Question 1

If a nation is selling more goods and services to foreigners than it is buying from them, then on net it must be buying assets abroad.

Accepted Answer

A nation having a surplus on its balance of trade, i.e. exporting more than importing, means that it is receiving more foreign currency than it is paying out. This surplus can be used to invest in buying assets abroad.

Question 2

From 2008 to 2012 both U.S. saving and U.S. investment fell.

Accepted Answer

According to data from the Bureau of Economic Analysis, U.S. saving as a percentage of GDP fell from 5.2% in 2008 to 2.1% in 2012, while U.S. investment as a percentage of GDP fell from 19.9% in 2008 to 16.1% in 2012.

Question 3

If the price of a good in the U.S. is $10, the exchange rate is 2 units of foreign currency per dollar, and the foreign price of the same good is 30 units of foreign currency, then the real exchange rate is 2/3.

Accepted Answer

The real exchange rate is calculated by dividing the foreign price by the domestic price and multiplying by the exchange rate.

(30 units of foreign currency / $10) * (2 units of foreign currency per dollar) = 6 units of foreign currency per dollar

Therefore, the real exchange rate is 2/3 or 0.666.

Question 4

In an open economy, national saving can be less than investment.

Accepted Answer

In an open economy, there can be capital inflows from other countries that can supplement domestic investment and allow it to exceed national saving. This can lead to a current account deficit, as the country is borrowing from other countries to finance its investment.

Question 5

If Walmart buys $50 million worth of consumer goods from China and sells them in the U.S., and China uses the $50 million to purchase U.S. bonds, U.S. net exports and U.S. net capital outflow both fall.

Accepted Answer

The answer of If Walmart buys $50 million worth of...

Question 6

A nation with a trade surplus will necessarily have saving that is greater than domestic investment.

Accepted Answer

A trade surplus means that a country's exports exceed its imports, resulting in an inflow of foreign currency. This leads to an increase in the country's savings since the excess currency is saved or invested in other countries. However, if the savings are not invested domestically, it will result in a decrease in domestic investment. Thus, a nation with a trade surplus will necessarily have savings greater than domestic investment.

Question 7

If a German firm buys goods from a U.S. firm with dollars it obtains by exchanging euros for dollars, both U.S. net exports and U.S. net capital outflow increase.

Accepted Answer

When a German firm buys goods from a U.S. firm with dollars obtained by exchanging euros for dollars, it increases U.S. net exports because the U.S. is exporting goods to Germany. Additionally, it increases U.S. net capital outflow because the German firm is using euros to buy dollars in order to purchase the goods, which means they are investing in the U.S. and increasing U.S. assets held by foreign investors.

Question 8

If a nation is selling more goods and services to foreigners than it is buying from them, then on net it must be selling assets abroad.

Accepted Answer

If a nation is selling more goods and services to foreigners than it is buying from them, it has a trade surplus, not necessarily selling assets abroad. This means it is earning more from exports than it spends on imports, which can increase its foreign reserves or be invested in foreign assets, but doesn't imply a net sale of domestic assets to foreigners.

Question 9

The increase in the trade deficit in the 1980's reflected a decrease in national saving that is associated with an increase in the government budget deficit.

Accepted Answer

The decrease in national saving led to a decrease in the supply of loanable funds, which increased interest rates and in turn caused an inflow of foreign capital that increased the trade deficit. This decrease in national saving was partly due to the increase in the government budget deficit during the 1980s.

Question 10

The large trade deficits in the U.S. during the 1990's were primarily associated with a rise in domestic investment spending rather than a rise in the budget deficit.

Accepted Answer

The statement is true according to economic analysis. The increase in domestic investment spending led to a greater demand for imported goods, which in turn contributed to the trade deficits. The budget deficit was not the primary driver of these deficits.

Question 11

When U.S. national saving rises, domestic investment also necessarily rises.

Accepted Answer

An increase in U.S. national saving does not necessarily lead to an increase in domestic investment. The relationship depends on various factors, including interest rates, economic conditions, and the global financial market. Increased savings can lead to higher investment, but it can also result in increased capital outflows to foreign investments.

Question 12

It is possible for a country to have domestic investment that exceeds national saving.

Accepted Answer

This is possible if the country is borrowing from foreign countries to finance its domestic investment. The difference between domestic investment and national saving is made up by borrowing from abroad. However, this can lead to high levels of foreign debt and pose risks to the country's economy.

Question 13

Other things the same, if U.S. net capital outflow rises, so does U.S. saving.

Accepted Answer

The answer of Other things the same, if U.S. net...

Question 14

If a country's trade surplus falls, its net capital outflow rises.

Accepted Answer

A country's trade surplus falling does not necessarily mean its net capital outflow rises. Trade surplus is the difference between a country's exports and imports, while net capital outflow is the difference between domestic investments abroad and foreign investments in the domestic economy. These two are related but not directly proportional; changes in one do not automatically lead to specific changes in the other.

Question 15

Other things the same, an increase in the nominal exchange rate raises the real exchange rate.

Accepted Answer

An increase in the nominal exchange rate means that the domestic currency has appreciated relative to a foreign currency. This means that more foreign currency can be purchased with each unit of domestic currency, leading to an increase in the real exchange rate (the purchasing power of the domestic currency relative to foreign currency).

Question 16

If the exchange rate is 80 yen per dollar, then a hotel room in Tokyo that costs 25,000 yen costs $200.

Accepted Answer

To convert yen to dollars, we need to divide by the exchange rate, not multiply. So, 25,000 yen divided by 80 yen per dollar equals $312.50.

Question 17

To increase domestic investment, a country must increase its saving.

Accepted Answer

The answer of To increase domestic investment, a country must...

Question 18

A Turkish firm exchanges lira (Turkish currency) for dollars. It then uses these dollars to purchase computers from the U.S. These actions decrease U.S. net capital outflow and increase U.S. net exports.

Accepted Answer

The exchange of lira for dollars and subsequent purchase of computers from the U.S. would increase U.S. net exports due to the sale of goods abroad, but it would not affect U.S. net capital outflow, which pertains to U.S. investments abroad minus foreign investments in the U.S.

Question 19

In an open economy national saving equals domestic investment plus net capital outflow.

Accepted Answer

This is a fundamental equation in macroeconomics, known as the saving-investment identity. It states that the total amount of saving in the economy (including private saving and government saving) must be equal to the total amount of investment (which includes domestic investment in physical capital) plus the net outflow of capital (which is the difference between the amount of capital flowing into the country and the amount flowing out of the country). In an open economy, where capital can flow freely across borders, net capital outflow can be positive (capital is flowing out of the country) or negative (capital is flowing into the country).

Question 20

If the exchange rate is 12.5 pesos per U.S. dollar, it is also 1/12.5 U.S. dollars per peso.

Accepted Answer

This statement is true because the exchange rate is a reciprocal relationship between two currencies. If 1 U.S. dollar is worth 12.5 pesos, then 1 peso is worth 1/12.5 U.S. dollars.

Quiz 31: Open-Economy Macroeconomics: Basic Concepts