Chapter 31 open economy macroeconomics basic concepts

Chapter 31
Open-Economy Macroeconomics: Basic Concepts
TRUE/FALSE
1.
A country with negative net exports has a trade surplus.
ANS: F
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
MSC: Definitional
2.
If a country’s imports exceed its exports it has a trade surplus.
ANS: F
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
MSC: Definitional

TOP:

Net exports

TOP:

Trade balance

3.

If a country sells more goods and services abroad than it purchases abroad, it has positive net exports and a

trade surplus.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net exports
MSC: Definitional
4.
Movies are a major export of the U.S.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
MSC: Definitional

TOP:

U.S. trade statistics

5.

Perhaps the most dramatic change in the U.S. economy over the past four decades has been the increasing
relative importance of international trade and finance.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance

TOP: U.S. trade
MSC: Definitional
6.
Reduced barriers to trade help explain an increase in U.S. exports and imports relative to GDP since 1950.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: U.S. trade
MSC: Definitional
7.
U.S. exports make up less than 20 percent of GDP.
ANS: T
DIF: 2
REF: 31-3
NAT: Analytic
LOC: International trade and finance
MSC: Definitional

TOP:

U.S. trade

8.

Net capital outflow is the purchase of domestic assets by foreign residents minus the purchase of foreign assets
by domestic residents.
ANS: F
DIF: 1

REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow
MSC: Definitional
9.

When net capital outflow is negative, it means that on net the value of domestic assets purchased by foreigners
exceeds the value of foreign assets purchased by domestic residents.
ANS: T
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow
MSC: Definitional
10. A rational investor will always purchase the bond that pays the highest real interest rate.
ANS: F
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Foreign portfolio investment
MSC: Applicative

2068


2069  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
11.

When a company from Germany builds an automobile factory in the United States, the German firm has
engaged in foreign direct investment.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Foreign direct investment
MSC: Definitional
12.

Both foreign direct investment and foreign portfolio investment by U.S. residents increase U.S. net capital
outflow.
ANS: T
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow, Foreign direct investment, Foreign portfolio investment
MSC: Definitional
13.

By itself, the purchase of a U.S. bond by a foreign resident decreases U.S. net capital outflow and increases
foreign capital outflow.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance

TOP: Net capital outflow
MSC: Definitional
14. For an economy as a whole, net exports must equal minus one times net capital outflow.
ANS: F
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow | Net exports
MSC: Definitional
15. If a country’s net exports fall, then its net capital outflow rises.
ANS: F
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow | Net exports
MSC: Definitional
16.

If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net exports and
U.S. net capital outflow decrease.
ANS: T
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow | Net exports
MSC: Applicative
17.

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.
ANS: F
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net exports, Net capital outflow
MSC: Interpretative
18.

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.
ANS: T
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net exports, Net capital outflow
MSC: Interpretative
19. In every economy, national saving equals domestic investment plus net capital outflow.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net capital outflow | Net exports
20. When U.S. national saving rises, domestic investment also necessarily rises.
ANS: F

DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: National accounts
MSC: Definitional
21. A nation with a trade surplus will necessarily have domestic investment that is greater than domestic saving.
ANS: F
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net exports, Saving
MSC: Analytical


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2070
22.

The large trade deficits in the United States in the 1990s were primarily associated with a rise in domestic
investment rather than a rise in the budget deficit.
ANS: T
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: U.S. trade
MSC: Definitional
23. In an open economy, national savings can be less than investment.
ANS: T

DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP:
MSC: Definitional

National accounts

24. If the exchange rate is 10 pesos per U.S. dollar, it is also 1/10 U.S. dollars per peso.
ANS: T
DIF: 1
REF: 31-2
NAT: Analytic
LOC: International trade and finance
TOP: Nominal exchange rate
MSC: Analytical
25. If the exchange rate is 125 yen per dollar, then a hotel room in Tokyo that costs 25,000 yen costs $200.
ANS: T
DIF: 1
REF: 31-2
NAT: Analytic
LOC: International trade and finance
TOP: Nominal exchange rate
MSC: Analytical
26. Other things the same, an increase in the nominal exchange rate raises the real exchange rate.
ANS: T
DIF: 2
REF: 31-2
NAT: Analytic

LOC: International trade and finance
TOP: Real exchange rate
MSC: Applicative
27. If the real exchange rate of the U.S. dollar falls, U.S. net exports will fall.
ANS: F
DIF: 1
REF: 31-2
NAT: Analytic
LOC: International trade and finance
TOP: Appreciation
MSC: Applicative
28.

The theory of purchasing-power parity states that a unit of a country’s currency should be able to buy the same
quantity of goods in foreign countries as it does domestically.
ANS: T
DIF: 1
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Definitional
29. Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.
ANS: F
DIF: 1
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Definitional

30.

Jason plans to buy shrimp in Florida and sell them in Ames, Iowa where the price is higher. Jason plans to
engage in arbitrage.
ANS: T
DIF: 1
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Arbitrage
MSC: Definitional
31.

Many economists believe that the theory of purchasing-power parity describes the forces that determine
exchange rates in the long run.
ANS: T
DIF: 1
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Definitional
32.

According to purchasing-power parity theory, the nominal exchange rate between the U.S. and another
country should equal the price level for that country divided by the price level for the U.S..
ANS: T
DIF: 1
REF: 31-3
NAT: Analytic

LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Definitional


2071  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
33.

