Practice Questions 5:

Multiple Choice Questions:

1. Which of the following statements is true?

a. When spending is greater than production in an open economy, the economy will have a trade surplus.

b. If an economy is a net lender in the international market for funds it must have a trade surplus.

c. It is possible for a country to have balanced trade and still find that its spending is greater than its production.

d. A country that is a net importer produces less than it spends.

e. (b) and (d)

2. The sum of domestic spending on foreign goods and services equals

a. Consumption.

b. Consumption plus investment.

c. Consumption plus investment plus government spending.

d. Net Exports.

e. Imports.

3. A national accounts identify is true

a. Only when the economy is in equilibrium.

b. Only for small open economies.

c. Only for closed economies.

d. (a) and (b)

e. (a) and (c)

f. By definition.

4. Which of the following equations is a national income accounts identity?

i. Y = C + G + I + NX

ii. C = a + b( Y - T)

iii. I = I (r)

iv. NX = NX (real exchange rate)

v. S - I = NX

a. (i ) and (v)

b. (i)

c. (v)

d. (i), (ii), and (v)

e. All of the above are national income accounts identities.

5. Suppose data for your small open economy indicates that investment is greater than saving.  This implies

a. That the trade balance is negative.

b. That the trade balance is positive.

c. That exports are greater than imports.

d. That imports are greater than exports.

e. (a) and (c)

f. (a) and (d)

g. (b) and (c)

h. (b) and (d)

6. Net capital outflows are positive when (pick all correct answers)

a. Imports are greater than exports.

b. The trade balance is positive.

c. The economy runs a trade deficit.

d. The economy borrows from foreigners.

e. Saving is greater than investment.

7. Suppose there is a small open economy that finds the world real interest rate is greater than the real interest rate that would prevail in its economy if it operated as a closed economy.  Which of the following statements is true?  For this economy

a. Net capital outflows are negative.

b. Exports are greater than imports leading to a trade deficit.

c. They will need to borrow funds from foreigners.

d. Saving is greater than investment.

8. In a small open economy an increase in government spending will

a. Reduce national saving.

b. Cause the world real interest rate to increase.

c. Cause net exports to decrease.

d. All of the above.

e. (a) and (b)

f. (a) and (c)

g. (b) and (c)

9. In a small open economy an increase in taxes will

a. Reduce national saving.

b. Cause the world real interest rate to increase.

c. Cause net exports to increase.

d. All of the above.

e. (a) and (b)

f. (a) and (c)

g. (b) and (c)

10. A small open economy A announces an increase in their level of government spending.  How will this affect another small open economy B?

a. It will result in economy B facing a higher world real interest rate.

b. It will result in economy B facing a lower world real interest rate.

c. It will cause economy B to increase its level of government spending to offset economy A's increased spending.

d. It will not affect economy B since economy A is too small to have an effect on the world real interest rate.

11. The world real interest rate increases.  This would be due to

a. A country with a small open economy increases its level of government spending.

b. A country with a small open economy declares war on another country and starts building up its military defenses.

c. A country with a large open economy decreases its level of government spending.

d. A country with a large open economy increases it level of taxation.

e. None of the above.

12. Holding everything else constant, if the investment demand function for a country with a small open economy shifts left then

a. This country will become a lender to foreigners.

b. This country will have a trade surplus.

c. This country will have exports less than imports.

d. (a) and (b)

e. (a) and (c)

13. Suppose you are told that currently a British pound trades for 1.9172 U.S. dollars.  What is the value of 1 U.S. dollar in British pounds?

a. It is the reciprocal of 1.9172.

b. .5216

c. There is not enough information to calculate this value.

d. (a) and (b)

14. Suppose you are told the nominal exchange rate is .8 yen per dollar and that the price of a computer in the U.S. is $1000.  In addition, you now that the real exchange rate is .5 U.S. computer per Japanese computer.  What is the price of a Japanese computer in yen?

a. 1600 yen

b. 625 yen

c. 400 yen

d. 2500 yen

15. Suppose you are told the nominal exchange rate is .8 yen per dollar, that the price of a computer in the U.S. is $1000, and the price of a computer in Japan is 500 yen.  What is the real exchange rate for the U.S.?

a. .625 Japanese computer/U.S. computer

b. .8 U.S. computer/Japanese computer

c. .8 Japanese computer/U.S. computer

d. 1.6 U.S. computer/Japanese computer

e. 1.6 Japanese computer/U.S. computer

16. Which of the following statements is true?  Holding everything else constant,

a. An increase in the price level in a foreign country will increase the nominal exchange rate.

b. A decrease in the price level in the domestic country will increase the nominal exchange rate.

c. If the Law of One Price holds then changes in the nominal exchange rate must be due to changes in the price level of either the domestic country or the foreign country.

d. (a) and (b)

e. (a) and (c)

f. (b) and (c)

g. All of the above.

Problems: 

1. This problem consists of five different steps.

a. Complete the following table.

b. Using the date you calculated in (a), fill in the following table for this economy.  Assume exports in this economy equal $0.

c. Calculate the production in this economy by filling in the following table.  Does the value of Y in (b) equal the value of Y in (c)?  (It should:  if it doesn't, you've made an error.)

d. Complete the following table.

e. Using the date you calculated in (d), fill in the following table for this economy.  Assume exports in this economy equal $500.

f. Calculate the production in this economy by filling in the following table.  Does the value of Y in (d) equal the value of Y in (e)?  (It should:  if it doesn't, you've made an error.)

2. This problem consists of two parts.

a. Complete the following table.

b. Using the information you calculated in (a), complete the following table.

3. The following equations describe a small open economy using a Classical (long run) Model.

Y = F(K, L) = A K^1/2L^1/2

K is constant at 25 units

L is constant at 100 units

The value of A is given to you as 20

C = 100 + .5(Y - T)

I = I(r) = 400 - 10r

G is constant at 100

T is constant at 50

a. What is the level of output for this economy?

b. If the real interest rate is 5%, or r = 5, then calculate C, I , and G.

c. Given the values you found in (b), what must the value of net exports be for this economy?

d. Fill in the following table for this economy.

e. Now, holding everything else constant suppose government spending increases by 50.  Fill in the following table.

f. What does a negative number for net capital outflow mean?

g. Now, suppose we are back at out initial situation.  This time there has been a change in investment such that investment decreases by 100 at every level of the real interest rate.  What is the new investment demand function?

h. Using the new investment demand function found in (g) and the initial information, calculate the values for the following table.  Assume r = 5.

i. Finally suppose we are back at the initial situation, but the real interest rate increases to 10%.  Calculate the value for the following table.

4. Suppose there are two countries that trade with one another.  Currently the nominal exchange rate is 2 pesos per dollar where pesos are the currency of country A and dollars are the curerency of country B.  Furthermore, suppose the price of a camera made in country B is 100 dollars while the price of a camera made in country A is 200 pesos.

a. What is the price of country B's camera in country A?

b. What is the price of country A's camera in country B?

c. Suppose the price level in country B rises by 20%.  What is the price of country B's camera in country B/

d. Given the information in (c), what is the price of country B's camera in country A?

e. Given the information in (c), what is the price of country A's camera in country B?  Assume country A's camera still costs 200 pesos in country A.

f. What must happen to the nominal exchange rate in order for purchasing power parity to hold?