CHAPTER 31: OPEN-ECONOMY MACROECONOMICS

1. Other things the same, if the Vietnam real exchange rate appreciates,
Vietnam net exports
a. increase and Vietnam net capital outflow decreases.
b. decrease and Vietnam net capital outflow increases.
c. and Vietnam net capital outflow both decrease.
d. and Vietnam net capital outflow both increase.

2. Suppose that real interest rates in Vietnam rise relative to real interest
rates in other countries. This increase would make foreigners
a. less willing to purchase Vietnam bonds, so Vietnam net capital outflow
would rise.
b. less willing to purchase Vietnam bonds, so Vietnam net capital outflow
would fall.
c. more willing to purchase Vietnam bonds, so Vietnam net capital outflow
would rise.
d. more willing to purchase Vietnam bonds, so Vietnam net capital outflow
would fall.

3. A country has $50 million of domestic investment and net capital outflow
of $15 million. What is saving?
a. $65 million.
b. -$35 million.
c. -$65 million.
d. $35 million.

? Solution:
Saving (S) = Domestic Investment (I) + Net Capital Outflow (NX)
We are given:
- Domestic Investment (I) = $50 million
- Net Capital Outflow (NX) = -$15 million (notice it's negative as it represents capital
flowing out of the country)
Now, let's plug these values into the formula:
S = $50 million + (-$15 million)
S = $35 million

4. Consider an identical basket of goods in both the Vietnam and the U.S.
For a given nominal exchange rate, in which case is it certain that the
Vietnam’s real exchange rate with the U.S. falls?
a. the price of the basket of goods rises in both the U.S. and Vietnam.
b. the price of the basket of goods falls in both the U.S. and Vietnam.
c. the price of the basket of goods falls in the U.S and rises in Vietnam.
d. the price of the basket of goods rises in the U.S. and falls in Vietnam.

5. When the USD gets "stronger" relative to the VND,

a. the U.S. trade deficit with Vietnam rises.
b. the U.S. trade deficit with Vietnam falls.
c. the U.S. trade deficit with Vietnam is unchanged
d. None of the above necessarily happens.

6. If a country has a trade deficit

a. it has positive net exports and negative net capital outflow.
b. it has negative net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has positive net exports and positive net capital outflow.

7. If purchasing-power parity holds but then U.S. prices rise, which of the
following move the exchange rate back towards purchasing-power parity?
a. Vietnam prices fall or Vietnam’s nominal exchange rate rises
b. Vietnam prices fall or Vietnam’s nominal exchange rate falls
c. Vietnam prices rise or Vietnam’s nominal exchange rate falls
d. Vietnam prices rise or Vietnam’s nominal exchange rate rises

8. Which of the following equations is always correct in an open economy?

a. NX = Y - C - G - I
b. NX = S - I
c. NX = NCO
d. All of the above are correct.

9. If a county has 25 billion euros of imports, 15 billion euros of exports,

and sells 20 billion euros of assets to foreigners, how many foreign assets do
domestic residents purchase?
a. 5 billion euros
b. 10 billion euros
c. 30 billion euros
d. None of the above are correct.
10. If domestic residents of other countries purchase $40 billion of Vietnam
assets and Vietnam residents purchase $5 billion of foreign assets, then
Vietnam net capital outflow is
a. -$35 billion and Vietnam has a trade surplus.
b. $35 billion and Vietnam has a trade deficit.
c. -$35 billion and Vietnam has a trade deficit.
d. $35 billion and Vietnam has a trade surplus.

11. Other things the same, if a country has a trade deficit and saving rises,
a. net capital outflow falls, so the trade deficit increases.
b. net capital outflow falls, so the trade deficit decreases.
c. net capital outflow rises, so the trade deficit increases.
d. net capital outflow rises, so the trade deficit decreases.

12. Suppose that Vietnam citizens purchase more cars made in Japan, and
Japanese purchase more bonds issued by Vietnam corporations. Other
things the same, these actions
a. raise both Vietnam net exports and Vietnam net capital outflows.
b. lower both Vietnam net exports and Vietnam net capital outflows.
c. lower Vietnam net exports and raise Vietnam net capital outflows.
d. raise Vietnam net exports and lower Vietnam net capital outflows.

13. If a cup of Starbucks coffee costs 50,000 VND in Saigon and 2 USD in
New York and purchasing-power parity holds, what is the nominal
exchange rate?
a. 1/25,000 VND per USD
b. 50,000 VND per USD
c. 25,000 VND per USD
d. None of the above are correct.

Solution:
14. If a country had a trade deficit of $10 billion and then its exports rose
by $20 billion and its imports rose by $10 billion, its net exports would now
be
a. -$10 billion.
b. $0
c. $10 billion.
d. -$20 billion.

