Macro Chapter 20 "Open Economy Macroeconomics"

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T/F The marginal propensity to import is the change in imports divided by the change in income

TRUE

T/F The open-economy government spending multiplier is smaller than the closed economy government spending multiplier.

TRUE

T/F The trade feedback effect is due to exports from one country causing that country to increase its imports.

TRUE

Assume that a $1.00 increase in exports increases GDP by $3.00, and a $1.00 increase in income increases import spending by $0.15. In this case, a $1,000 million increase in exports will increase net exports by A) $550 million. B) $1,000 million. C) $700 million. D) $1,350 million

A) $550 million

Refer to Figure 20.1. The open economy multiplier is A) 1.25. B) 2. C) 4. D) 8.

A) 1.25

The open economy multiplier is A) 1/[1 - (MPC - MPM)]. B) 1/[1 - MPC - MPM]. C) 1/[1 - (MPM - MPC)]. D) MPM/[1 - (MPC - MPM)]

A) 1/[1-(MPC - MPM)]

Refer to Figure 20.1. If the economy is open and the government increases spending by 15, the new equilibrium output is A) 81.25. B) 100. C) 112.50. D) 125.

A) 81.25

The marginal propensity to consume domestic goods is the A) MPC - MPM. B) MPC + MPM. C) MPC - MPS. D) MPC + MPS

A) MPC - MPM

The record of a countryʹs transactions in goods, services, and assets with the rest of the world is its A) balance of payments. B) balance of trade. C) capital account. D) current account.

A) balance of payments

Exports A) bring foreign exchange, and thus they are registered as credit in the balance of payments. B) bring foreign exchange, and thus they are registered as debit in the balance of payments. C) cause foreign exchange to leave the country, and thus they are registered as credit in the balance of payments. D) cause foreign exchange to leave the country, and thus they are registered as debit in the balance of payments.

A) bring foreign exchange, and thus they are registered as credit in the balance of payments

A U.S. firm builds a factory in South Africa. This will be entered as a A) debit in the U.S. capital account. B) debit in the U.S. current account. C) credit in the U.S. capital account. D) credit in the U.S. current account

A) debit in the U.S. capital account

U.S. exports tend to decrease when A) economic activity abroad is decreasing. B) foreign GDPs are rising. C) U.S. prices are low relative to those in the rest of the world. D) the inflation rate in the United States is lower than the inflation rates in other countries.

A) economic activity abroad

U.S. exports tend to increase when A) economic activity abroad is increasing. B) foreign GDPs are falling. C) U.S. prices are rising compared to the rest of the world. D) the value of the dollar rises.

A) economic activity abroad is increasing

An increase in the supply of dollars and an increase in the demand for Japanese yen A) increases the dollar price of yen. B) decreases the dollar price of yen. C) increases the yen price of dollars. D) does not change the exchange rate between dollars and yen

A) increases the dollar price of yen

The open-economy multiplier ________ the closed-economy multiplier. A) is larger than B) equals C) is smaller than D) can be smaller or larger, depending on the size of MPM and MPC

C) is smaller than

A decrease in the supply of dollars and a decrease in the demand for Japanese yen A) increases the value of the dollar. B) increases the value of the yen. C) increases the yen price of dollars. D) does not change the exchange rate between dollars and yen.

A) increases the value of the dollar

An increase in U.S. exports to Japan ________ the demand for U.S. dollars and ________ the supply of yen. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases

A) increases; increases

Which of the following is an item in the U.S. current account? A) net investment income B) the change in foreign private assets in the United States C) the change in private U.S. assets abroad D) the change in foreign government assets in the United States

A) net investment income

The value of the dollar relative to the euro would increase, if A) the demand for dollars increases and the supply of euros increases. B) the demand for dollars decreases and the supply of euros increases. C) the supply of dollars increases and the demand for euros increases. D) the supply of dollars increases and the demand for euros decreases.

A) the demand for dollars increases and the supply of euros increases

When foreign assets in the United States decrease, A) the United States residents are reducing their debt to the rest of the world. B) the United States residents are increasing their stock of assets. C) the United States residents are increasing their debt to the rest of the world. D) foreign residents debts to the United States residents also increase.

A) the united states residents are reducing their debt to the rest of the world

The most common reason for exchanging one currency for another is A) to purchase goods produced in another country. B) to engage in fixed capital investment in another country. C) to purchase stocks and bonds in another country. D) to engage in currency speculation.

