Chapter 4: Open-Economy Macroeconomic basic concepts

MULTIPLE CHOICE

1
1.Foreign-produced goods and services that are purchased domestically are called : HH nước ngoài được tiêu thụ
trong nước
a. imports.
b. exports.
c. net imports.
d. net exports.
2.When Claudia, a U.S. citizen, purchases a handbag made in France, the purchase is
a. both a U.S. and French import.
b. a U.S. export and a French import.
c. a U.S. import and a French export.
d. neither an export nor an import for either country.
3.A country's trade balance : NX
a. must be zero.
b. must be greater than zero.
c. is greater than zero only if exports are greater than imports.
d. is greater than zero only if imports are greater than exports.
4.The value of Peru's exports minus the value of Peru's imports is called : EX – IM
a. Peru's foreign portfolio investment.
b. Peru's foreign direct investment.
c. Peru's net exports.
d. Peru's net imports.
5.If Germany purchased more goods and services abroad than it sold abroad last year, then it had :

IM > EX  NX = EX - IM < 0  Deficit

a. positive net exports which is a trade surplus.
b. positive net exports which is a trade deficit.
c. negative net exports which is a trade surplus.
d. negative net exports which is a trade deficit.
Table 18-1
Bolivian Trade Flows
Goods Services
Purchased $40 billion Purchased $20 billion
Abroad Abroad
Sold Abroad $10 billion Sold Abroad $25 billion
6.Refer to Table 18-1. What are Bolivia’s exports?
a. $60 billion
b. $35 billion
c. $10 billion
d. None of the above are correct.
7.Refer to Table 18-1. What are Bolivia’s imports?
a. $60 billion
b. $35 billion
c. $40 billion
d. None of the above are correct.
8.Refer to Table 18-1. What are Bolivia’s net exports?
a. $30 billion
b. $5 billion
c. -$5 billion
d. -$25 billion
9.You buy a new car built in Sweden (tăng IM  NX giảm). Other things the same, your purchase by itself
a. raises both Vietnam’s exports and Vietnam’s net exports.
b. raises Vietnam’s imports and lowers Vietnam net exports.
c. raises both Vietnam imports and Vietnam net exports.
d. raises Vietnam’s imports and Vietnam’s U.S. net exports.
10.Net capital outflow (NCO = capital outflow – capital inflow) is defined as the purchase of
a. foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
b. foreign assets by domestic residents minus the purchase of foreign goods and services by domestic
residents.
c. domestic assets by foreign residents minus the purchase of domestic goods and services by foreign
residents.
d. domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.
 11. Net capital outflow (NCO) measures
a. foreign assets held by domestic residents minus domestic assets held by foreign residents.
b. the imbalance between the amount of foreign assets bought by domestic residents and the amount
of domestic assets bought by foreigners.
c. the imbalance between the amount of foreign assets bought by domestic residents and the amount
of domestic goods and services sold to foreigners.
d. None of the above is correct.

12.Net capital outflow equals

a. the purchase of foreign assets by domestic residents.
b. the purchase of domestic assets by foreign residents.
c. the purchase of domestic assets by foreign residents - the purchase of foreign assets by domestic
residents
d. the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreign
residents

13.An open economy's GDP is always given by

a. Y = C + I + G.
b. Y = C + I + G + T.
c. Y = C + I + G + S.
d. Y = C + I + G + NX.

14.Which of the following equations is always correct in an open economy?

a. I = Y - C
b. I = S
c. I = S - NCO
d. I = S + NX

15.Which of the following is correct?

a. NCO + C = NX
b. NCO = NX
c. NX - NCO = C
d. NX + NCO = C

16.If a country has a trade surplus

a. it has positive net exports and positive net capital outflow.
b. it has positive net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has negative net exports and negative net capital outflow.

17.If a country has a trade deficit

a. it has positive net exports and positive net capital outflow.
b. it has positive net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has negative net exports and negative net capital outflow.

