1.

Multiple-choice Questions:
1) A country's gross national product (GNP) is
A) the value of all final goods and services produced by its factors of
production and sold on the market in a given time period.
B) the value of all intermediate goods and services produced by its factors of
production and sold on the market in a given time period.
C) the value of all final goods produced by its factors of production and sold
on the market in a given time period.
D) the value of all final goods and services produced by its factors of
production and sold on the market.
E) the value of all final goods and services produced by its factors of
production, excluding land, and sold on the market in a given time period.
Answer: A
2) Which one of the following statements is the MOST accurate?
A) The sale of a used textbook does generate income for factors of
production.
B) The sale of a used textbook does not generate income for any factor of
production.
C) The sale of a used textbook sometimes does and sometimes does not
generate income for factors of production.
D) It is hard to tell whether a sale of a used textbook does or does not
generate income for factors of production.
E) The sale of a used textbook is a part of the GNP.
Answer: B
3) GDP is different than GNP in that
A) it accounts for net unilateral transfers.
B) it does not account for indirect business taxes.
C) it does not account for a country's production using services with foreignowned capital.
D) it accounts for depreciation.
E) it is a less helpful measure for national income.
Answer: E
4) The CA is equal to
A) Y - (C - I + G).

B) Y + (C + I + G).
C) Y - (C + I + G).
D) Y - (C + I - G).
E) Y + (C - I - G).
Answer: C
5) Which of the following is TRUE?
A) A country with a current account surplus is earning more from its exports
than it spends on imports.
B) A country could finance a current account deficit by using previously
accumulated foreign wealth to pay for its imports.
C) A country with a current account deficit must be increasing its net foreign
debts by the amount of the deficit.
D) We can describe the current account surplus as the difference between
income and absorption.
E) All of the above are true of current account balances.
Answer: E
6) Which of the following is FALSE about private savings and government
savings?
A) SP = Y - T - C
B) Total savings (S) = SP + .
C) A negative government saving always causes a current account deficit.
D) The national income identity can help us to analyze the channels through
which government saving decisions influence macroeconomic conditions.
E) None of the above; all statements are true.
Answer: C
7) What is the exchange rate between the dollar and the British pound if a
pair of American jeans costs 45 dollars in New York and 30 Pounds in
London?
A) 1.5 dollars per British pound
B) 0.5 dollars per British pound
C) 2.5 dollars per British pound
D) 3.5 dollars per British pound
E) 2 dollars per British pound
Answer: A

8) When a country's currency depreciates

A) foreigners find that its exports are more expensive, and domestic
residents find that imports from abroad are more expensive.
B) foreigners find that its exports are more expensive, and domestic
residents find that imports from abroad are cheaper.
C) foreigners find that its exports are cheaper; however, domestic residents
are not affected.
D) foreigners are not affected, but domestic residents find that imports from
abroad are more expensive.
E) foreigners find that its exports are cheaper and domestic residents find
that imports from abroad are more expensive.
Answer: E
9) An appreciation of a country's currency
A) decreases the relative price of its exports and lowers the relative price of
its imports.
B) raises the relative price of its exports and raises the relative price of its
imports.
C) lowers the relative price of its exports and raises the relative price of its
imports.
D) raises the relative price of its exports and lowers the relative price of its
imports.
E) raises the relative price of its exports and does not affect the relative price
of its imports.
Answer: D
2. Explain how to record the following transactions in the BOP accounts
and explain why.
1) An American buys a Japanese car, paying by writing a check on an
account with a bank in New York.
Debit the current account, because it is a U.S. goods import.
Credit the financial account, because now the Japanese seller has a
claim on the USD check in a U.S. bank. As a result, foreigners hold
more U.S. assets (a financial inflow).
2) The United States issues a $10,000 debt forgiveness to Argentina.

Debit the capital account, because wealth is transferred from U.S. to

Argentina.
Credit the financial account, because now the U.S. holds less foreign
assets (the Argentinian debt of $10,000).
3) A U.S. citizen buys a newly issued share of stock in Britain, paying
for his order with a check, which the British company deposits in its
own U.S. bank account in New York.
Debit the financial account, because U.S. residents hold more foreign
assets (a share of stock in Britain). It is a financial outflow.
Credit the financial account, because foreigners (the British company)
hold more U.S. assets (U.S. bank deposits). It is a financial inflow.
4) You travel to Paris and pay for a $100 dinner with your credit card.
Debit the current account, because it is a U.S. service import.
Credit the financial account, because foreigners (the French
restaurant) hold more U.S. assets ($100 claim on the credit card
company). It is a financial inflow.
5) The Chinese central bank carries out an official foreign exchange
intervention in which it uses U.S. dollars to buy renminbi (Chinese
yuan) from U.S investors.
Debit the financial account under official reserve assets, because
foreigners (the Chinese central bank) now hold less U.S. assets. It is a
financial outflow.
Credit the financial account, because U.S. residents hold less foreign
assets (renminbi). It is a financial inflow.
6) A British company imports some Apple computers from U.S. and
pays them with its account in a bank in New York.
Credit the current account, because it is a U.S. goods export.