If the purchasing power of the dollar is always the same at home and abroad, then the nominal exchange rate
defined as units of foreign currency per dollar decreases if the U.S. price level rises more than the price level
in foreign countries.
ANS: T
DIF: 2
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity | Real exchange rate MSC:
Analytical
34. Other things the same, an increase in the foreign price level leads to an increase in the real exchange rate.
ANS: F
DIF: 2
REF: 31-2
NAT: Analytic
LOC: International trade and finance
TOP: Real exchange rate
MSC: Analytic
35.

If prices in the U.S. rise faster than prices in the United Kingdom, then according to the doctrine of
purchasing-power parity the U.S. nominal exchange rate should fall.

ANS: T
DIF: 2
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Interpretative
36.

According to the theory of purchasing-power parity, the real exchange rate defined as foreign goods per unit
of U.S. goods will equal the exchange rate defined as units of foreign currency per dollar times the domestic
price level divided by the foreign price level.
ANS: T
DIF: 1
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Definitional
37.

In the 1970s and 1980s the U.S. dollar depreciated against the German mark and appreciated against the
Italian lira because U.S. inflation was lower than in Germany but higher than in Italy.
ANS: F
DIF: 1
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity | U.S. exchange rates MSC:
Definitional

38.

When the central bank of some country prints large quantities of money, that county’s currency loses value
both in terms of the goods and services it buys and in terms of the amount of foreign currencies it can buy.
ANS: T
DIF: 2
REF: 31-3
NAT: Analytic
LOC: International trade and finance
TOP: Purchasing-power parity
MSC: Analytical
SHORT ANSWER
1.

List the factors that might influence a country's exports, imports, and trade balance.

ANS:

a.
b.
c.
d.
e.

the tastes of consumers for domestic and foreign goods
the prices of goods at home and abroad
the exchange rates at which people can use domestic currency to buy foreign currencies
the costs of importing goods from country to country
the policies of the government toward international trade

DIF: 2
MSC: Applicative
2.

REF:

31-1

TOP:

Trade balance

Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what
directions this changes U.S. net exports and U.S. net capital outflow.

ANS:
The purchase of a foreign good by a U.S. resident is a U.S. import. Since net exports = exports - imports, net exports
decrease. Bill pays for the software with U.S. dollars so that the Japanese have obtained more U.S. assets. Since, net
capital outflow = the amount of foreign assets acquired by domestic residents - domestic assets acquired by foreign
residents, the increase in foreign holdings of dollars by Japanese residents decreases U.S. net capital outflow.
DIF:
TOP:

3
REF: 31-1
Net capital outflow | Net exports

MSC: Analytical

Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2072
3.
Why are net exports and net capital outflow always equal?
ANS:
Net exports and net capital outflow are always equal because every international transaction is an exchange. When a
seller country transfers a good or service to a buyer country, the buyer country gives up some asset to pay for this
good or service. The value of that asset equals the value of goods and services sold. Hence, the net value of goods
and services sold by a country (NX) must equal the net value of assets acquired (NCO).
DIF:
TOP:
4.

3
REF: 31-1
Net capital outflow | Net exports

MSC: Analytical

Colonial America had little industry and so had mostly raw materials to export. At the same time, there were
many opportunities to purchase capital goods and earn a high rate of return because there was little existing
capital so that the marginal product of capital was relatively high. What does this suggest about net exports
and net capital outflow in colonial America?

ANS:
Net exports were negative because the value of exports was low, and the colonies imported capital goods. If net
exports were negative, net capital outflow must also have been negative. Net capital outflow would have been
negative because the colonies sold stocks, bonds, and other domestic assets to buy capital goods from abroad.
DIF:
TOP:
5.

2
REF: 31-1
Net capital outflow | Net exports

MSC: Applicative

Derive the relation between savings, domestic investment, and net capital outflow using the national income
accounting identity.

ANS:
Start from the national income accounting identity,
(1) Y = C + I + G + NX.
Recall from Chapter 25 that national saving is the income that is left after paying for current consumption and
government expenditure,
(2) S = Y - C - G.
Rearranging, (1) we obtain Y - C - G = I + NX, and substituting in (2)
(3) S = I + NX.
Because net exports also equal net capital outflow, we can also write this equation as
(4) S = I + NCO.
DIF: 3
MSC: Analytical
6.

REF:

31-1

TOP:

National income accounts

Suppose that a country has $120 billion of national saving, and $80 billion of domestic investment. Is this
possible? Where did the other $40 billion of national savings go?

ANS:
This is possible for an open economy. The remaining $40 billion is for net capital outflow in the form of purchases
of foreign-owned assets by this country’s residents. Domestic residents can save by buying U.S. assets or by buying
foreign assets.
DIF: 2
MSC: Applicative

REF:

31-1

TOP:

National savings

7.
How do the nominal exchange rate and the real exchange rate differ?
ANS:
The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of
another. The real exchange rate is the rate at which a person can trade the goods and services of one country for the
goods and services of another.
DIF:
TOP:

2

REF: 31-2
Nominal exchange rate | Real exchange rate

MSC: Definitional


2073  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
8.
How do we find the real exchange rate from the nominal exchange rate?
ANS:
Real Exchange Rate = Nominal Exchange Rate x Domestic Price Index/Foreign Price Index
DIF:
TOP:
9.