A) to purchase goods produced in another country

When a countryʹs exports of goods are less than its imports of goods in a given period, it has a A) trade deficit. B) capital account deficit. C) trade surplus. D) current account surplus

A) trade deficit

If planned aggregate expenditures are $400 billion, consumption is $120 billion, investment is $60 billion, government spending is $70 billion, there is a A) trade surplus of $150 billion. B) trade surplus of $250 billion. C) trade deficit of $650 billion. D) trade balance.

A) trade surplus of $150 billion

In the early part of the twentieth century, nearly all currencies A) were backed by gold. B) were held together by a system of fixed exchange rates in which the value of those currencies was set in relation to the British pound. C) were held together by a system of fixed exchange rates in which the value of those currencies was set in relation to the U.S. dollar. D) were held together by a system of flexible exchange rates in which the value of those currencies fluctuated in response to the relative supply of and demand for them

A) were backed by gold

If an economyʹs MPC is 0.8 and the MPM is 0.55, then an increase in government spending of $2,000 will increase income by A) $5,500. B) $8,000. C) $10,000. D) $20,000.

B) $8,000

Refer to Figure 20.1. If the economy is closed and the government increases spending by 15, the new equilibrium output is A) 150. B) 175. C) 180. D) 200.

B) 175

The U.S. and Canada heavily trade with each other. Which of the following is TRUE? A) Canadian prices increase ⇒ Canadian exports increase ⇒ U.S. prices decrease. B) Canadian prices increase ⇒ Canadian exports decrease ⇒ U.S. prices increase. C) Canadian prices decrease ⇒ Canadian exports decrease ⇒ U.S. prices decrease. D) Canadian prices decrease ⇒ Canadian exports decrease ⇒ U.S. prices increase.

B) Canadian prices increase ⇒ Canadian exports decrease ⇒ U.S. prices increase.

Which of the following statements is TRUE? A) A country runs a capital account deficit if it imports more than it exports. B) If the current account is in surplus, the capital account must be in deficit. C) The overall sum of all the entries in the balance of payments must be positive. D) A country runs a current account surplus if it sells more of its assets abroad than it buys abroad.

B) If the current account is in surplus, the capital account must be in deficit

If exchange rates are fixed, then an increase in Canadaʹs export prices causes A) U.S. import prices to fall. B) U.S. import prices to rise. C) Canadian import prices to fall. D) Canadian import prices to rise

B) U.S import prices to rise

The U.S. and Japan heavily trade with each other. Which of the following is TRUE? A) U.S. prices increase ⇒ U.S. exports increase ⇒ Japanese prices decrease. B) U.S. prices increase ⇒ U.S. imports increase ⇒ Japanese prices increase. C) U.S. prices decrease ⇒ U.S. imports increase ⇒ Japanese prices increase. D) U.S. prices decrease ⇒ U.S. exports decrease ⇒ Japanese prices increase

B) U.S. prices increase ⇒ U.S. imports increase ⇒ Japanese prices increase.

An Italian citizen buys a U.S. bond. This transaction will be entered as A) a credit in the U.S. current account. B) a credit in the U.S. capital account. C) a debit in the U.S. current account. D) a debit in the U.S. capital account

B) a credit in the U.S. capital account

) If income increases by $450, we know that the change in A) consumption, saving, and imports is greater than $450. B) consumption, saving, and imports equals $450. C) consumption and saving is greater than $450. D) consumption, saving, imports, and exports is less than $450.

B) consumption, saving, and imports equals $450

The balance of payments is divided into two major accounts, the A) current account and the trade account. B) current account and the capital account. C) current account and the reserve account. D) trade account and the capital account

B) current account and the capital account

Until the mid-1970s the United States consistently ran A) current account deficits and capital account surpluses. B) current account surpluses and capital account deficits. C) deficits in both the current account and the capital account. D) surpluses in both the current account and the capital account.

B) current account surpluses and capital account deficits

Any transaction that causes foreign exchange to leave a country is a A) credit item in that countryʹs balance of trade. B) debit item in that countryʹs balance of payments. C) credit item in that countryʹs balance of payments. D) debit item in that countryʹs balance of trade.

B) debit item in that country's balance of payments

The price of one countryʹs currency in terms of another countryʹs currency is the A) balance of trade. B) exchange rate. C) terms of trade. D) currency valuation.

