chapter 18

Suppose the net capital flows of the China equaled -$10 billion in one year, what do you know about the net foreign investment of the United States in that year?

$10 billion

If the exchange rate between the U.S. dollar and the yen is $1 = ¥100, the price level in the United States is 110 and the price level in Japan is 100, what is the real exchange rate?

110

Which of the following statements about the accounts in the balance of payment is correct?

A country that runs a current account surplus must run a financial account deficit.

The savings and investment equation shows that

S = I + NFI.

The balance of payments is

a record of a country's trade with other countries in goods, services, and assets

In the foreign exchange market for dollars, which of the following will cause the equilibrium exchange rate to rise?

a shift left in supply that is greater than a decrease in demand

Which of the following statements about the balance of payments is correct?

a. Foreign investment in the United States shows up as a positive entry in the U.S. financial account. b. Additions to foreign holdings of dollars show up as positive entries in the U.S. financial account. c. Ignoring the capital account, a current account deficit must be exactly offset by a financial account surplus, leaving the balance of payments equal to zero

Which of the following statements is correct?

a. Net exports is roughly equal to the current account balance. b. The financial account balance is roughly equal to net capital flows. c. Net capital flows are roughly equal to net foreign investment but with the opposite sign.

When imports are greater than exports, as is usually the case for the United States, which of the following must be true?

a. There will be a net capital inflow as people in the United States sell assets and borrow to pay for the surplus of imports over exports. b. The United States must be a net borrower from abroad. c. U.S. net foreign investment must be negative.

Which of the following factors cause both the demand curve and the supply curve for dollars in the foreign exchange market to shift?

a. changes in the demand for U.S.-produced goods and services and changes in the demand for foreign produced goods and services b. changes in the desire to invest in the United States and changes in the desire to invest in foreign countries c. changes in the expectations of currency traders concerning the likely future value of the dollar and the likely future value of foreign currencies

Which of the following are sources of foreign demand for U.S. dollars?

a. foreign firms and consumers who want to buy goods and services produced in the United States b. foreign firms and consumers who want to invest in the United States c. currency traders who believe that the value of the dollar in the future will be greater than its value today

In the balance of payments, the current account records

a. imports and exports of goods and services. b. income received and income paid for investments between U.S. residents and foreigners. c. the difference between transfers made to residents of other countries and transfers received by U.S. residents from other countries.

Which of the following measures are closely associated with the concept of net foreign investment?

a. net capital flows b. capital outflows and capital inflows c. net foreign direct investment and net foreign portfolio investment

In which of the following situations does a country experience a net capital inflow and a financial account surplus?

a. when the country sells more assets to foreigners than it buys from foreigners b. when the country borrows more from foreigners than it lends to foreigners c. when the country runs a current account deficit

In the balance of payments, the net exports component of aggregate expenditures can be obtained by

adding together the balance of trade and the balance of services

Fill in the blanks. Currency ___________ occurs when the market value of a country's currency rises relative to the value of another country's currency, while currency ____________ occurs when the market value of a country's currency declines relative to value of another country's currency

appreciation; depreciation

Budget deficits may reduce

both domestic investment and net foreign investment

A country experiences twin deficits when a government budget deficit causes a

current account deficit

. Fill in the blanks. If the exchange rate changes from ¥100 = $1 to ¥85 = $1, the dollar has ___________, and the yen has ___________.

depreciated; appreciated

Fill in the blanks. When firms build or buy facilities in foreign countries, they are engaging in foreign ___________________. When investors buy stocks or bonds issued in foreign countries, they are engaging in foreign ___________________.

direct investment; portfolio investment

If a country has a deficit in its balance of trade, it means that this country

imports more goods than it exports

A depreciation in the domestic currency will

increase exports and decrease imports, thereby increasing net exports.

The balance of trade

is equal to the difference between exports of goods and imports of goods

Fill in the blanks. In an open economy, an expansionary fiscal policy may be ________ effective because the crowding out effect could be ________.

less; larger

When a foreign investor buys a bond issued by either a U.S. firm or the federal government, or when a foreign firm builds a factory in the United States, the transaction is recorded in the balance of payments as

only a capital inflow.

Nearly all economies in the world are

open economies

Purchases of assets a country has made abroad and foreign purchases of assets in the country are recorded in

the financial account.

Which of the following determines how many units of a foreign currency you can purchase with one dollar?

the nominal exchange rate

Which two factors do economists combine to establish the real exchange rate between two countries?

the relative price levels and the nominal exchange rate between the two countries' currencies

An increase in income in both the United States and the United Kingdom income will increase

the supply and demand for pounds and have an uncertain effect on the exchange rate.

In the financial account

there is a capital outflow from the United States when an investor in the United States buys a foreign bond.

In 2012, the United States ran a ______________ with all of its major trading partners and with every region of the world

trade deficit

When will the demand curve for dollars shift to the right?

when speculators decide that the value of the dollar will rise relative to the value of the yen

If the dollar price of a euro is $1.35, then the euro price of a dollar is

€0.74.

From a balance of payments point of view, the net exports component of aggregate expenditures equals

the balance of trade and services.

The part of the balance of payments that records a country's exports and imports of goods and services is

the current account.

What impact does the additional policy channel available in an open economy have?

It increases the ability of an expansionary monetary policy to affect aggregate demand.

Which of the following is the saving-investment equation?

National Saving = Domestic Investment + Net Foreign Investment

In the balance of payments, the difference between the value of the goods a country exports and the value of the goods a country imports is called

the balance of trade

Given the definition of net foreign investment, a country such as the United States that has negative net foreign investment must be

saving less than it is investing domestically.

A recession in the United States will

shift the supply curve of dollars to the left.

An increase in interest rates in Japan will

shift the supply curve of dollars to the right.

Fill in the blanks. In an open economy, a contractionary fiscal policy will have a ________ impact on aggregate demand and, therefore, will be ________ effective in slowing down an economy.

smaller; less

Currency traders who buy and sell foreign exchange in an attempt to profit from changes in exchange rates are

speculators

Fill in the blanks. When the exchange rate (measured as foreign currency per dollar) is above the equilibrium exchange rate, there is a ___________ of dollars and, consequently, ____________ pressure on the exchange rate

surplus; downward