True/False
Indicate whether the
sentence or statement is true or false.
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1.
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Net capital outflow is the purchase of domestic
assets by foreigners minus the purchase of foreign assets by domestic residents.
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2.
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A country's net capital outflow (NCO) is
always equal to its net exports (NX).
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3.
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All other things being equal, an increase in a
country's real interest rate reduces net capital outflow.
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4.
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An increase in UK net capital outflow increases the
supply of pounds in the market for foreign currency exchange and decreases the real exchange rate of
the pound.
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5.
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If labour unions convince UK consumers to "buy
British," it will improve (move toward surplus) the UK trade balance.
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6.
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If a country's net capital outflow (NCO) is
positive, it is an addition to its demand for loanable funds.
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7.
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An increase in the government's budget deficit
shifts the supply of loanable funds to the right.
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8.
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An increase in the UK government's budget
deficit tends to cause the real exchange rate of the pound to depreciate.
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9.
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The term "twin deficits" refers to a
country's trade deficit and its government budget deficit.
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10.
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If the EU raises its tariff on imported sugar, it
will reduce imports and improve the trade balance of EU members.
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11.
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If the EU raises its tariff on imported sugar,
domestic sugar growers will benefit, but the euro will appreciate and domestic producers of export
goods will be harmed.
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12.
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An increase in the government budget deficit
reduces net exports.
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13.
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A country experiencing capital flight will
experience a reduction in its net capital outflow and its net exports.
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14.
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If UK residents increase their saving, the pound
will appreciate in the market for foreign currency exchange.
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15.
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A rise in Denmark’s net exports (NX) will
increase the demand for the Danish krone in the market for foreign currency exchange and the krone
will appreciate in value.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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Which of the following statements regarding the
loanable funds market is not true?
a. | A decrease in a country's net capital outflow
shifts the demand for loanable funds to the left. | b. | An increase in domestic investment shifts the demand for loanable funds to the
right. | c. | An increase in a country's net capital outflow
shifts the supply of loanable funds to the left. | d. | An increase in a country's net capital outflow raises its real interest
rate. |
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17.
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An increase in the government budget
deficit
a. | has no impact on the real interest rate and fails to
crowd out investment because foreigners buy assets in the deficit country. | b. | decreases the real interest rate and crowds out
investment. | c. | none of these
answers | d. | increases the real interest rate and crowds out
investment. |
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18.
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Which of the following statement regarding the
loanable funds market is true?
a. | A decrease in the government budget deficit increases
the real interest rate. | b. | An increase in the
government budget deficit shifts the supply of loanable funds to the
right. | c. | An increase in private saving shifts the supply of
loanable funds to the left. | d. | An increase in the
government budget deficit shifts the supply of loanable funds to the
left. |
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19.
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Assuming all other things unchanged, a higher UK
real interest rate
a. | decreases UK net capital outflow because UK residents
and foreigners prefer to invest in the UK | b. | none of these
answers | c. | decreases UK net capital outflow because UK residents
and foreigners prefer to invest abroad. | d. | increases UK net
capital outflow because UK residents and foreigners prefer to invest in the
UK. |
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20.
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An increase in Europe's taste for UK produced
Hondas would cause the pound to
a. | depreciate and would increase UK net
exports. | b. | appreciate and would increase UK net
exports. | c. | depreciate and would decrease UK net
exports. | d. | appreciate and would decrease UK net
exports. | e. | appreciate, but the total value of UK net export stays
the same. |
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21.
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An increase in the UK government budget
deficit
a. | increases UK net exports and decreases UK net capital
outflow. | b. | decreases UK net exports and UK net capital outflow the
same amount. | c. | increases UK net
exports and UK net capital outflow the same amount. | d. | decreases UK net exports and increases UK net capital
outflow. |
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22.
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The phrase "twin deficits" refers
to
a. | a country's trade deficit and its government budget
deficit. | b. | the fact that if a country has a trade deficit, its
trading partners must also have trade deficits. | c. | the equality of a
country's saving deficit and its investment deficit. | d. | a country's trade deficit and its net capital outflow
deficit. |
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23.