Debit the financial account, because foreigners (the British company)

hold less U.S. assets (deposits in a U.S. account). It is a financial
outflow.
7) A U.S.-owned factory in Britain uses local earnings to buy additional
machinery.
There is no recording in the U.S. Balance of Payments of this offshore
transaction.
3. GNP accounts avoid double counting by including only the value of final
goods and services sold on the market. Should the measure of imports
used in the GNP accounts therefore be defined to include only imports of
final goods and services from abroad? What about exports?
Answer: The reason for including only the value of final goods and
services in GNP, as stated in the question, is to avoid the problem of
double counting. Double counting will not occur if intermediate imports
are subtracted and intermediate exported goods are added to GNP
accounts. Consider the sale of U.S. steel to Toyota and to General
Motors. The steel sold to General Motors should not be included in GNP
because the value of that steel is subsumed in the cars produced in the
United States. The value of the steel sold to Toyota will not enter the
national income accounts in a more finished state because the value of
the Toyota goes toward Japanese GNP. The value of the steel should be
subtracted from GNP in Japan because U.S. factors of production receive
payment for it. Thus, we do want to count imports of intermediate goods
(as a negative), to avoid double counting both domestic and foreign
production.
4. The nation of Pecunia had a current account deficit of $1 billion and a
nonreserve financial account surplus of $500 million in 2014. Assume
that its capital account balance is zero in 2014.
1) What was the balance of payments of Pecunia in that year? What
happens to the countrys net foreign wealth?

2) Assume that foreign central banks neither buy nor sell Pecunian
assets. How did the Pecunian central banks foreign reserves change
in 2014?
3) How would your answer to (2) change if you learned that foreign
central banks had purchased $600 million of Pecunian assets in 2014?
4) Draw up the Pecunian balance of payments accounts for 2014 under
the assumption that the event described in (c) occurred that year.
Answer:
1) The balance of payments = current account + capital account +
nonreserve financial account. Thus it is -$1 billion + $500 million = $500 million. The country as a whole had to finance its $1 billion
current account deficit, so Pecunias net foreign assets fell by $1
billion.
2) By definition, the balance of payments = foreign assets acquired by
Pecunian central bank Pecunian assets acquired by foreign central
banks. Since the latter term is zero, the balance of payments of -$500
million means that foreign assets held by Pecunian central bank
decreases by $500 million, that is, Pecunian central bank sells $500
million foreign assets to finance its current account deficit.
3) By definition, the balance of payments = foreign assets acquired by
Pecunian central bank Pecunian assets acquired by foreign central
banks. The latter term is now $600 million, thus foreign assets
acquired by Pecunian central bank is -$500 million + $600 million =
$100 million. It means that Pecunian central bank purchases $100
million of foreign assets.
4) Penucian balance of payments accounts are the following: the current
account balance is -$1 billion, the financial account balance is $1
billion. In particular, under the financial account, nonreserve
financial account balance is $500 million, for the official reserve
assets account, foreign assets acquired by Pecunian central bank
increases by $100 million (a financial account debit, financial
outflow), and Pecunian assets acquired by foreign central banks
increases by $600 million (a financial account credit, financial
inflow).

5. Assume that U.S. exports only designer jeans and imports only British
sweaters. Fill the following table. Explain how the relative prices of
imports and exports change when U.S. dollars appreciate.

Price of
Jeans

Price of
Sweaters

Exchange
rates

40 dollars
40 dollars
40 dollars
40 dollars

50 pounds
50 pounds
50 pounds
50 pounds

$1/pound
$1.5/pound
$2/pound
$2.5/pound

Relative
price of
imports
1.25
1.875
2.5
3.125

Relative
price of
exports
0.8
0.533
0.4
0.35

In this example, the relative price of imports is the price of British

sweaters in terms of U.S jeans, or pairs of U.S. jeans per British sweater.
The relative price of exports is the price of U.S jeans in terms of British
sweaters, or number of British sweaters per pair of U.S. jeans. Using
direct quotation, when the exchange rate decreases, U.S dollars
appreciates, and we find that the relative price of imports decreases,
implying that imports are getting cheaper relative to exports. On the other
hand, the relative price of exports increases, implying that exports are
getting more expensive relative to imports.