18.If a country has a trade surplus (NX=NCO > 0 ; S > I ; Y > C+I+
G), then its
a. saving is greater than domestic investment and Y > C + I + G.
b. saving is greater than domestic investment and Y < C + I + G.
c. saving is less than domestic investment and Y > C +I + G.
d. saving is less than domestic investment and Y < C + I + G.
THE PRICES FOR INTERNATIONAL TRANSACTIONS: REAL AND NOMINAL EXCHANGE
RATES
19.The nominal exchange rate is the
a. nominal interest rate in one country divided by the nominal interest rate in the other country.
b. the ratio of a foreign country’s interest rate to the domestic interest rate.
c. rate at which a person can trade the currency of one country for another.
d. the real exchange rate minus the inflation rate.

20.If the exchange rate were 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars would cost
a. 125 Egyptian pounds
b. 50 Egyptian pounds
c. 5 Egyptian pounds
d. None of the above is correct.

21.Other things the same, if the dollar depreciates relative to the Japanese yen, then
a. the exchange rate falls. It will cost fewer yen to travel in the U.S.
b. the exchange rate falls. It will cost more yen to travel in the U.S.
c. the exchange rate rises. It will cost fewer yen to travel in the U.S.
d. the exchange rate rises. It will cost more yen to travel in the U.S.

22.Other things the same, if the dollar appreciates relative to the Japanese yen, then
a. the exchange rate falls. It will cost fewer yen to travel in the U.S.
b. the exchange rate falls. It will cost more yen to travel in the U.S.
c. the exchange rate rises. It will cost fewer yen to travel in the U.S.
d. the exchange rate rises. It will cost more yen to travel in the U.S.

23.If you are vacationing in France and the dollar depreciates relative to the euro, then
a. the dollar buys more euros. It will take fewer dollars to buy a good that costs 50 euros.
b. the dollar buys more euros. It will take more dollars to buy a good that costs 50 euros.
c. the dollar buys fewer euros. It will take fewer dollars to buy a good that costs 50 euros.
d. the dollar buys fewer euros. It will take more dollars to buy a good that costs 50 euros.

24.Other things the same, if the exchange rate changes from 30 Thai bhat per dollar to 25 Thai bhat per dollar, then
the dollar has
a. appreciated and so buys more Thai goods.
b. appreciated and so buys fewer Thai goods.
c. depreciated and so buys more Thai goods.
d. depreciated and so buys fewer Thai goods.

25.Other things the same, if the exchange rate changes from .30 Kuwaiti dinar per dollar to .35 Kuwaiti dinar per
dollar, then the dollar has
a. appreciated and so buys more Kuwaiti goods.
b. appreciated and so buys fewer Kuwaiti goods.
c. depreciated and so buys more Kuwaiti goods.
d. depreciated and so buys fewer Kuwaiti goods.

26.If a dollar currently purchases 12.5 pesos and someone forecasts that in a year it will be 14 pesos, then the fore-
cast is given in
a. real terms and implies the dollar will appreciate.
b. real terms and implies the dollar will depreciate.
c. nominal terms and implies the dollar will appreciate.
d. nominal terms and implies the dollar will depreciate.

SHORT ANSWER
1 .Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what direc-
tions this changes U.S. net exports and U.S. net capital outflow.

The purchase of a foreign good by a U.S. resident is a U.S. import. Since net exports = exports – imports,
net exports decrease. Bill pays for the software with U.S. dollars so that the Japanese have obtained more
U.S. assets. Since, net capital outflow = the amount of foreign assets acquired by domestic residents –do-
mestic assets acquired by foreign residents, the increase in foreign holdings of dollars by Japanese resi-
dents decreases U.S. net capital outflow.

2 .Derive the relation between savings, domestic investment, and net capital outflow using the national income ac-
counting identity.

Saving equals domestic investment plus net capital outflow, since any dollar saved can be used
to finance accumulation of domestic capital or it can be used to finance the purchase of capital
abroad.