2
REF: 31-2
Nominal exchange rate | Real exchange rate

MSC: Definitional

Suppose a bottle of wine costs 25 euros in France and 20 dollars in the United States. If the exchange rate is
1.25 euros per dollar, what is the real exchange rate?

ANS:
The real exchange rate = nominal exchange rate  Domestic Price/Foreign price = 1.25 euros per dollar
dollars/25 euros = 1.
DIF: 2
MSC: Applicative

REF:

31-2

TOP:

20

Purchasing-power parity

10. What is the logic behind the theory of purchasing-power parity?
ANS:
The logic behind purchasing-power parity is the law of one price, which asserts that a good must sell for the same
price in all locations. If the price for a good is higher in one market than in another, someone can make a profit by
purchasing the good where it is relatively cheap, and selling the good where it is relatively expensive. This process
of arbitrage leads to an equalization of prices for the good in all locations. If purchasing power parity holds, the
amount of dollars it takes to buy a good in the U.S. should buy enough foreign currency to buy the same good in a
foreign country.
DIF:
TOP:
11.

2
REF: 31-3
Arbitrage | Purchasing-power parity

MSC: Analytical

Suppose that a U.S. dollar buys more gold in Australia than it buys in Russia. What does purchasing-power
parity imply should happen?

ANS:
People can make a profit by buying gold in Australia and selling it in Russia. Purchases in Australia drive down the
amount of gold a dollar can buy there. Sales in Russia drive up the amount of gold a dollar can buy there.
Purchasing-power parity theory claims that this should continue until the dollar can buy the same amount of gold
anywhere.
DIF:
TOP:

2
REF: 31-3
Arbitrage | Purchasing-power parity

MSC: Analytical

12. What does purchasing-power parity imply about the real exchange rate?
ANS:
That it is equal to one. The number of dollars it takes to buy goods in the U.S.buys enough foreign currency to buy
the same amount of goods in a foreign country.
DIF:
TOP:
13.

1
REF: 31-3
Purchasing-power parity | Real exchange rate

MSC:

Definitional

According to purchasing-power parity, what is the relationship between changes in price levels between two
countries and changes in nominal exchange rates?

ANS:
Purchasing-power parity asserts that the nominal exchange rate is equal to the foreign price level divided by the
domestic price level. If the domestic price level rises more than the foreign price level, the domestic currency
depreciates. If the foreign price level rises more than the domestic price level, the domestic currency appreciates.
DIF: 2
MSC: Analytical

REF:

31-3

TOP:

Purchasing-power parity


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2074
14.

Can purchasing-power parity be used to explain the fact that the U.S. dollar has depreciated by more than 50
percent against the German mark between 1970 and 1998, but appreciated by more than 100 percent against
the Italian lira during the same period? Defend your answer.

ANS:
The theory of purchasing-power parity suggests that Italy must have experienced much more inflation than the
United States while Germany must have experienced much less inflation. In fact, that is exactly what has happened.

DIF: 2
MSC: Applicative
15.

REF:

31-3

TOP:

Purchasing-power parity

Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does
purchasing-power parity imply will happen to the real and to the nominal exchange rate?

ANS:
Higher money growth leads to higher prices, so prices will rise more in Turkey than in the United States. Under
purchasing-power parity, this has no affect on the real exchange rate. However, in order for a dollar to buy as many
goods in Turkey as it buys in the United States when prices are rising faster in Turkey, the nominal exchange rate
must be rising so that a dollar buys more Turkish lira.
DIF: 2
MSC: Applicative

REF:

31-3

TOP:

Purchasing-power parity

16. Assuming all other things equal, what would happen to the U.S. dollar real exchange rate under each
of the following circumstances?
a.
b.
c.

ANS:

a.
b.
c.

The U.S. nominal exchange rate depreciates.
U.S. domestic prices increase.
Prices in the rest of the world rise.

The U.S. dollar real exchange rate depreciates.
The U.S. dollar real exchange rate appreciates.
The U.S. dollar real exchange rate depreciates.

DIF: 2
MSC: Analytical
17.

REF:

31-3

TOP:

Real exchange rate

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why
is it not completely accurate?

ANS:
Purchasing-power parity works well in helping us explain long-term trends in exchange rates, and in explaining
what happens to exchange rates during hyperinflation. It is not completely accurate because (1) not all goods are
easily traded, and (2) even tradable goods are not always perfect substitutes when they are produced in different
countries.
DIF: 2
MSC: Interpretive
18.

REF:

31-3

TOP:

Purchasing-power parity

Suppose a lobster supper in Maine costs fewer dollars than a Lobster supper in Paris, France. Explain why this
is inconsistent with purchasing-power parity and explain why the inconsistency may exist.

ANS:
According to purchasing-power parity, a dollar should buy the same amount of goods everywhere in the world. The
inconsistency may exist because lobsters have to be transported to Paris. Price differences can also persist because
goods are not perfect substitutes. While eating lobster gazing at the Maine coastline may be a pleasurable

experience, eating well-prepared lobster in a fancy French restaurant may be an experience people would be willing
to pay more for.
DIF: 2
MSC: Interpretive

REF:

31-3

TOP:

Purchasing-power parity


2075  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts

Sec00-Open-Economy Macroeconomic Models-Introduction
MULTIPLE CHOICE

1.

Which type(s) of economies interact with other economies?
a.
b.
c.
d.

only closed economies
only open economies
closed economies and open economies

neither closed nor open economies

ANS: B
DIF: 1
LOC: International trade and finance
MSC: Definitional

2.

