Question 1

Net exports equals the balance of trade surplus.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy?

Accepted Answer

A)  consumption 
B)  private investment 
C)  net exports 
D)  All of the above are crowded out by higher interest rates. 
A)  consumption 
B)  private investment 
C)  net exports 
D)  All of the above are crowded out by higher interest rates.

Question 3

You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera?

Accepted Answer

A)  105 euros 
B)  106.25 euros 
C)  110.15 euros 
D)  147 euros 
A)  105 euros 
B)  106.25 euros 
C)  110.15 euros 
D)  147 euros

Question 4

Currency traders expect the dollar to appreciate. What impact will this have on equilibrium in the foreign exchange market?

Accepted Answer

A)  The dollar will appreciate, and the equilibrium quantity of dollars will decrease. 
B)  The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease. 
C)  The dollar will appreciate, and the equilibrium quantity of dollars will increase. 
D)  The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined. 
A)  The dollar will appreciate, and the equilibrium quantity of dollars will decrease. 
B)  The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease. 
C)  The dollar will appreciate, and the equilibrium quantity of dollars will increase. 
D)  The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined.

Question 5

How will contractionary monetary policy in Japan affect the demand for the yen and the supply of the yen in the foreign exchange market?

Accepted Answer

A)  The demand for the yen will fall, and the supply of the yen will increase. 
B)  The demand for the yen will increase, and the supply of the yen will fall. 
C)  The demand for the yen will fall, and the supply of the yen will fall. 
D)  The demand for the yen will increase, and the supply of the yen will increase. 
A)  The demand for the yen will fall, and the supply of the yen will increase. 
B)  The demand for the yen will increase, and the supply of the yen will fall. 
C)  The demand for the yen will fall, and the supply of the yen will fall. 
D)  The demand for the yen will increase, and the supply of the yen will increase.

Question 6

What is the relationship between the balance of trade and the current account balance?

Accepted Answer

The balance of trade measures the differ

Question 7

Expansionary monetary policy will have what effect on the components of aggregate demand?

Accepted Answer

A)  Consumption, investment, and net exports will rise. 
B)  Consumption and investment will rise, but net exports will fall. 
C)  Consumption will rise, but investment and net exports will fall. 
D)  Consumption will fall, but investment and net exports will rise. 
A)  Consumption, investment, and net exports will rise. 
B)  Consumption and investment will rise, but net exports will fall. 
C)  Consumption will rise, but investment and net exports will fall. 
D)  Consumption will fall, but investment and net exports will rise.

Question 8

In an open economy, the current account balance equals ________. (Assume that the capital account is zero and net transfers are zero.)

Accepted Answer

A)  net foreign investment + domestic investment 
B)  net capital outflows 
C)  the financial account balance + net income on investments 
D)  net foreign investment 
A)  net foreign investment + domestic investment 
B)  net capital outflows 
C)  the financial account balance + net income on investments 
D)  net foreign investment

Question 9

If the current account is in deficit and the capital account is zero, then

Accepted Answer

A)  the financial account must be in surplus. 
B)  the balance of trade must be in surplus. 
C)  the balance of payments must be in surplus. 
D)  there is a capital outflow. 
E)  the balance of services must be in surplus. 
A)  the financial account must be in surplus. 
B)  the balance of trade must be in surplus. 
C)  the balance of payments must be in surplus. 
D)  there is a capital outflow. 
E)  the balance of services must be in surplus.

Question 10

If the balance on the current account in the United States is $750 billion, which of the following is most likely to be true?

Accepted Answer

A)  The balance on the financial account is negative. 
B)  The trade balance is negative. 
C)  Net foreign investment is negative. 
D)  The balance on the capital account is positive. 
A)  The balance on the financial account is negative. 
B)  The trade balance is negative. 
C)  Net foreign investment is negative. 
D)  The balance on the capital account is positive.

Question 11

Figure 29-1  
-Refer to Figure 29-1. The appreciation of the euro is represented as a movement from

Accepted Answer

A)  D to A. 
B)  D to C. 
C)  B to C. 
D)  A to C. 
E)  A to B. 
A)  D to A. 
B)  D to C. 
C)  B to C. 
D)  A to C. 
E)  A to B.

Question 12

Ceteris paribus, an increase in the government budget deficit increases interest rates in the United States and causes a real appreciation of the dollar.

Accepted Answer

A) True 
 B)False

Question 13

How does an increase in a country's exchange rate affect its balance of trade?

Accepted Answer

A)  An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. 
B)  An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. 
C)  An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. 
D)  An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade. 
A)  An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. 
B)  An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. 
C)  An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. 
D)  An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade.