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Which of the following statements regarding the
market for foreign currency exchange is true?
a. | An increase in UK net exports decreases the supply of
pounds and the pound depreciates. | b. | An increase in UK
net exports increases the demand for pounds and the pound appreciates. | c. | An increase in UK net exports increases the supply of pounds and the pound
depreciates. | d. | An increase in UK
net exports decreases the demand for pounds and the pound
appreciates. |
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24.
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Which of the following statements regarding the
market for foreign currency exchange is true?
a. | An increase in UK net capital outflow increases the
supply of pounds and the pound depreciates. | b. | An increase in UK
net capital outflow increases the demand for pounds and the pound
appreciates. | c. | An increase in UK
net capital outflow increases the demand for pounds and the pound
depreciates. | d. | An increase in UK
net capital outflow increases the supply of pounds and the pound
appreciates. |
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25.
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If the EU imposes a quota on the importing of
clothing produced in China, so reducing UK imports of clothing, which of the following is true
regarding the market for foreign currency exchange?
a. | The demand for pounds decreases and the pound
depreciates. | b. | The supply of
pounds increases and the pound depreciates. | c. | The supply of
pounds decreases and the pound appreciates. | d. | The demand for
pounds increases and the pound appreciates. |
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26.
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If the EU imposes a quota on the importing of
clothing produced in China, so reducing UK imports of clothing, which of the following is true
regarding UK net exports?
a. | Net exports will rise. | b. | none of these answers | c. | Net exports will
fall. | d. | Net exports will remain
unchanged. |
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27.
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Suppose, due to political instability, Russians
suddenly choose to invest in UK assets as opposed to Russian assets. Which of the following
statements is true regarding UK net foreign investment?
a. | UK net foreign investment is unchanged because only UK
residents can alter UK net foreign investment. | b. | UK net foreign
investment rises. | c. | UK net foreign
investment falls. | d. | none of these
answers |
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28.
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Suppose, due to political instability, Russians
suddenly choose to purchase UK assets as opposed to Russian assets. Which of the following statements
is true regarding the value of the pound and UK net exports?
a. | The pound appreciates, and UK net exports
rise. | b. | The pound appreciates, and UK net exports
fall. | c. | The pound depreciates, and UK net exports
rise. | d. | The pound depreciates, and UK net exports
fall. |
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29.
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An increase in UK private saving
a. | increases UK net exports and UK net capital outflow the
same amount. | b. | increases UK net
exports and decreases UK net capital outflow. | c. | decreases UK net
exports and UK net capital outflow the same amount. | d. | decreases UK net exports and increases UK net capital
outflow. |
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30.
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Which of the following statements about trade
policy is true?
a. | A country's trade policy has no impact on the size
of its trade balance. | b. | none of these
answers | c. | A restrictive import quota decreases a country's
net exports. | d. | A restrictive
import quota increases a country's net exports. |
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31.
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Which of the following groups would not benefit
from an EU import quota on Japanese cars?
a. | EU consumers who buy electronics from
Japan. | b. | EU farmers who export grain. | c. | Employees of EU car manufacturers. | d. | Shareholders of German carmaker BMW. |
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32.
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An example of a trade policy is
a. | a tariff on sugar. | b. | All are examples of trade policy. | c. | capital flight because it increases a country's net
exports. | d. | an increase in the government budget deficit because it
reduces a country's net exports. |
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33.
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An export subsidy should have the opposite effect
of
a. | a government budget deficit. | b. | capital flight. | c. | an increase in
private saving. | d. | a
tariff. |
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34.
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Which of the following groups would be most harmed
by a UK government budget deficit?
a. | Foreigners who wish to buy assets in the
UK. | b. | BAe Systems wishing to sell aircraft to Saudi
Arabia. | c. | UK residents wishing to buy foreign produced
cars. | d. | Lenders of loanable
funds. |
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35.
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Capital flight
a. | decreases a country's net exports and increases its
long-run growth path. | b. | increases a
country's net exports and increases its long-run growth path. | c. | increases a country's net exports and decreases its long-run growth
path. | d. | decreases a country's net exports and decreases its
long-run growth path. |
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