REF:
TOP:

31-0
NAT: Analytic
International trade

International trade
a.
b.
c.
d.

raises the standard of living in all trading countries.
lowers the standard of living in all trading countries.
leaves the standard of living unchanged.
raises the standard of living for importing countries and lowers it for exporting countries.

ANS: A
DIF: 1
LOC: International trade and finance

MSC: Definitional

REF:
TOP:

31-0
NAT: Analytic
International trade

Sec01 - Open-Economy Macroeconomics: Basic Concepts -The International Flow
of Goods and Capital
MULTIPLE CHOICE

1.

Foreign-produced goods and services that are sold domestically are called
a.
b.
c.
d.

imports.
exports.
net imports.
net exports.

ANS: A
NAT: Analytic
MSC: Definitional

2.

TOP:

Imports

When Claudia, a U.S. citizen, purchases a handbag made in France, the purchase is
a.
b.
c.
d.

both a U.S. and French import.
a U.S. export and a French import.
a U.S. import and a French export.
neither an export nor an import for either country.

ANS: C
NAT: Analytic
MSC: Definitional

3.

DIF: 1
REF: 31-1
LOC: International trade and finance

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Imports | Exports

Juan lives in Ecuador and purchases a motorcycle manufactured in the United States. The
motorcycle is
a.
b.
c.
d.

both a U.S. and Ecuadorian export.
both a U.S. and Ecuadorian import.
a U.S. import and an Ecuadorian export.
a U.S. export and an Ecuadorian import.

ANS: D
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Exports | Imports

Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2076
4.

Net exports of a country are the value of
a.
b.
c.
d.

goods and services imported minus the value of goods and services exported.
goods and services exported minus the value of goods and services imported.
goods exported minus the value of goods imported.
goods imported minus the value of goods exported.

ANS: B
NAT: Analytic
MSC: Definitional

5.

a.
b.
c.
d.

a.
b.
c.
d.

TOP:

Net exports | Trade balance

TOP:

Net exports

exports rise, imports rise
exports rise, imports fall
imports rise, exports rise
imports rise, exports fall

DIF: 1
REF: 31-1
LOC: International trade and finance

One year a country has negative net exports. The next year it still has negative net exports and
imports have risen more than exports.
its trade surplus fell.
its trade surplus rose.
its trade deficit fell.
its trade deficit rose

ANS: D
NAT: Analytic
MSC: Analytical

DIF: 2
REF: 31-1

LOC: International trade and finance

TOP:

Trade balance

One year a country has positive net exports. The next year it still has positive but larger net exports
a.
b.
c.
d.

its trade surplus fell.
its trade surplus rose.
its trade deficit fell.
its trade deficit rose

ANS: B
NAT: Analytic
MSC: Analytical

9.

DIF: 1
REF: 31-1
LOC: International trade and finance

Which of the following both raise net exports?

a.

b.
c.
d.

8.

Net exports

a trade surplus and positive net exports.
a trade surplus and negative net exports.
a trade deficit and positive net exports.
a trade deficit and negative net exports.

ANS: B
NAT: Analytic
MSC: Analytical

7.

TOP:

A country sells more to foreign countries than it buys from them. It has

ANS: A
NAT: Analytic
MSC: Definitional

6.

DIF: 1

REF: 31-1
LOC: International trade and finance

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Trade balance

TOP:

Net exports

A country's trade balance
a.
b.
c.
d.

must be zero.
must be greater than zero.
is greater than zero only if exports are greater than imports.
is greater than zero only if imports are greater than exports.

ANS: C
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance


2077  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
10. The value of Peru's exports minus the value of Peru's imports is called
a.
b.
c.
d.

Peru's foreign portfolio investment.
Peru's foreign direct investment.
Peru's net exports.
Peru's net imports.

ANS: C
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

11. If the United States had negative net exports last year, then it

a.
b.
c.
d.

sold more abroad than it purchased abroad and had a trade surplus.
sold more abroad than it purchased abroad and had a trade deficit.
bought more abroad than it sold abroad and had a trade surplus.
bought more abroad than it sold abroad and had a trade deficit.

ANS: D
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports | Trade balance

12. If Saudi Arabia had positive net exports last year, then it
a.
b.
c.
d.

sold more abroad than it purchased abroad and had a trade surplus.
sold more abroad than it purchased abroad and had a trade deficit.

bought more abroad than it sold abroad and had a trade surplus.
bought more abroad than it sold abroad and had a trade deficit.

ANS: A
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports | Trade balance

13. If Germany purchased more abroad than it sold abroad last year, then it had
a.
b.
c.
d.

positive net exports which is a trade surplus.
positive net exports which is a trade deficit.
negative net exports which is a trade surplus.
negative net exports which is a trade deficit.

ANS: D
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports | Trade balance

14. Suppose that a country imports $75 million of goods and services and exports $100 million of goods
and services. What is the value of net exports?
a.
b.
c.
d.

$175 million
$75 million
$25 million
-$25 million

ANS: C
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

15. A country purchases $3 billion of foreign-produced goods and services and sells $2 billion dollars of
domestically produced goods and services to foreign countries. It has
a.
b.
c.
d.

exports of $3 billion and a trade surplus of $1 billion.
exports of $3 billion and a trade deficit of $1 billion.
exports of $2 billion and a trade surplus of $1 billion.
exports of $2 billion and a trade deficit of $1 billion.

