question 14

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

Accepted Answer

A Japanese company builds a factory in the United States.

Question 15

According to the study materials, what is the effect of expansionary monetary policy in an open economy compared to a closed economy?

Accepted Answer

It is more effective in an open economy due to the additional channel of net exports.

Question 16

If national saving in the United States 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 17

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 18

If the U.S. runs a budget deficit and attracts foreign investment, what is the likely effect on the supply and demand for dollars in the foreign exchange market?

Accepted Answer

Demand for dollars rises, supply of dollars falls.

Question 19

Which of the following is NOT a component of the current account?

Accepted Answer

Purchases of foreign assets.

Question 20

Suppose a country has $S = Y - C - G$ and $Y = C + I + G + NX$. Which equation shows the relationship between saving, investment, and net exports?

Accepted Answer

$S = I + NX$

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

Study Guide - Practice Questions

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