Macroeconomics [ch. 18]
- 1.
An economy that interacts with other economies is known as
- A.
A balanced trade economy
- B.
An export economy
- C.
An import economy
- D.
A closed economy
- E.
An open economy
Correct Answer
E. An open economyExplanation
An economy that interacts with other economies is known as an open economy. In an open economy, there is a significant level of trade and exchange of goods, services, and capital with other countries. This interaction allows for the flow of imports and exports, foreign investments, and international economic cooperation. Unlike a closed economy, which has limited or no interaction with other economies, an open economy benefits from increased opportunities for growth, innovation, and specialization through international trade and investment.Rate this question:
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- 2.
Each of the following is a reason why the U.S. economy continues to engage in greater amounts of international trade except which one?
- A.
There are larger cargo ships and airplanes
- B.
High-technology goods are more valuable per pound and, thus, more likely to be traded
- C.
NAFTA imposes requirements for increase trade between countries in North America
- D.
There have been improvements in technology that have improved telecommunications between countries
- E.
All of the above are reasons for increase trade by the U.S.
Correct Answer
C. NAFTA imposes requirements for increase trade between countries in North AmericaExplanation
The correct answer is "NAFTA imposes requirements for increase trade between countries in North America." This statement suggests that NAFTA, which is a trade agreement between the United States, Canada, and Mexico, does not impose requirements for increased trade between these countries. The other options provided in the question, such as larger cargo ships and airplanes, high-technology goods, and improvements in technology, all contribute to the increase in international trade by the U.S.Rate this question:
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- 3.
Which of the following statements is true about a country with a trade deficit?
- A.
Net capital outflow must be positive
- B.
Net exports are negative
- C.
Net exports are positive
- D.
Exports exceed imports
- E.
None of the above is true
Correct Answer
B. Net exports are negativeExplanation
A country with a trade deficit means that its imports exceed its exports. This implies that the value of goods and services leaving the country (exports) is less than the value of goods and services entering the country (imports). Therefore, net exports, which is the difference between exports and imports, will be negative.Rate this question:
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- 4.
Which of the following is an example of foreign direct investment?
- A.
McDonald's builds a restaurant in Moscow
- B.
Columbia Pictures sells the rights to a movie to a Russia movie studio
- C.
General Motors buys stock in Volvo
- D.
General Motors buys steel from Japan
Correct Answer
A. McDonald's builds a restaurant in MoscowExplanation
McDonald's building a restaurant in Moscow is an example of foreign direct investment because it involves a company from one country (McDonald's) establishing and operating a business (restaurant) in another country (Moscow). This type of investment involves a significant level of ownership and control by the foreign company in the host country, and it typically includes the transfer of capital, technology, and expertise. In this case, McDonald's is directly investing in the Russian market by establishing a physical presence and contributing to the local economy.Rate this question:
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- 5.
Which of the following would directly increase U.S. net capital outflow?
- A.
General Electric sells an aircraft engine to Airbus in Great Britain
- B.
Microsoft builds a new distribution facility in Sweden
- C.
Honda builds a new plant in Ohio
- D.
Toyota buys stock in AT&T
Correct Answer
B. Microsoft builds a new distribution facility in SwedenExplanation
Microsoft building a new distribution facility in Sweden would directly increase U.S. net capital outflow because it involves a U.S. company investing in a foreign country. When Microsoft builds a facility in Sweden, it requires a significant amount of capital investment, which will flow out of the U.S. and into Sweden. This increases the net capital outflow of the U.S. as the investment is made in a foreign country.Rate this question:
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- 6.
If Japan exports more than it imports,
- A.
Japan's net exports are negative
- B.
Japan's net capital outflow must be negative
- C.
Japan's net capital outflow must be positive
- D.
Japan is running a trade deficit
Correct Answer
C. Japan's net capital outflow must be positiveExplanation
If Japan exports more than it imports, it means that it has a trade surplus. A trade surplus indicates that Japan is selling more goods and services to other countries than it is buying from them. As a result, Japan's net capital outflow must be positive, meaning that it is investing more in foreign countries than foreign countries are investing in Japan. This positive net capital outflow is a result of the excess funds generated from the trade surplus being invested abroad.Rate this question:
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- 7.
If the United States saves $1,000 billion and U.S. net capital outflow is -$200 billion, U.S. domestic investment is
- A.
-$200 billion
- B.
$200 billion
- C.
$800 billion
- D.
$1,000 billion
- E.
$1,200 billion
Correct Answer
E. $1,200 billionExplanation
If the United States saves $1,000 billion and U.S. net capital outflow is -$200 billion, it means that the U.S. is investing more abroad than it is receiving in foreign investments. This negative net capital outflow indicates that there is a capital deficit, which implies that U.S. domestic investment is not sufficient to meet the savings. Therefore, U.S. domestic investment must be higher than the savings of $1,000 billion. The only option that reflects this is $1,200 billion, making it the correct answer.Rate this question:
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- 8.
If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar,
- A.
The dollar has depreciated
- B.