ANS: D
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Exports | Imports | Trade balance
MSC: Applicative


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2078
16. Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing
this is the only trade that these countries do. What are the net exports of Oceania and Escudia in that
order?
a.
b.
c.

d.

$140 and $140
$100 and $40
$60 and -$60
None of the above is correct.

ANS: C
NAT: Analytic
MSC: Applicative

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

17. If the U.S. has exports of $1.5 trillion and imports of $2.2 trillion, then the U.S.
a.
b.
c.
d.

sells more overseas then it buys from overseas; it has a trade deficit.
sells more overseas then it buys from overseas; it has a trade surplus.
buys more from overseas then it sells overseas; it has a trade deficit.
buys more from overseas then it sells overseas; it has a trade surplus.

ANS: C
NAT: Analytic
MSC: Applicative

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Net exports | Trade balance

18. If U.S. exports are $150 billion and U.S. imports are $100 billion, which of the following is correct?
a.
b.
c.
d.

The U.S. has a trade surplus of $100 billion.
The U.S. has a trade surplus of $50 billion.
The U.S. has a trade deficit of $100 billion.
The U.S. has a trade deficit of $50 billion.

ANS: B
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

19. If U.S. exports are $300 billion and U.S. imports total $350 billion, which of the following is
correct?
a.
b.
c.
d.

The U.S. has a trade surplus of $350 billion.
The U.S. has a trade surplus of $50 billion.
The U.S. has a trade deficit of $350 billion.
The U.S. has a trade deficit of $50 billion.

ANS: D
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

20. If a country has $2.4 billion of net exports and purchases $4.8 billion of goods and services from

foreign countries, then it has
a.
b.
c.
d.

$7.2 billion of exports and $4.8 billion of imports.
$7.2 billion of imports and $4.8 billion of exports.
$4.8 billion of exports and $2.4 billion of imports.
$4.8 billion of imports and $2.4 billion of exports.

ANS: A
NAT: Analytic
MSC: Analytical

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

21. If a country has net exports of $9 billion and sold $50 billion of goods and services abroad, then it
has
a.
b.
c.
d.

$59 billion of imports and $50 billion of exports.
$59 billion of exports and $50 billion of imports.
$50 billion of imports and $41 billion of exports.
$50 billion of exports and $41 billion of imports.

ANS: D
NAT: Analytic
MSC: Analytical

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Net exports


2079  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
Table 31-1
Goods
Purchased Abroad
Sold Abroad

Argentinean Trade Flows
Services
$40 billion
Purchased Abroad
$10 billion
Sold Abroad

$20 billion
$25 billion

22. Refer to Table 31-1. What are Argentina’s exports?
a.
b.
c.
d.

$60 billion
$35 billion
$10 billion
None of the above are correct.

ANS: B
NAT: Analytic
MSC: Applicative

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Exports

TOP:

Exports

TOP:

Exports

23. Refer to Table 31-1. What are Argentina’s imports?
a.
b.
c.
d.

$60 billion
$35 billion
$40 billion
None of the above are correct.

ANS: A
NAT: Analytic
MSC: Applicative

DIF: 2
REF: 31-1
LOC: International trade and finance

24. Refer to Table 31-1. What are Argentina’s net exports?
a.
b.
c.
d.

$30 billion
$5 billion
-$5 billion
-$25 billion

ANS: D
NAT: Analytic
MSC: Applicative

DIF: 2
REF: 31-1
LOC: International trade and finance

25. Paine Pharmaceuticals produces medicines in the U.S. Its overseas sales
a.
b.
c.
d.

are an export of the U.S. and increase U.S. net exports.
are an export of the U.S. and decrease U.S. net exports.
are an import of the U.S. and increase U.S. net exports.
are an import of the U.S. and decrease U.S. net exports.

ANS: A
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Exports | Imports | Net exports

MSC: Applicative

26. Bob traps lobsters in Maine and sells them to a restaurant in Egypt. Other things the same, these
sales
a.
b.
c.
d.

increase U.S. net exports and has no effect on Egyptian net exports.
increase U.S. net exports and decrease Egyptian net exports.
decrease U.S. net exports and have no effect on Egyptian net exports.
decrease U.S. net exports and increase Egyptian net exports.

ANS: B
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2080
27. Sonya, a citizen of Denmark, produces boots and shoes that she sells to department stores in the
United States. Other things the same, these sales

a.
b.
c.
d.

increase U.S. net exports and have no effect on Danish net exports.
decrease U.S. net exports and have no effect on Danish net exports.
increase U.S. net exports and decrease Danish net exports.
decrease U.S. net exports and increase Danish net exports.

ANS: D
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

28. A firm in China sells toys to a U.S. department store chain. Other things the same, these sales
a.
b.
c.
d.

increase U.S. net exports and decrease Chinese net exports.
decrease U.S. net exports and increase Chinese net exports.

increase U.S. and Chinese net exports.
decrease U.S. and Chinese net exports.

ANS: B
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

29. Ivan, a Russian citizen, sells several hundred cases of caviar to a restaurant chain in the United
States. By itself, this sale
a.
b.
c.
d.

increases U.S. net exports and decreases Russian net exports.
increases U.S. net exports and has no effect on Russian net exports.
decreases U.S. net exports and increases Russian net exports.
decreases U.S. net exports and has no effect on Russian net exports.

