True/False
Indicate whether the
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
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? An increase in UK net exports:
a. | decreases the supply of pounds and the pound depreciates. | b. | increases the demand
for pounds and the pound appreciates. | c. | increases the supply of pounds and the pound
depreciates. | d. | 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. | c. | Net exports will fall. | b. | none of these
answers | 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? The pound:
a. | appreciates, and UK net exports rise. | c. | depreciates, and UK net exports
rise. | b. | appreciates, and UK net exports fall. | d. | 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. | c. | an increase in private
saving. | b. | capital flight. | 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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