The dollar has appreciated
- C.
The dollar could have appreciated or depreciated depending on what happened to relative prices in Brazil and the United States
- D.
None of the above is true
Correct Answer
B. The dollar has appreciatedExplanation
If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar, it means that the value of the Brazilian real has decreased relative to the US dollar. Therefore, the US dollar has appreciated in value compared to the Brazilian real.Rate this question:
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- 9.
Suppose the real exchange rate between Russia and the United States is defined in terms of bottles of Russian vodka per bottle of U.S. vodka. Which of the following will increase the real exchange rate (that is, increase the number of bottles of Russian vodka per bottle of U.S. vodka)?
- A.
A decrease int he ruble price of Russian vodka
- B.
An increase in the dollar price of U.S. vodka
- C.
An increase in the number of rubles for which the dollar can be exchanged
- D.
All of the above will increase the real exchange rate
- E.
None of the above will increase the real exchange rate
Correct Answer
D. All of the above will increase the real exchange rateExplanation
All of the above options will increase the real exchange rate. A decrease in the ruble price of Russian vodka means that Russian vodka becomes cheaper relative to U.S. vodka, increasing the number of bottles of Russian vodka per bottle of U.S. vodka. An increase in the dollar price of U.S. vodka means that U.S. vodka becomes more expensive relative to Russian vodka, again increasing the number of bottles of Russian vodka per bottle of U.S. vodka. Lastly, an increase in the number of rubles for which the dollar can be exchanged means that the value of the ruble has increased, making Russian vodka relatively cheaper and increasing the real exchange rate.Rate this question:
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- 10.
The most accurate measure of the international value of the dollar is
- A.
The yen/dollar exchange rate
- B.
The Brazilian real/dollar exchange rate
- C.
The peso/dollar exchange rate
- D.
The British pound/dollar exchange rate
- E.
An exchange rate index that accounts for many exchange rates
Correct Answer
E. An exchange rate index that accounts for many exchange ratesExplanation
The most accurate measure of the international value of the dollar is an exchange rate index that accounts for many exchange rates. This is because relying on a single exchange rate, such as the yen/dollar or pound/dollar exchange rate, may not provide a comprehensive view of the dollar's value in the international market. By considering multiple exchange rates, an exchange rate index can provide a more holistic and accurate measure of the dollar's international value.Rate this question:
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- 11.
If the nominal exchange rate between British pounds and dollars is .5 pound per dollar, how many dollars can you get for a British pound?
- A.
2 dollars
- B.
1.5 dollars
- C.
1 dollar
- D.
.5 of a dollar
- E.
None of the above is correct
Correct Answer
A. 2 dollarsExplanation
The given question asks for the number of dollars that can be obtained for a British pound, given a nominal exchange rate of .5 pound per dollar. Since the exchange rate is given as .5 pound per dollar, it means that for every 1 pound, you can get 2 dollars. Therefore, the correct answer is 2 dollars.Rate this question:
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- 12.
Suppose the nominal exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. Further, suppose that a pound of hamburger costs $2 in the United States and 250 yen in Japan. What is the real exchange rate between Japan and the United States?
- A.
.5 pound of Japanese hamburger/pound of American hamburger
- B.
.8 pound of Japanese hamburger/pound of American hamburger
- C.
1.25 pounds of Japanese hamburger/pound of American hamburger
- D.
2.5 pounds of Japanese hamburger/pound of American hamburger
- E.
None of the above
Correct Answer
B. .8 pound of Japanese hamburger/pound of American hamburgerExplanation
The real exchange rate between Japan and the United States can be calculated by dividing the nominal exchange rate by the ratio of the price levels in Japan and the United States. In this case, the nominal exchange rate is 100 yen per dollar. The price of a pound of hamburger is $2 in the United States and 250 yen in Japan. By dividing the price level in Japan (250 yen) by the price level in the United States ($2), we get 125 yen per dollar. Therefore, the real exchange rate is .8 pound of Japanese hamburger per pound of American hamburger.Rate this question:
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- 13.
Which of the following people or firms would be pleased by a depreciation of the dollar?
- A.
A U.S. tourist traveling in Europe
- B.
A U.S. importer of Russian vodka
- C.
A French exporter of wine to the United States
- D.
An Italian importer of U.S. steel
- E.
A Saudi Arabian prince exporting oil to the United States
Correct Answer
D. An Italian importer of U.S. steelExplanation
An Italian importer of U.S. steel would be pleased by a depreciation of the dollar because it would make the U.S. steel cheaper for them to import. A depreciation of the dollar means that the value of the dollar decreases compared to other currencies, making imports from the United States more affordable. This would benefit the Italian importer as they would be able to purchase U.S. steel at a lower cost, potentially increasing their profit margins or allowing them to offer more competitive prices to their customers.Rate this question:
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- 14.
Suppose a cup of coffee is 1.5 euros in Germany and $.50 in the United States. If purchasing-power parity holds, what is the nominal exchange rate between euros and dollars?
- A.