ANS: C
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

30. A Swiss company sells chocolates to a retailer in the United States. These sales by themselves
a.
b.
c.
d.

decrease U.S. net export and Swiss net exports.
decrease U.S. net exports and increase Swiss net exports.
increase U.S. and Swiss net exports.
increase U.S. net exports and decrease Swiss net exports.

ANS: B
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

31. Clear Brook Farms, a U.S. manufacturer of frozen vegetarian entrees, sells cases of its product to
stores overseas. Its sales
a.
b.
c.
d.

decrease U.S. exports but increase U.S. net exports.
decrease both U.S. exports and U.S. net exports.
increase both U.S. exports and U.S. net exports.
increase U.S. exports but decrease U.S. net exports.

ANS: C
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

32. You buy a new car built in Sweden. Other things the same, your purchase by itself
a.
b.
c.

d.

raises both U.S. exports and U.S. net exports.
raises U.S. exports and lowers U.S. net exports.
raises both U.S. imports and U.S. net exports.
raises U.S. imports and lowers U.S. net exports.

ANS: D
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports


2081  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
33. A firm in the United Kingdom hires a firm in the U.S. to train its managers. By itself this
transaction
a.
b.
c.
d.

increases U.S. imports and decreases U.S. net exports.
increases U.S. imports and increases U.S. net exports.

increases U.S. exports and decreases U.S. net exports.
increases U.S. exports and increases U.S. net exports.

ANS: D
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Exports | Imports | Net exports
MSC: Applicative

34. A firm in India hires a U.S. firm to provide economic forecasts. By itself this transaction
a.
b.
c.
d.

increases U.S. exports and so increases the U.S. trade balance.
increases U.S. exports and so decreases the U.S. trade balance.
increases U.S. imports and so increases the U.S. trade balance.
increases U.S. imports and so decreases the U.S. trade balance.

ANS: A
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Exports | Imports | Trade balance
MSC: Applicative

35. If U.S. consumers increase their demand for apples from New Zealand, then other things the same
New Zealand’s
a.
b.
c.
d.

imports and net exports rise.
imports rise and net exports fall.
exports and net exports rise.
exports rise and net exports fall.

ANS: C
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Exports | Imports | Net exports
MSC: Interpretive

36. Mike, a U.S. citizen, buys $1,000 worth of olives from Greece. By itself this purchase
a.
b.
c.
d.

increases U.S. imports by $1,000 and increases U.S. net exports by $1,000.
increases U.S. imports by $1,000 and decreases U.S. net exports by $1,000.
increases U.S. exports by $1,000 and increases U.S. net exports by $1,000.
increases U.S. exports by $1,000 and decreases U.S. net exports by $1,000.

ANS: B
NAT: Analytic
MSC: Applicative

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

37. If a country had a trade surplus of $50 billion and then its exports rose by $30 billion and its imports
rose by $20 billion, its net exports would now be
a.
b.
c.
d.

$0 billion.
$20 billion.
$40 billion.
$60 billion.

ANS: D
DIF: 3
LOC: International trade and finance

REF:

TOP:

31-1
Net exports

MSC: Analytical


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2082
38. Which of the following is correct?
a.

b.
c.
d.

U.S. exports as a percentage of GDP have more than doubled since 1950. The U.S. currently has a
trade surplus.
U.S. exports as a percentage of GDP have more than doubled since 1950. The U.S. currently has a
trade deficit.
U.S. exports as a percentage of GDP have increased, but have not nearly doubled since 1950. The
U.S. currently has a trade surplus.
U.S. exports as a percentage of GDP have increased, but have not nearly doubled since 1950. The
U.S. currently has a trade deficit.

ANS: B
NAT: Analytic
MSC: Definitional

DIF: 2

REF: 31-1
LOC: International trade and finance

TOP:

U.S. trade facts

TOP:

U.S. trade facts

39. Over the past five decades, the U.S. economy has become
a.
b.
c.
d.

more closed.
more open.
less trade-oriented.
more self-sufficient.

ANS: B
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

40. Since 1950 U.S. imports as a percentage of GDP have approximately
a.
b.
c.
d.

stayed constant.
doubled.
tripled.
quadrupled.

ANS: C
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

U.S. trade facts

41. Since 1950 U.S. exports as a percentage of GDP have approximately
a.
b.
c.
d.

stayed constant.

doubled.
tripled.
quadrupled.

ANS: B
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

U.S. trade facts

42. The increase in international trade in the United States is partly due to
a.
b.
c.
d.

improvements in transportation.
advances in telecommunications.
increased trade of goods with a high value per pound.
All of the above are correct.

ANS: D
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

U.S. trade facts

43. Which of the following is correct? Over about the last fifty years
a.
b.
c.
d.

U.S. exports and U.S. imports each about doubled.
U.S. exports and U.S. imports each about tripled.
U.S. exports about doubled and U.S. imports about tripled.
U.S. exports about tripled and U.S. imports about doubled.

ANS: C
NAT: Analytic
MSC: Definitional

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

U.S. trade facts


2083  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
44. U.S. international trade has
a.
b.
c.
d.

decreased because of a decrease in the trade of goods with a high value per pound.
decreased because of an increase in the trade of goods with a high value per pound.
increased because of a decrease in trade of goods with a high value per pound.
increased because of an increase in trade of goods with a high value per pound.

ANS: D
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

U.S. trade facts

45. Net capital outflow is defined as the purchase of
a.
b.

c.
d.

foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
foreign assets by domestic residents minus the purchase of foreign goods and services by domestic
residents.
domestic assets by foreign residents minus the purchase of domestic goods and services by foreign
residents.
domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.