B) exchange rate

When the prices of a countryʹs imports increase, the prices of domestic goods may increase. This occurs because A) an increase in the prices of imported inputs will cause aggregate supply to increase. B) if import prices rise relative to domestic prices, households will tend to substitute domestically produced goods and services for imports. C) if import prices rise relative to domestic prices, households will tend to substitute imports for domestically produced goods and services. D) an increase in the prices of imported inputs will cause aggregate demand to decrease

B) if import prices rise relative to domestic prices, households will tend to substitute domestically produced goods and services for imports.

An increased growth rate in Malaysia has increased the Malaysian demand for U.S. -produced coal. Malaysia increases its imports of U.S.-produced coal by $20 million. U.S. net exports will A) increase by $20 million. B) increase by less than $20 million. C) increase by more than $20 million. D) increase by $20 million or more.

B) increase by less than $20 million

If the MPM is 0.1, then a $3,500 increase in income will A) increase imports by $35,000. B) increase imports by $350. C) increase exports by $35,000. D) increase exports by $350

B) increase imports by $350

An increase in the supply of dollars and an increase in the demand for Japanese yen A) increases the value of the dollar. B) increases the value of the yen. C) increases the yen price of dollars. D) does not change the exchange rate between dollars and yen.

B) increases the value of the yen

When foreign assets in the United States increase, A) the United States residents are reducing their debt to the rest of the world. B) the United States residents are increasing their debt to the rest of the world. C) foreign residents debt to the United States residents also decrease. D) the United States residents are reducing their stock of assets

B) the United States residents are increasing their debt to the rest of the world

Economic activity increases in Western Europe, and this causes economic activity to increase in the United States. This is an example of A) the price feedback effect. B) the trade feedback effect. C) the export feedback effect. D) the import feedback effect.

B) the trade feedback effect

If an economyʹs MPC is 0.95 and the MPM is 0.15, then an increase in government spending of $1,000 will increase income by A) $1,000. B) $4,500. C) $5,000. D) $8,000.

C) $5,000

Refer to Figure 20.1. What is the MPM in this economy? A) 0.2 B) 0.25 C) 0.6 D) cannot be determined from the graph

C) 0.6

Refer to Figure 20.1. What is the MPC in this economy? A) 0.5 B) 0.75 C) 0.8 D) cannot be determined from the graph

C) 0.8

U.S. exports tend to increase when A) economic activity abroad is decreasing. B) foreign GDPs are falling. C) U.S. prices are falling compared to those in the rest of the world. D) the U.S. dollar is strong compared to foreign currencies

C) U.S prices are falling compared to those in the rest of the world

U.S. exports tend to decrease when A) economic activity abroad is increasing. B) foreign GDPs are rising. C) U.S. prices are rising relative to those in the rest of the world. D) the U.S dollar is weak compared to foreign currencies.

C) U.S. prices are rising relative to those in the rest of the world

A $100 million increase in government spending causes A) an equal amount of change in equilibrium output in an open and a closed economy. B) a larger change in an open economy than in a closed economy. C) a larger change in a closed economy than in an open economy. D) a larger change in a closed economy than in an open economy if the MPM is zero

C) a larger change in a closed economy than in an open economy

Japan imports over 90% of its consumption of oil. If the price of oil increases, Japanʹs A) aggregate demand curve shifts to the right. B) aggregate supply curve shift to the right. C) aggregate supply curve shifts to the left. D) aggregate planned expenditures increase

C) aggregate supply curve shifts to the left

Which of the following increases the price of the dollar relative to the Mexican peso? A) an increase in the supply of dollars B) an increase in the demand for pesos C) an increase in the demand for dollars D) a decrease in the supply of pesos

C) an increase in the demand for dollars

In the United States, which of the following is NOT directly determined by U.S. income? A) consumption B) income tax revenue C) exports D) imports

C) exports

If the MPS is 0.25 and the MPC is 0.6, then the MPM A) is 0.85. B) is 0.35. C) is 0.15 D) cannot be determined from the given information

C) is 0.15

When a foreigner buys shares in a U.S. company, the transaction A) is registered as a credit in the capital account, and it decreases foreign private assets in the United States. B) is registered as a debit in the current account, and it decreases private U.S. assets abroad. C) is registered as a credit in the capital account, and it increases foreign private assets in the United States. D) is registered as a debit in the capital account, and it increases private U.S. assets abroad

C) is registered as a credit in the capital account, and it increases foreign private assets in the United States

Suppose that an increase in the price level of one country drives up prices in other countries. This, in turn, increases the price level in the first country. This process is the A) J-curve effect. B) trade feedback effect. C) price feedback effect. D) balance of trade effect

C) price feedback effect

A flexible exchange rate between two countries is determined by A) the governments of both countries. B) the International Monetary Fund. C) the demand and supply of both countriesʹ currencies. D) Bretton Woods agreement.