1/3 euro per dollar
- B.
3 euros per dollar
- C.
1.5 euros per dollar
- D.
.75 euro per dollar
Correct Answer
B. 3 euros per dollarExplanation
According to purchasing-power parity, the nominal exchange rate should equalize the prices of goods and services in different countries. In this case, the price of a cup of coffee is 1.5 euros in Germany and $.50 in the United States. To equalize these prices, the nominal exchange rate between euros and dollars should be such that 1.5 euros is equal to $.50. To find this rate, we divide 1.5 euros by $.50, which gives us 3 euros per dollar. Therefore, the correct answer is 3 euros per dollar.Rate this question:
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- 15.
Which of the following products would likely be the least accurate if used to calculate purchasing-power parity?
- A.
Gold
- B.
Automobiles
- C.
Diamonds
- D.
Dental services
Correct Answer
D. Dental servicesExplanation
Dental services would likely be the least accurate product to calculate purchasing-power parity because the cost of dental services can vary significantly between countries due to factors such as different levels of healthcare infrastructure, labor costs, and regulations. Unlike physical products like gold, automobiles, or diamonds, dental services are highly dependent on local factors and may not have consistent pricing across different countries. Therefore, using dental services as a measure for purchasing-power parity may not provide an accurate comparison of the cost of living between countries.Rate this question:
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- 16.
Suppose the money supply in Mexico grows more quickly than the money supply in the United States. We would expect that
- A.
The peso should depreciate relative to the dollar
- B.
The peso should appreciate relative to the dollar
- C.
The peso should maintain a constant exchange rate with the dollar because of purchasing-power parity
- D.
None of the above is true
Correct Answer
A. The peso should depreciate relative to the dollarExplanation
If the money supply in Mexico grows more quickly than the money supply in the United States, it would lead to an increase in the supply of pesos in the foreign exchange market. This increase in supply would cause the value of the peso to decrease relative to the dollar, resulting in depreciation. Therefore, the correct answer is that the peso should depreciate relative to the dollar.Rate this question:
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- 17.
When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as
- A.
Purchasing-power parity
- B.
Net capital outflow
- C.
Arbitrage
- D.
Net exports
- E.
Currency appreciation
Correct Answer
C. ArbitrageExplanation
Arbitrage refers to the practice of exploiting price differences for the same good in different locations. In this scenario, individuals take advantage of lower prices in one area by purchasing the good and then selling it in another area where it is more expensive. This allows them to make a profit by capitalizing on the price disparity. Therefore, the correct answer is arbitrage.Rate this question:
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- 18.
Suppose a U.S. resident buys a Jaguar automobile from Great Britain and the British exporter uses the receipts to buy stock in General Electric. Which of the following statements is true from the perspective of the United States?
- A.
Net exports fall, and net capital outflow falls
- B.
Net exports rise, and net capital outflow rises
- C.
Net exports fall, and net capital outflow rises
- D.
Net exports rise, and net capital outflow rises
- E.
None of the above is true
Correct Answer
A. Net exports fall, and net capital outflow fallsExplanation
When a U.S. resident buys a Jaguar from Great Britain, it is considered an import, which reduces net exports. The British exporter then uses the receipts to buy stock in General Electric, which is considered a capital outflow from the United States. Therefore, net capital outflow also falls.Rate this question:
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- 19.
Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?
- A.
Saving is the sum of investment and net capital outflow
- B.
For a given amount of saving, an increase in net capital outflow must decrease domestic investment
- C.
For a given amount of saving, a decrease in net capital outflow must decrease domestic investment
- D.
An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged
Correct Answer
C. For a given amount of saving, a decrease in net capital outflow must decrease domestic investmentExplanation
A decrease in net capital outflow means that there is less investment abroad, which in turn means that more capital is available domestically. This increase in domestic capital should lead to an increase in domestic investment rather than a decrease. Therefore, the statement that a decrease in net capital outflow must decrease domestic investment is not true.Rate this question:
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- 20.
Suppose the inflation rate over the last 20 years has been 10 percent in Great Britain, 7 percent in Japan, and 3 percent in the United States. If purchasing-power parity holds, which of the following statements is true? Over this period,
- A.
The value of the dollar should have fallen compared to the value of the pound and the yen
- B.
The yen should have risen in the value compared to the pound and fallen compared to the dollar
- C.
The yen should have fallen in value compared to the pound and risen compared to the dollar
- D.
The value of the pound should have risen compared to the value of the yen and the dollar
- E.
None of the above is true
Correct Answer
B. The yen should have risen in the value compared to the pound and fallen compared to the dollarExplanation
Over the last 20 years, if the inflation rate in Great Britain has been higher than that in Japan and the United States, then the value of the pound should have risen compared to the yen and the dollar. On the other hand, if the inflation rate in Japan has been lower than that in Great Britain and the United States, then the yen should have fallen in value compared to the pound and risen compared to the dollar. Therefore, the statement that "the yen should have risen in value compared to the pound and fallen compared to the dollar" is true.Rate this question:
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