Solution:

15. A depreciation of the U.S. real exchange rate induces U.S. consumers to
buy
a. more domestic goods and more foreign goods.
b. fewer domestic goods and more foreign goods.
c. more domestic goods and fewer foreign goods.
d. fewer domestic goods and fewer foreign goods.

16. If saving is less than domestic investment, then

a. there is a trade surplus and Y < C + I + G.
b. there is a trade deficit and Y > C + I + G.
c. there is a trade deficit and Y < C + I + G.
d. there is a trade surplus and Y > C + I + G.

17. The theory of purchasing-power parity says that higher inflation in a

nation causes the nation’s currency to ……………, leaving the
……………… exchange rate unchanged.
a. appreciate, real
b. depreciate, nominal
c. depreciate, real
d. appreciate, nominal

18. If a country has negative net capital outflows, then its net exports are
a. positive and its saving is smaller than its domestic investment.
b. positive and its saving is larger than its domestic investment.
c. negative and its saving is smaller than its domestic investment.
d. negative and its saving is larger than its domestic investment.

19. In an open economy, gross domestic product equals $1,850 billion,

consumption expenditure equals $975 billion, government expenditure
equals $225 billion, investment equals $500 billion, and net exports equals
$150 billion. What is national savings?
a. $975 billion
b. $0
c. $500 billion
d. $650 billion

Solution:
20. The VND is said to depreciate against the USD if
a. the exchange rate falls. Other things the same, it will cost fewer USD to buy
Vietnam goods.
b. the exchange rate rises. Other things the same, it will cost fewer USD to buy
Vietnam goods.
c. the exchange rate rises. Other things the same, it will cost more USD to buy
Vietnam goods.
d. the exchange rate falls. Other things the same, it will cost more USD to buy
Vietnam goods.

21. If a nation’s currency doubles in value on foreign exchange markets,

the currency is said to _________, reflecting a change in the _________
exchange rate.
a. appreciate, real
b. depreciate, real
c. appreciate, nominal
d. depreciate, nominal

22. If a US dollar currently exchanges at a rate of 23,000 VND and someone

forecasts that in a year it will exchanges at a rate of 23,500 VND, then the
forecast is given in
a. nominal terms and implies the US dollar will depreciate.
b. real terms and implies the US dollar will depreciate.
c. real terms and implies the US dollar will appreciate.
d. nominal terms and implies the US dollar will appreciate.
23. Suppose that more British decide to vacation in Vietnam and that the
British purchase more Vietnam Treasury Bills. Ignoring how payments are
made for these purchases,
a. the first action by itself lowers Vietnam’s net exports, the second action by
itself raises Vietnam’s net capital outflow.
b. the first action by itself raises Vietnam’s net exports, the second action by
itself raises Vietnam’s net capital outflow.
c. the first action by itself raises Vietnam’s net exports, the second action by
itself lowers Vietnam’s net capital outflow.
d. the first action by itself lowers Vietnam’s net exports, the second action by
itself lowers Vietnam’s net capital outflow.

24. If U.S. residents purchase $500 billion of foreign assets and foreigners
purchase $1300 billion of U.S. assets,
a. U.S. net capital outflow is $800 billion; capital is flowing out of the U.S.
b. U.S. net capital outflow is $800 billion; capital is flowing into the U.S.
c. U.S. net capital outflow is -$800 billion; capital is flowing into the U.S.
d. U.S. net capital outflow is -$800 billion; capital is flowing out of the U.S.

Solution:
- Net capital outflow: This measures the net flow of capital out of a country. A positive
value indicates capital flowing out, while a negative value indicates capital flowing in.
- Let's analyze the foreign asset purchases:
+ U.S. residents purchase $500 billion of foreign assets: This represents capital
flowing out of the U.S.
+ Foreigners purchase $1300 billion of U.S. assets: This represents capital flowing
into the U.S.
- Calculating Net Capital Outflow:
Net Capital Outflow = Foreign Purchases of U.S. Assets - U.S. Purchases of Foreign
AssetsNet Capital Outflow = $1300 billion (foreign purchases) - $500 billion (U.S.
purchases)
Net Capital Outflow = -$800 billion (negative value)

25. U.S. exports are $400 billion, U.S. imports are $900 billion. Which of
the following are consistent with the level of net exports?
a. The U.S has a trade deficit. The U.S. purchases $800 of foreign assets and
foreign countries purchase $300 of U.S. assets.
b. The U.S. has a trade surplus. The U.S. purchases $300 of foreign assets and
foreign countries purchase $800 of U.S. assets.
c. The U.S. has a trade deficit. The U.S. purchases $300 of foreign assets and
foreign countries purchase $800 of U.S. assets.
d. The U.S has a trade surplus. The U.S. purchases $800 of foreign assets and
foreign countries purchase $300 of U.S. assets.