Question 1

If the UK's money supply grows faster than Switzerland's, the value of the pound should rise relative to the value of the Swiss franc.

Accepted Answer

A faster growth in the UK's money supply compared to Switzerland's typically leads to inflationary pressures, which can decrease the value of the pound relative to the Swiss franc.

Question 2

Which of the following would directly increase UK net capital outflow?

Accepted Answer

Net capital outflow increases when domestic residents invest in foreign assets. BP building an oil rig in Venezuela is an example of a UK company investing abroad, thus increasing UK net capital outflow.

Question 3

A country's trade balance is positive when

Accepted Answer

A country's trade balance is positive when its exports exceed its imports, indicating that it is exporting more goods and services than it is importing. This is often seen as a favorable economic indicator, as it can lead to increased production, job creation, and economic growth.

Question 4

Arbitrage is the process of taking advantage of differences in prices of the same good by buying where the good is cheap and selling where it is expensive.

Accepted Answer

This is the definition of arbitrage.

Question 5

Each of the following is a reason why international trade has expanded in recent decades except which one?

Accepted Answer

While the other choices all provide reasons for the expansion of international trade, choice A does not accurately reflect a reason for this expansion. In fact, technological improvements have often led to greater specialization among countries, meaning that they may be more dissimilar in terms of the goods they produce.

Question 6

Which of the following is equivalent to the trade deficit?

Accepted Answer

A trade deficit occurs when a country's imports exceed its exports, which is offset by a net capital inflow.

Question 7

Which of the following statements is true about a country with a trade deficit?

Accepted Answer

A trade deficit occurs when a country's imports exceed its exports, which means that net exports (exports minus imports) are negative.

Question 8

Which of the following would be recorded as an UK merchandise export?

Accepted Answer

A French car hire firm purchasing Honda cars built in the UK would be recorded as a UK merchandise export, as the cars physically leave the UK and enter France. Choices A, B, and C are not recorded as merchandise exports, as they do not involve the physical movement of goods across borders.

Question 9

For a given amount of UK national saving, an increase in UK net capital outflow decreases UK domestic investment.

Accepted Answer

Net capital outflow represents the difference between the amount of national saving that is invested domestically and the amount of national saving that is invested abroad. An increase in net capital outflow means that more money is being invested abroad, leaving less available for domestic investment. Therefore, an increase in net capital outflow decreases UK domestic investment.

Question 10

If the yen/euro exchange rate rises, the euro has appreciated.

Accepted Answer

An increase in the yen/euro exchange rate means that it now takes more yen to buy one euro. This indicates that the euro has become relatively more valuable in comparison to the yen, meaning it has appreciated.

Question 11

A country that exports more than it imports is said to have a trade deficit.

Accepted Answer

A country that exports more than it imports is said to have a trade surplus, not a trade deficit.

Question 12

If a company based in the UK prefers a strong pound (a pound with a high foreign exchange value), then the company probably exports more than it imports

Accepted Answer

A strong pound makes exports more expensive and imports cheaper, so a company that exports more than it imports would prefer a weaker pound to make its products more affordable in foreign markets.

Question 13

If UK imports total £100 billion and UK exports total £150 billion, which of the following would be true?

Accepted Answer

Net exports are calculated as exports minus imports. Here, £150 billion - £100 billion = £50 billion, indicating a trade surplus.

Question 14

If a case of mineral water is priced at €8 in the eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/euro exchange rate should be 5,760 yen/euro.

Accepted Answer

According to purchasing power parity, the exchange rate should equalize the price of the goods in both countries. If a case of mineral water is €8 in the eurozone and 720 yen in Japan, the exchange rate should be 720 yen/€8 = 90 yen/euro, not 5,760 yen/euro.

Question 15

If the nominal exchange rate is 2 UK pounds per 1 US dollar, and if the price of a Big Mac is $2 in the USA and £6 in the UK, then the real exchange rate is 2/3 British Big Mac per American Big Mac.

Accepted Answer

The real exchange rate is calculated as the ratio of the price of a basket of goods in two different countries. In this case, the basket of goods is a Big Mac. To calculate the real exchange rate, we need to divide the price of a UK Big Mac by the price of a US Big Mac, multiplied by the exchange rate.

(£6 per Big Mac) / ($2 per Big Mac x 2 pounds per dollar) = 3/1

Therefore, the real exchange rate is 3 British Big Macs per US Big Mac, or 2/3 US Big Macs per British Big Mac.

Question 16

If Spain has a positive capital inflow, what does this signify?

Accepted Answer

A positive capital inflow means that more foreign funds were invested in Spain than Spain invested abroad. This indicates that there is foreign interest in the Spanish market and that foreign investors have confidence in Spain's economy. It does not necessarily signify anything about the government's budget deficit or the country's trade surplus.

Question 17

An economy that interacts with other economies is known as

Accepted Answer

An open economy is one that interacts with other economies through trade, investments, and other forms of economic transactions. It does not necessarily mean that the economy only imports or exports goods and services, but rather it is open to the global market and integrates with other economies.

Question 18

For any country, net exports are always equal to net capital outflow because every international transaction involves an exchange of an equal value of some combination of goods and assets.

Accepted Answer

Net exports (exports minus imports) must equal net capital outflow (the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners) because the value of goods and services traded internationally is balanced by the flow of capital.

Question 19

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

Accepted Answer

Foreign direct investment involves a company from one country making a direct investment in a company or project in another country. Building a McDonald's restaurant in Moscow is an example of foreign direct investment. Option A is a simple purchase of goods and does not involve investment in a company or project. Option B is the purchase of shares of a foreign company but is not a direct investment in a new company or project. Option D is a licensing agreement and does not involve direct investment in a company or project.

Question 20

If purchasing power parity holds, the real exchange rate is always equal to 1.

Accepted Answer

If purchasing power parity holds, the real exchange rate between two countries will always be equal to 1. This means that the exchange rate between two currencies takes into account the differences in the countries' inflation rates, so that the same basket of goods costs the same in both countries. When the real exchange rate is equal to 1, it means that the exchange rate is in line with what the purchasing power parity theory predicts. However, this is not always the case in practice.

Quiz 29: Open-Economy Macroeconomics: Basic Concepts