ANS: A
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net capital outflow

46. Net capital outflow measures
a.
b.
c.
d.

foreign assets held by domestic residents minus domestic assets held by foreign residents.
the imbalance between the amount of foreign assets bought by domestic residents and the amount

of domestic assets bought by foreigners.
the imbalance between the amount of foreign assets bought by domestic residents and the amount
of domestic goods and services sold to foreigners.
None of the above is correct.

ANS: B
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net capital outflow

47. Net capital outflow equals
a.
b.
c.
d.

the purchase of foreign assets by domestic residents.
the purchase of domestic assets by foreign residents.
the purchase of domestic assets by foreign residents - the purchase of foreign assets by domestic
residents
the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreign
residents

ANS: D
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net capital outflow

48. Net capital outflow equals the difference between a country's
a.
b.
c.
d.

income and expenditure.
investment and saving.
buying of foreign goods and services and sales of goods and services abroad.
purchases of foreign assets and sales of domestic assets abroad.

ANS: D
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net capital outflow


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2084
49. Net exports measures the difference between a country's
a.
b.
c.
d.

income and expenditures.
sale of goods and services abroad and purchase of foreign goods and services.
sale of domestic assets abroad and purchase of foreign assets.
All of the above are correct.

ANS: B
NAT: Analytic
MSC: Definitional

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Net exports

50. Suppose that foreign citizens decide to purchase more U.S. pharmaceuticals and U.S. citizens decide
to buy more stock in foreign corporations. Other things the same, these actions
a.
b.
c.
d.

raise both U.S. net exports and U.S. net capital outflows.
raise U.S. net exports and lower U.S. net capital outflows.
lower both U.S. net exports and U.S. net capital outflows.
lower U.S. net exports and raise U.S. net capital outflows.

ANS: A
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net exports | Net capital outflow
MSC: Definitional

51. Suppose that more British decide to vacation in the U.S. and that the British purchase more U.S.
Treasury bonds. Ignoring how payments are made for these purchases,
a.

b.
c.
d.

the first action by itself raises U.S. net exports, the second action by itself raises U.S. net capital
outflow.

the first action by itself raises U.S. net exports, the second action by itself lowers U.S. net capital
outflow.
the first action by itself lowers U.S. net exports, the second action by itself raises U.S. net capital
outflow.
the first action by itself lowers U.S. net exports, the second action by itself lowers U.S. net capital
outflow.

ANS: B
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Net exports | Net capital outflow
MSC: Interpretive

52. Which of the following is an example of U.S. foreign direct investment?
a.
b.
c.
d.

A Swedish car manufacturer opens a plant in Tennessee.
A Dutch citizen buys shares of stock in a U.S. company.
A U.S. based restaurant chain opens new restaurants in China.
A U.S. citizen buys stock in companies located in Japan.

ANS: C
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign direct investment

53. Which of the following is an example of U.S. foreign direct investment?
a.
b.
c.
d.

A U.S. based mutual fund buys stock in Eastern European companies.
A U.S. citizen builds and operates a coffee shop in the Netherlands.
A Swiss bank buys a U.S. government bond.
A German tractor factory opens a plant in Waterloo, Iowa.

ANS: B
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign direct investment

2085  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
54. Which of the following is an example of U.S. foreign direct investment?
a.
b.
c.
d.

A Polish company opens a shipbuilding plant in the United States.
A Bolivian bank buys U.S. corporate bonds.
A U.S. bank buys Bolivian corporate bonds.
A U.S. furniture maker opens a plant in Mexico.

ANS: D
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign direct investment

55. Which of the following is an example of U.S. foreign portfolio investment?
a.
b.
c.

d.

Disney builds a new amusement park near Barcelona, Spain.
A U.S. citizen buys bonds issued by the British government.
A Dutch hotel chain opens a new hotel in the United States.
A citizen of Singapore buys a bond issued by a U.S. corporation.

ANS: B
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign portfolio investment

56. Which of the following is an example of U.S. foreign portfolio investment?
a.
b.
c.
d.

Toni, a U.S. citizen, buys bonds issued by a Swedish corporation.
Randall, a U.S. citizen, opens a cheesecake factory in Italy.
Both A and B are examples of U.S. portfolio investment.
Neither A nor B are examples of U.S. portfolio investment.

ANS: A
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign portfolio investment

57. Which of the following is an example of U.S. foreign portfolio investment?
a.
b.
c.
d.

Albert, a German citizen, buys stock in a U.S. computer company.
Larry, a citizen of Ireland, opens a fish and chips restaurant in the United States.
Nancy, a U.S. citizen, buys bonds issued by a Japanese bank.
Dustin, a U.S. citizen, opens a country-western tavern in New Zealand.

ANS: C
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign portfolio investment

58. Mary, a U.S. citizen, buys stock in an Italian railroad. This purchase is an example of
a.
b.
c.
d.

investment for Mary and U.S. foreign direct investment.
investment for Mary and U.S. foreign portfolio investment.
saving for Mary and U.S. foreign direct investment.
saving for Mary and U.S. foreign portfolio investment.

ANS: D
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign portfolio investment

59. Larry, a U.S. citizen, opens and operates a bookstore in Spain. This action is an example of
a.

b.
c.
d.

investment for Larry and U.S. foreign direct investment.
investment for Larry and U.S. foreign portfolio investment.
U.S. foreign direct investment and U.S. domestic investment.
U.S. foreign portfolio investment and U.S. domestic investment.