Question 14

The late Hugo Chavez, Venezuela's former president, proposed that the independence of the Venezuelan central bank be eliminated. Given the research on the relationship between central bank independence and inflation, we should expect this event to cause inflation to ________ and the real exchange rate to ________ between the two counties. (Assume the nominal exchange does not change, and that the United States is the domestic country).

Accepted Answer

A)  rise in Venezuela relative to the United States; fall 
B)  fall in Venezuela relative to the United States; fall 
C)  rise in Venezuela relative to the United States; rise 
D)  fall in Venezuela relative to the United States; rise 
A)  rise in Venezuela relative to the United States; fall 
B)  fall in Venezuela relative to the United States; fall 
C)  rise in Venezuela relative to the United States; rise 
D)  fall in Venezuela relative to the United States; rise

Question 15

How will an interest rate decrease in the United States affect equilibrium in the foreign exchange market?

Accepted Answer

A)  The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined. 
B)  The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined. 
C)  The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase. 
D)  The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase. 
A)  The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined. 
B)  The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined. 
C)  The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase. 
D)  The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase.

Question 16

Assuming no change in the nominal exchange rate, how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)

Accepted Answer

A)  The real exchange rate will rise. 
B)  The real exchange rate will fall. 
C)  The real exchange rate will be unaffected. 
D)  The impact on the real exchange rate cannot be predicted. 
A)  The real exchange rate will rise. 
B)  The real exchange rate will fall. 
C)  The real exchange rate will be unaffected. 
D)  The impact on the real exchange rate cannot be predicted.

Question 17

Ceteris paribus, an increase in the government's budget deficit will decrease the financial account surplus.

Accepted Answer

A) True 
 B)False

Question 18

The impact of crowding out

Accepted Answer

A)  is larger in a closed economy as compared to an open economy. 
B)  is larger in an open economy as compared to a closed economy. 
C)  is larger in an open economy as compared to a closed economy when fiscal policy is contractionary. 
D)  is larger in a closed economy as compared to an open economy when fiscal policy is contractionary. 
A)  is larger in a closed economy as compared to an open economy. 
B)  is larger in an open economy as compared to a closed economy. 
C)  is larger in an open economy as compared to a closed economy when fiscal policy is contractionary. 
D)  is larger in a closed economy as compared to an open economy when fiscal policy is contractionary.

Question 19

How does a decrease in the federal budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?

Accepted Answer

A)  The demand for dollars falls, and the supply of dollars falls. 
B)  The demand for dollars rises, and the supply of dollars rises. 
C)  The demand for dollars rises, and the supply of dollars falls. 
D)  The demand for dollars falls, and the supply of dollars rises. 
A)  The demand for dollars falls, and the supply of dollars falls. 
B)  The demand for dollars rises, and the supply of dollars rises. 
C)  The demand for dollars rises, and the supply of dollars falls. 
D)  The demand for dollars falls, and the supply of dollars rises.

Question 20

Which of the following would decrease the balance on the current account?

Accepted Answer

A)  a decrease in foreign direct investment 
B)  a decrease in the amount of aid money the government sends abroad 
C)  a decrease in imports 
D)  None of the above will increase the balance on the current account. 
A)  a decrease in foreign direct investment 
B)  a decrease in the amount of aid money the government sends abroad 
C)  a decrease in imports 
D)  None of the above will increase the balance on the current account.

Exam 29: Macroeconomics in an Open Economy

Net exports equals the balance of trade surplus.

Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy?

Currency traders expect the dollar to appreciate. What impact will this have on equilibrium in the foreign exchange market?

How will contractionary monetary policy in Japan affect the demand for the yen and the supply of the yen in the foreign exchange market?

What is the relationship between the balance of trade and the current account balance?

Expansionary monetary policy will have what effect on the components of aggregate demand?

In an open economy, the current account balance equals ________. (Assume that the capital account is zero and net transfers are zero.)

If the current account is in deficit and the capital account is zero, then

If the balance on the current account in the United States is $750 billion, which of the following is most likely to be true?

Figure 29-1 -Refer to Figure 29-1. The appreciation of the euro is represented as a movement from

Ceteris paribus, an increase in the government budget deficit increases interest rates in the United States and causes a real appreciation of the dollar.

How does an increase in a country's exchange rate affect its balance of trade?

How will an interest rate decrease in the United States affect equilibrium in the foreign exchange market?

Assuming no change in the nominal exchange rate, how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)

Ceteris paribus, an increase in the government's budget deficit will decrease the financial account surplus.

The impact of crowding out

How does a decrease in the federal budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?

Which of the following would decrease the balance on the current account?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

The International Financial System

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