Download Exercise Set 10_Answers

Econ 200, Spring 2012
Exercise Set 10
Open Economy Basic Concepts
1. A country's balance of international trade is positive when
a. exports exceed imports.
b. exports plus investment exceed imports plus domestic saving.
c. imports exceed exports.
d. imports plus domestic saving exceed exports plus investment.
ANS: A
exports exceed imports.
2. Which of the following would be recorded as an UK export?
a. A UK tourist spends 10,000 euros on vacation in the south of France.
b. A machine shop in Nottingham purchases a grinder made in Italy.
c. A UK resident receives a £50 dividend on shares she owns in a business in
Germany.
d. The French government purchases a fleet of new Peugeot cars built at Peugeot’s
factory in the UK.
ANS: D
The French government purchases a fleet of new Peugeot cars built at Peugeot’s factory in the UK.
3. Which of the following is equivalent to the trade deficit?
a. imports ÷ exports
b. net capital inflow
c. exports + imports
d. net exports - imports
ANS: B
net capital inflow
4. If UK imports total £100 billion and UK exports total £150 billion, which of the following would be
true?
a. UK net exports equal £-50 billion
b. The UK has a trade surplus of £50 billion.
c. The UK has a trade deficit of £100 billion.
d. The UK has a trade deficit of £50 billion.
ANS: B
The UK has a trade surplus of £50 billion.
5. If Spain has a positive capital inflow, what does this signify?
a. Nothing.
b. That the government is running a budget deficit.
c. That more funds were invested in the Spain by foreigners than Spain invested abroad.
d. That Spain is running a trade surplus.
ANS: C
That more funds were invested in the Spain by foreigners than Spain invested abroad.
6. It must always be true that net capital outflow
a. is greater than net exports.
b. is less than net exports.
c. is equal to net exports.
d. equals 0.
ANS: C
is equal to net exports.
7. If savings in Germany is €300 billion and investment in Germany is €550 billion, then
a. there must be net capital outflow of €-550 billion.
b. there must be net capital outflow of €-250 billion.
c. the German government must be running a €250 billion surplus.
d. the German financial market must be experiencing a net capital outflow.
ANS: B
there must be net capital outflow of €-250 billion.
8. Foreign direct investment differs from foreign portfolio investment in that
a. direct investments involve stocks and bonds.
b. direct investments can only be made by the International Monetary Fund.
c. direct investments involve physical capital; portfolio investments involve financial capital
d. a government must be involved in direct investment, but portfolio investment can involve private
firms.
ANS: C
direct investments involve real capital; portfolio investments involve financial capital.
9. Which of the following, if undertaken by a UK economic agent, is foreign direct investment?
a. A purchase of 100 shares in Vodafone.
b. A loan of £1 million to a Brazilian mining company.
c. A purchase of shares in Swiss firm Nestlé.
d. The establishment of a new accountancy practice in Bucharest, Romania.
ANS: D
The establishment of a new accountancy practice in Bucharest, Romania.
10. Net capital outflow measures
a. the flow of goods and services between countries.
b. the flow of assets between countries.
c. government budget surpluses and deficits relative to those experienced in other
countries.
d. the amount of physical capital built in foreign countries.
ANS: B
the flow of assets between countries.
11. A UK trade deficit is a sign of
a. reduced national savings.
b. reduced production of manufactured goods.
c. an over reliance on the service economy.
d. high unemployment in the UK economy.
ANS: A
reduced national savings.
12. The (nominal) exchange rate is the
a. value of money.
b. quantity of euros, dollars, yen, etc., that are traded on currency markets.
c. amount of foreign currency that is used to buy goods made in your country.
d. number of units of a foreign currency that can be bought with one unit of your
own currency.
ANS: D
number of units of a foreign currency that can be bought with one unit of your own currency.
13. If the nominal exchange rate is 1.5 US dollars per euro, Europeans will spend __________ to by a $12
watch in New York City.
a. €8
b. €15
c. €1.5
d. €12
ANS: A
€8
14. When the euro depreciates against the pound,
a. the number of pounds per euro will increase.
b. tourism from eurozone countries to London will increase.
c. UK exports to Euroland will increase.
d. the price of imported Italian olive oil in the UK will fall.
ANS: D
the price of imported Italian olive oil in the UK will fall.
15. When fewer euros are needed to buy a unit of Japanese yen, the euro
a. has devalued.
b. has inflated.
c. has appreciated.
d. has depreciated.
ANS: C
has appreciated.
16. If one country has a lower inflation rate than other countries, its
a. currency tends to appreciate.
b. currency tends to depreciate.
c. real interest rate will be higher than in other countries.
d. nominal interest rate will be higher than in other countries.
ANS: A
currency tends to appreciate.
17. In the long run, exchange rates
a. are determined by business cycle fluctuations.
b. are determined by governments and central banks.
c. will adjust until the price of a bundle of goods is the same in both countries.
d. will reflect economic fluctuations in both countries.
ANS: C
will adjust until the price of a bundle of goods is the same in both countries.
18. Which of the following is a statement of the purchasing power parity theory of exchange rate
determination? The exchange rate will adjust in the
a. long run until the interest rate is roughly the same in both countries.
b. long run until real GDP is roughly the same in both countries.
c. long run until the average price of goods is roughly the same in both countries.
d. short run until the average price of goods is roughly the same in both countries.
ANS: C
long run until the average price of goods is roughly the same in both countries.
19. Suppose the same basket of goods costs $100 in the U.S. and 50 pounds in Britain. According to PPP,
if the prices do not change, what will be the exchange rate?
a. 2 dollars/pound
b. 4 dollars/pound
c. 5 dollars/pound
d. 0.5 dollars/pound
ANS: A
2 dollars/pound
20. Which of the following is a reason why exchange rates may deviate from their purchasing power
parity values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a
domestically produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange
prices.
d. Both a and b are correct.
ANS: D
Both a and b are correct.
21. If the UK price level is increasing by 3 per cent annually and the Swiss price level is increasing by 5 per
cent annually, by what percentage would the sterling price of francs need to change according to
purchasing power parity?
a. depreciate by 5 per cent per year
b. appreciate by 3 per cent per year
c. appreciate by 5 per cent per year
d. depreciate by 2 per cent per year
ANS: D
depreciate by 2 per cent per year