Question 1

A country's balance of payments is made up of:

Accepted Answer

A country's balance of payments consists of the current account (which includes goods and services trade, income receipts, and unilateral transfers) and the financial account (which includes capital flows and foreign direct investment). Therefore, choice B is the correct answer as it includes both the current and financial accounts.

Question 2

In 2013, the United States:

Accepted Answer

According to data from the Bureau of Economic Analysis, the United States had a current account deficit in 2013, meaning that the value of goods and services imported exceeded the value of goods and services exported.

Question 3

Holding everything else constant, a decrease in political risk in a country will MOST likely cause:

Accepted Answer

A decrease in political risk will make investors more confident in the stability of the country, and therefore more likely to invest capital. This will result in an increase in capital inflows into the country.

Question 4

Fast-growing economies often have a greater demand for loanable funds than do slower-growing economies because fast-growing economies:

Accepted Answer

Fast-growing economies have more investment opportunities, which require a greater demand for loanable funds to finance projects and expand businesses. This is because high rates of economic growth typically attract more investment, both domestic and foreign, leading to a higher demand for credit. A high private savings rate may lower the demand for loans, while a high public savings rate may make more funds available for investment, but these factors are not necessarily the main driver of increased demand for loanable funds in a fast-growing economy. A surplus balance of payments may indicate strong economic performance, but it does not directly affect the demand for loans.

Question 5

The United States dollar-Mexican peso exchange market is initially in equilibrium. Suppose there is a decrease in demand for U.S. dollars. Holding everything else constant, this will result in a movement along the _____ of U.S. dollars and a(n) _____ in pesos per U.S. dollar.

Accepted Answer

A decrease in demand for U.S. dollars will result in a movement along the supply curve of U.S. dollars, leading to a decrease in the exchange rate, meaning fewer pesos per U.S. dollar.

Question 6

A shift to the left of the demand for loanable funds could be caused by:

Accepted Answer

A shift to the left of the demand for loanable funds indicates a decrease in the demand for borrowing. Less business investment spending financed through borrowing would lead to a decrease in the demand for loanable funds. Option A would cause a shift to the right, as more business investment spending financed through borrowing would increase the demand for loanable funds. Option C, a loosening of requirements needed to borrow funds, would increase the demand for loanable funds and cause a shift to the right. Option D, a more promising-looking economy, would not directly affect the demand for loanable funds and would not cause a shift.

Question 7

When a country's currency undergoes a real appreciation:

Accepted Answer

When a country's currency undergoes a real appreciation, the price of its goods increases relative to foreign goods, causing exports to become relatively more expensive and therefore less attractive to foreign buyers. At the same time, imports become relatively cheaper and more attractive to domestic consumers, leading to an increase in imports. Therefore, exports fall, and imports rise.

Question 8

The nominal exchange rate:

Accepted Answer

The nominal exchange rate is the rate at which one currency can be exchanged for another currency, without taking into account inflation. Hence, it is unadjusted for inflation.

Options A and B are incorrect because the nominal exchange rate does not account for inflation, and it may not always equal purchasing power parity.

Option D is partially correct as the nominal exchange rate does affect the current account, as changes in the exchange rate can impact the competitiveness of exports and imports, and hence affect the balance of trade. However, it is not the most accurate answer as the question is asking about the nature of the nominal exchange rate, rather than its effects.

Question 9

A currency has depreciated when:

Accepted Answer

Depreciation of a currency means that the value of that currency has decreased in comparison to a foreign currency. This means that the currency can buy fewer foreign goods than it could previously. Therefore, choice A is the correct answer.

Question 10

When purchasing power parity is lower than the nominal exchange rate, over time one can expect:

Accepted Answer

When purchasing power parity is lower than the nominal exchange rate, it means that goods and services are relatively more expensive in the country with the higher exchange rate. This can lead to a decrease in demand for exports from that country, which may lead to a decrease in the value of their currency and a fall in the exchange rate.

Question 11

A decrease in capital flows into a country, holding everything else constant, will:

Accepted Answer

The answer of A decrease in capital flows into a...

Question 12

Holding everything else constant, if the U.S. dollar falls against the Mexican peso:

Accepted Answer

When the U.S. dollar falls against the Mexican peso, it means that the peso has appreciated relative to the dollar. As a result, U.S. goods become cheaper for Mexican buyers because they need fewer pesos to buy the same amount of U.S. dollars.

Question 13

When a country's currency depreciates:

Accepted Answer

When a country's currency depreciates, its goods become cheaper for foreigners to purchase. This leads to an increase in demand for the country's goods and can ultimately increase exports. As a result, choice B is incorrect. Additionally, a depreciation in currency typically leads to inflation which can reduce the country's purchasing power leading to a decrease in imports. Therefore, choice C is also incorrect. While foreign goods may become more expensive for the country due to inflation, they do not become cheaper in the global context. Hence, choice D is incorrect.

Question 14

To determine the real exchange rate, one needs to know:

Accepted Answer

The real exchange rate is determined by adjusting the nominal exchange rate for differences in the aggregate price level between countries. Therefore, to determine the real exchange rate, one needs to know the nominal exchange rate and the aggregate price level in both countries.

Question 15

Suppose a U.S. dollar initially trades for €1.20. After a few months, the U.S. dollar trades for €1.40. This means:

Accepted Answer

When the exchange rate changes from €1.20 for $1 to €1.40 for $1, it means that the dollar has appreciated, since it now takes fewer dollars to purchase one euro. Option C is incorrect as it is the opposite of the correct explanation, and Option D is not necessarily true and cannot be inferred from the given information.

Question 16

Which of the following is a payment from the United States to foreigners?

Accepted Answer

The dollar value of tea the United States imports from India represents a payment from the U.S. to foreigners, as it involves purchasing goods from another country.

Question 17

If the country's balance of payments on the current account is positive:

Accepted Answer

The answer of If the country's balance of payments on...

Question 18

If a country's loanable funds market is initially in equilibrium and then there are capital outflows, this will result in a _____ in the equilibrium interest rate, while the equilibrium quantity of loanable funds will _____.

Accepted Answer

The answer of If a country's loanable funds market is...

Question 19

A country that contracts its money supply will MOST likely have a(n):

Accepted Answer

Contracting the money supply typically leads to higher interest rates, which can attract foreign investment, increasing the demand for the country's currency in the foreign exchange market.

Question 20

Countries A and B trade freely with each other. Suppose interest rates in the loanable funds market in country A are lower than in the country B. This means:

Accepted Answer

Funds will flow from country A to country B because investors will seek higher returns by lending in country B.

Quiz 19: Open-Economy Macroeconomics