C) the demand and supply of both countries' currencies

The value of the dollar relative to the euro would decrease, if A) the demand for dollars increases and the supply of euros increases. B) the demand for dollars decreases and the supply of euros increases. C) the supply of dollars increases and the demand for euros increases. D) the supply of dollars increases and the demand for euros decreases.

C) the supply of dollars increases and the demand for euros increases

If planned aggregate expenditures are $240 billion, consumption is $140 billion, investment is $70 billion, government spending is $50 billion, there is a A) trade deficit of $10 billion. B) trade surplus of $20 billion. C) trade deficit of $20 billion. D) trade balance.

C) trade deficit of $20 billion

The tendency for an increase in the economic activity of one country to lead to a worldwide increase in economic activity is the A) multiplier effect. B) trickle-down effect. C) trade feedback effect. D) spontaneous growth effect

C) trade feedback effect

When a countryʹs exports of goods are greater than its imports of goods in a given period, it has a A) trade deficit. B) capital account surplus. C) trade surplus. D) current account deficit.

C) trade surplus

The agreements that were reached at the Bretton Woods conference in 1944 established a system A) in which the values of currencies were fixed in terms of a specific number of ounces of gold, which in turn determined their values in international trading. B) of floating exchange rates determined by the supply and demand of one nationʹs currency relative to the currency of other nations. C) of essentially fixed exchange rates under which each country agreed to intervene in the foreign exchange market when necessary to maintain the agreed-upon value of its currency. D) that prohibited governments from intervening in the foreign exchange markets

C)of essentially fixed exchange rates under which each country agreed to intervene in the foreign exchange market when necessary to maintain the agreed-upon value of its currency.

Planned aggregate expenditure in an open economy equals A) C + I + G - IM. B) C + I + G + EX. C) C + I + G + EX + IM. D) C + I + G + EX - IM.

D) C + I + G + EX - IM

Algebraically, the relationship between imports and income can be written as A) IM = Y/m. B) Y = mIM. C) IM = m/Y. D) IM = mY.

D) IM = mY

Which of the following statements is true? A) The larger a nationʹs marginal propensity to consume, the smaller the open-economy multiplier. B) The smaller a nationʹs marginal propensity to import, the smaller the open-economy multiplier. C) The larger a nationʹs marginal propensity to export, the smaller the open-economy multiplier. D) The larger a nationʹs marginal propensity to import, the smaller the open-economy multiplier.

D) The larger a nationʹs marginal propensity to import, the smaller the open-economy multiplier.

A U.S. individual buys shares in a Swiss company. This transaction will be entered as A) a credit in the U.S. current account. B) a debit in the U.S. current account. C) a credit in the U.S. capital account. D) a debit in the U.S. capital account

D) a debit in the U.S capital account

Which of the following is/are likely to affect the demand for imports? A) the relative prices of domestically produced and foreign-produced goods B) the after-tax real wage C) interest rates D) all of the above

D) all of the above

The trade feedback effect includes all of the following steps EXCEPT A) an increase in U.S. economic activity stimulates U.S. imports. B) an increase in foreign imports stimulates U.S. exports. C) an increase in U.S. exports stimulates U.S. economic activity. D) an increase in foreign income stimulates U.S. imports

D) an increase in foreign income stimulates U.S. imports

Which of the following is likely to increase the exports of a country? A) an increase in income in the domestic country B) a decrease in income in the domestic country C) a decrease in income in foreign countries D) an increase in income in foreign countries

D) an increase in income in foreign countries

Which of the following decreases the price of the dollar relative to the British pound? A) a decrease in the supply of dollars B) a decrease in the demand for pounds C) an increase in the demand for dollars D) an increase in the supply of dollars

D) an increase in the supply of dollars

The difference between a countryʹs merchandise exports and its merchandise imports is the A) balance of payments. B) capital account. C) current account. D) balance of trade

D) balance of trade

Imports A) bring foreign exchange, and thus they are registered as credit in the balance of payments. B) bring foreign exchange, and thus they are registered as debit in the balance of payments. C) cause foreign exchange to leave the country, and thus they are registered as credit in the balance of payments. D) cause foreign exchange to leave the country, and thus they are registered as debit in the balance of payments.

D) cause foreign exchange to leave the country, and thus they are registered as debit in the balance of payments.

