CLEP Macroeconomics chapter practice4 questions

20 Open-Economy Macroeconomics and Exchange Rates

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 4

A domestic consulting firm bills a foreign client and is paid. That sale is recorded as

Selling a service to a nonresident is an export, and exports of services sit in the current account. A files a business receipt as a government one. B names the settlement that may follow rather than the service itself, and would be the entry only if the firm had bought a foreign asset. C treats the payment as a purely monetary event, though a cross-border sale is exactly what these accounts exist to record, and E confuses an intangible service with a produced asset.
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D. an export of services in the current account

Selling a service to a nonresident is an export, and exports of services sit in the current account. A files a business receipt as a government one. B names the settlement that may follow rather than the service itself, and would be the entry only if the firm had bought a foreign asset. C treats the payment as a purely monetary event, though a cross-border sale is exactly what these accounts exist to record, and E confuses an intangible service with a produced asset.

Question 2

Question 2 of 4

Net exports are -30, net primary income is 12, and net transfers are -3. The current-account balance is

Add the three components: -30+12-3=-21. A makes every entry an outflow, so the one inflow picks up a minus sign. C stops after net exports and primary income, leaving transfers out. D flips the sign on transfers, and E flips it on net exports, the largest term in the sum.
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B. -21

Add the three components: -30+12-3=-21. A makes every entry an outflow, so the one inflow picks up a minus sign. C stops after net exports and primary income, leaving transfers out. D flips the sign on transfers, and E flips it on net exports, the largest term in the sum.

Question 3

Question 3 of 4

The domestic currency appreciates against the currencies of its trading partners. Other things equal,

Appreciation raises the foreign-currency price of domestic goods and lowers the domestic-currency price of imports, so exports fall and imports rise. B reverses both flows, and E states the price change from the foreign buyer's side backwards. C reads the import price correctly but then attaches a rise in net exports to it, and D carries that mistake into aggregate demand, which this channel shifts left rather than right.
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A. exports fall and imports rise

Appreciation raises the foreign-currency price of domestic goods and lowers the domestic-currency price of imports, so exports fall and imports rise. B reverses both flows, and E states the price change from the foreign buyer's side backwards. C reads the import price correctly but then attaches a rise in net exports to it, and D carries that mistake into aggregate demand, which this channel shifts left rather than right.

Question 4

Question 4 of 4

A depreciation of the domestic currency against its trading partners' currencies leaves domestically produced exports

Foreign buyers need less of their own currency to cover a given domestic-currency price, so exports look cheaper abroad. A runs the conversion the wrong way. B and E both deny any pass-through: B assumes a sticky domestic price blocks it, when a sticky domestic price is precisely what lets the foreign price fall, and E confines exchange-rate effects to asset markets. D reverses which side of the transaction sees the cheaper price.
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C. cheaper when measured in foreign currency

Foreign buyers need less of their own currency to cover a given domestic-currency price, so exports look cheaper abroad. A runs the conversion the wrong way. B and E both deny any pass-through: B assumes a sticky domestic price blocks it, when a sticky domestic price is precisely what lets the foreign price fall, and E confines exchange-rate effects to asset markets. D reverses which side of the transaction sees the cheaper price.

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