ANS: A
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Investment | Foreign direct investment
MSC:

Interpretive


Chapter 31 /Open-Economy Macroeconomics: Basic Concepts  2086
60. John, a U.S. citizen, opens up a Sports bar in Tokyo. This is an example of U.S.
a.
b.
c.
d.

exports.
imports.
foreign portfolio investment.

foreign direct investment.

ANS: D
NAT: Analytic
MSC: Interpretive

DIF: 1
REF: 31-1
LOC: International trade and finance

TOP:

Foreign direct investment

61. A Swiss watchmaker opens a factory in the United States. This is an example of Swiss
a.
b.
c.
d.

exports.
imports.
foreign portfolio investment.
foreign direct investment.

ANS: D
NAT: Analytic
MSC: Interpretive

DIF: 1

REF: 31-1
LOC: International trade and finance

TOP:

Foreign direct investment

62. If a country changes its corporate tax laws so that foreign businesses build and manage more
business in that country, then that net capital outflow of that country
a.
b.
c.
d.

and the net capital outflow of other countries rise.
rises and the net capital outflow of other countries fall.
falls and the net capital outflow of other countries rise.
None of the above are correct.

ANS: C
NAT: Analytic
MSC: Interpretive

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Foreign investment

63. If a country changes its corporate tax laws so that domestic businesses build and manage more
business in other countries, then the net capital outflow of that country
a.
b.
c.
d.

and the net capital outflow of other countries rise.
rises and the net capital outflow of other countries fall.
falls and the net capital outflow of other countries rise.
None of the above are correct.

ANS: B
NAT: Analytic
MSC: Interpretive

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Foreign investment

64. Suppose that the real return from operating factories in Ghana rises relative to the real rate of return
in the United States. Other things the same,
a.
b.
c.

d.

this will increases U.S. net capital outflow and decrease Ghanan net capital outflow.
this will decreases U.S. net capital outflow and increase Ghanan net capital outflow.
this will only increase U.S. net capital outflow.
this will only increase Ghanan net capital outflow.

ANS: A
NAT: Analytic
MSC: Analytical

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Net capital outflow

65. A U.S. mutual fund buys stocks issued by a Columbian company. This purchase is an example of
a.
b.
c.
d.

U.S. foreign direct investment. It increases Columbia’s net capital outflow.
U.S. foreign direct investment. It decreases Columbia’s net capital outflow.
U.S. foreign portfolio investment. It decreases Columbia’s net capital outflow.
U.S. foreign portfolio investment. It increases Columbia’s net capital outflow.

ANS: C
DIF: 2
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Foreign direct investment | Net capital outflow MSC:

Interpretive


2087  Chapter 31 /Open-Economy Macroeconomics: Basic Concepts
66. A U.S. firm buys bonds issued by a technology center in India. This purchase is an example of U.S.
a.

b.
c.
d.
ANS:
NAT:
TOP:
MSC:

foreign portfolio investment. By itself it is an increase in U.S. holdings of foreign bonds and
increases U.S. net capital outflow.
foreign portfolio investment. By itself it is an increase in U.S. holdings of foreign bonds and
decreases U.S. net capital outflow.
foreign direct investment. By itself it is an increase in U.S. holdings of foreign bonds and increases
U.S. net capital outflow.
foreign direct investment. By itself it is an increase in U.S. holdings of foreign bonds and decreases
U.S. net capital outflow.

A
DIF: 2
REF: 31-1
Analytic
LOC: International trade and finance
Foreign direct investment | Foreign portfolio investment | Net capital outflow
Interpretive

67. Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are U.S.
a.
b.
c.
d.

foreign portfolio investment that increase U.S. net capital outflow.
foreign portfolio investment that decrease U.S. net capital outflow.
foreign direct investment that increase U.S. net capital outflow.
foreign direct investment that decrease U.S. net capital outflow.

ANS: C
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Foreign direct investment | Net capital outflow MSC:

Interpretive

68. A U.S. citizen buys bonds issued by an automobile manufacturer in Japan. Her expenditures are U.S.

a.
b.
c.
d.

foreign direct investment that increase U.S. net capital outflow.
foreign direct investment that decrease U.S. net capital outflow.
foreign portfolio investment that increase U.S. net capital outflow.
foreign portfolio investment that decrease U.S. net capital outflow.

ANS: C
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Foreign portfolio investment | Net capital outflow

MSC: Interpretive

69. Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures
a.
b.
c.
d.

increase U.S. and Israeli net capital outflow.
increase U.S. net capital outflow, but decrease Israeli net capital outflow.
decrease U.S. net capital outflow, but increase Israeli net capital outflow.
None of the above is correct.

ANS: B
NAT: Analytic
MSC: Interpretive

DIF: 2
REF: 31-1
LOC: International trade and finance

TOP:

Net capital outflow

70. An Italian company builds and operates a pasta factory in the United States. This is an example of
Italian
a.
b.
c.
d.

foreign direct investment that increases Italian net capital outflow.
foreign direct investment that decreases Italian net capital outflow.
foreign portfolio investment that increases Italian net capital outflow.
foreign portfolio investment that decreases Italian net capital outflow.

ANS: A
DIF: 1
REF: 31-1
NAT: Analytic
LOC: International trade and finance
TOP: Foreign direct investment | Net capital outflow MSC:

Interpretive