If two countries donʹt trade with each other, an increase in the price level in one country A) increases the price level in the other country. B) decreases the price level in the other country. C) increases the price level in the other country then decreases it. D) does not affect the price level in the other countr

D) does not affect the price level in the other country

Exchange rates that are determined by the unregulated forces of supply and demand are A) fixed exchange rates. B) pegged exchange rates. C) managed exchange rates. D) floating exchange rates.

D) floating exchange rates

In 1971, most countries, including the United States, A) returned to the gold standard. B) adopted a new system of fixed exchange rates. C) adopted a single, internationally accepted currency whose use is limited to international transactions. D) gave up trying to fix exchange rates formally and began allowing them to be determined essentially by supply and demand.

D) gave up trying to fix exchange rates formally and began allowing them to be determined essentially by supply and demand

The trade feedback effect illustrates the fact that A) an increase in U.S. economic activity leads to a decrease in the economic activity of other countries. B) U.S. imports depress the imports of other countries. C) imports and exports are unrelated to one another. D) imports affect exports and exports affect imports

D) imports affect exporgs and exports affect imports

T/F The 2007 price level in Great Britain was relatively higher than the price level in the United States. Thus, a U.S. manufacturing facility looking to buy coal for its plant would most likely buy coal at home in the United States.

TRUE

When an American buys an asset abroad, the transaction A) is registered as a credit in the capital account, and it decreases private U.S. assets abroad. B) is registered as a debit in the current account, and it decreases private U.S. assets abroad. C) is registered as a credit in the capital account, and it increases private U.S. assets abroad. D) is registered as a debit in the capital account, and it increases private U.S. assets abroad.

D) is registered as a debit in the capital account, and it increases private U.S. assets abroud

When United States residents acquire assets abroad, they are in essence A) borrowing money, and foreign debts to the United States decrease. B) borrowing money, and foreign debts to the United States increase. C) lending money, and foreign debts to the United States decrease. D) lending money, and foreign debts to the United States increase.

D) lending money, and foreign debts to the United States increase

The open economy multiplier will decrease if A) the MPC decreases. B) the MPM decreases. C) either the MPM or the MPC decreases. D) the MPM increases.

D) the MPM increases

Which of the following statements is TRUE? A) An increase in exports causes a balance of payments surplus. B) A decrease in exports causes a balance of payments deficit. C) A decreases in imports causes a balance of payments surplus. D) The balance of payments is always in balance

D) the balance of payments is always in balance

The level of U.S. exports depends directly on A) the level of income in the United States. B) the size of the spending multiplier in other countries. C) the size of the spending multiplier in the United States. D) the level of income in other countries

D) the level of income in other countries

If planned aggregate expenditures are $300 billion, consumption is $180 billion, investment is $75 billion, government spending is $45 billion, there is a A) trade surplus of $300 billion. B) trade surplus of $600 billion. C) trade deficit of $300 billion. D) trade balance.

D) trade balance

T/F A current account deficit means that foreigners do not like our goods

FALSE

T/F A depreciation in a countryʹs currency will immediately reduce its trade deficit.

FALSE

T/F An increase in Germanyʹs interest rate and an increase in Germanyʹs price level relative to U.S. price level have the same effect on the exchange rate between the two countries

FALSE

T/F Declining economic activity abroad will increase U.S. exports.

FALSE

T/F If the $/yen exchange rate rises, then so does the value of the dollar

FALSE

T/F The current international monetary system is based on a gold standard.

FALSE

T/F The record of a countryʹs transactions in goods, services, and assets with the rest of the world is its balance of trade.

FALSE

T/F When an American buys a factory in China, the transaction is registered a credit in the U.S. capital account.

FALSE

T/F When the United States acquires assets abroad, it is in essence borrowing money, and foreign debts to the United States decrease

FALSE

T/F The balance of trade is part of the current account which is part of the balance of payments.

TRUE

T/F A current account deficit implies a capital account surplus

TRUE

T/F A decrease in the price level in the United States relative to the price level in Mexico causes an appreciation of the dollar against the peso.

TRUE

T/F An excess supply of euros will cause a depreciation of the euro

TRUE

T/F If the MPC is 0.75 and the MPM is 0.25, the open economy multiplier is 2.

TRUE

T/F If the MPC is 0.95 and the MPM is 0.05, the open economy multiplier is 10.

TRUE

T/F Imports equal the MPM times income

TRUE

T/F Included in the U.S. current account is interest that U.S. residents receive on overseas assets.

TRUE