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184  Chapter Open-Economy Macroeconomics: Basic Concepts
Chapter: Open-Economy
Macroeconomics: Basic Concepts
1. A country’s balance of international trade is positive when
a. exports exceed imports.
b. exports plus investment exceed imports plus domestic saving.
c. imports exceed exports.
d. imports plus domestic saving exceed exports plus investment.
2. Which of the following would be recorded as an U.S. merchandise export?
a. An American tourist spends 10,000 francs on vacation in the south of
France.
b. A machine shop in Ohio purchases a grinder made in Italy.
c. An American receives a $50 dividend check on stock she owns in a
business in Germany.
d. France purchases a new jet Kghter aircraft from the Boeing
Company in the United States.
3. Which of the following is equivalent to the trade deKcit?
a. imports/exports
b. net capital inQow
c. exports + imports
d. net exports – imports
4. If U.S. imports total $100 billion and U.S. exports total $150 billion,
which of the following would be true?
a. U.S. net exports equal –$50 billion
b. The U.S. has a trade surplus of $50 billion.
c. The U.S. has a trade deKcit of $100 billion.
d. The U.S. has a trade deKcit of $50 billion.
5. What does a positive U.S. capital inQow signify?
a. Nothing.
b. That the government is running a budget deKcit.
c. That more funds were invested in the United States by
foreigners than the United States invested abroad.
d. That the United States is running a trade surplus.
6. International trade in Knancial assets
a. increases risk because little is known about Krms in foreign lands.
b. increases risk because default risk is greater in foreign countries.
c. increases risk because of currency Quctuations.
d. reduces risk by allowing for increased diversiKcation.
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7. It must always be true that net capital outQow
a. is greater than net exports.
b. is less than net exports.
c. is equal to net exports.
d. equals 0.
8. If savings in Germany is $300 billion and investment in Germany is
$550 billion, then
a. there must be net capital outQow of –$550 billion.
b. there must be net capital outQow of –$250 billion.
c. the German government must be running a $250 billion surplus.
d. the German Knancial market must be experiencing a net capital
outQow.
9. If interest rates in Canada rise above those in the rest of the world, then
a. the demand for Canadian dollars decreases.
b. exports from Canada to other countries increases.
c. imports into Canada from other countries decreases.
d. it raises Canada’s exchange rate and this may result in a deKcit
on Canada’s current account.
10. Foreign direct investment di[ers from foreign portfolio investment in that
a. direct investments involve stocks and bonds.
b. direct investments can only be made by the International Monetary
Fund.
c. direct investments involve physical capital; portfolio
investments involve Knancial capital
d. a government must be involved in direct investment, but portfolio
investment can involve private Krms.
11. Which of the following would be classiKed as a direct foreign investment?
a. a purchase of 100 shares of British Petroleum stock
b. a loan of $1 million to a Brazilian utilities Krm
c. A loan of $1 million from the World Bank to Surinam
d. building a new Pizza Hut in St. Petersburg, Russia
12. Net capital outQow measures
a. the Qow of goods and services between countries.
b. the Qow of assets between countries.
c. government budget surpluses and deKcits relative to those
experienced in other countries.
d. the amount of physical capital built in foreign countries.
13. U.S. trade deKcits (thâm hụt thương mại) are a sign of
a. reduced national savings.
b. reduced production of manufactured goods.
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Chapter Open-Economy Macroeconomics: Basic Concepts
 185
c. an over reliance on the service economy.
d. high rates of unemployment in the U.S. economy.
14. The exchange rate (tỷ giá hối đói) is the
a. value of money.
b. quantity of dollars, yen, etc., that are traded on currency markets.
c. amount of foreign currency that is used to buy goods made in your
country.
d. number of units of a foreign currency that can be bought with one
unit of your own currency.
15. If you were told that the exchange rate was 1.5 U.S. dollars per 1
Canadian dollar (CDN), that would mean that Canadians would have to
spend to by
a
$12 watch in New York City. (
a. $8 CDN
b. $15 CDN
c. $1.5 CDN
d. $12 CDN
16. Currencies depreciate and appreciate all the time. Who gains and who
loses when the Mexican peso depreciates?
a. Americans holding Mexican pesos gain, U.S. tourists to Mexico lose.
b. U.S. exporters to Mexico gain, Americans holding pesos lose.
c. Mexican exporters gain, Mexican importers lose.
d. Mexican importers gain, Mexican exporters lose.
17. When Italy devalues its currency
a. the dollars per Italian lira will increase.
b. the drain of U.S. reserves on Italian lira will fall.
c. U.S. exports to Italy will increase.
d. the price of imported Italian olive oil in the United States will fall.
18. When fewer U.S. dollars are needed to buy a unit of Japanese yen, the
dollar
a. is devalued.
b. is inQated.
c. appreciates.
d. depreciates.
19. If one country has a lower inQation rate than other countries, its
a. currency tends to appreciate.
b. currency tends to depreciate.
c. real interest rate will be higher than in other countries.
d. nominal interest rate will be higher than in other countries.
20. In the long run, exchange rates
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186  Chapter Open-Economy Macroeconomics: Basic Concepts
a. are determined by business cycle Quctuations.
b. are determined by movements of Eurodollars.
c. will adjust until the price of a bundle of goods is the same in both
countries.
d. will reQect economic Quctuations in both countries.
21. Which of the following is a statement of the purchasing power parity
theory of exchange rate determination? The exchange rate will
adjust in the
a. long run until the interest rate is roughly the same in both countries.
b. long run until real GDP is roughly the same in both countries.
c. long run until the average price of goods is roughly the same in both
countries.
d. short run until the average price of goods is roughly the same in both
countries.
22. Suppose the same basket of goods costs $100 in the U.S. and 50
pounds in Britain. According to PPP, if the prices do not change, what
will be the exchange rate?
a. 2 dollars/pound
b. 4 dollars/pound
c. 5 dollars/pound
d. .5 dollars/pound
23. Which of the following is a reason why exchange rates may deviate
from their purchasing power parity values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect
substitute for a domestically-produced version of the same
thing.
c. In some markets, import quotas limit the ability of Krms to agree on
exchange prices.
d. Both a and b are correct.
24. If the U.S. price level is increasing by 3 percent annually and the Swiss
price level is increasing by 5 percent annually, by what percent would
the dollar price of francs need to change according to purchasing power
parity?
a. depreciate by 5 percent
b. appreciate by 3 percent
c. appreciate by 5 percent
d. depreciate by 2 percent
25. Arbitrage (kinh doanh chênh lệch giá)refers to
a. simultaneously buying and selling a currency in order to proKt from a
di[erence in exchange rates.
b. simultaneously buying and selling a currency in order to change the
exchange rate.
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c. buying a currency when its price is high and selling it when its price is
low.
d. exchanging the domestic currency for a foreign currency.

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