Macroeconomics: Open Economy Macroeconomics

Topics in this chapter

• Open Economy Circular Flow
• Balance of Payments Accounts
• Trade Balance and Multiplier
• Capital Flows and Investment
• Foreign Exchange Market
• Exchange Rate Systems

Cheat sheet

Practice questions

1. Question 1Q-175A90

   Which of the following is recorded in the current account of the balance of payments?

   1. A.Foreign direct investment received from abroad
   2. B.Export of software services
   3. C.Purchase of foreign government securities
   4. D.External commercial borrowing
   See the answer and solution
2. Question 2Q-7C2327

   Under a flexible exchange rate system, if the demand for foreign currency increases while its supply remains unchanged, what is the most likely immediate effect?

   1. A.The domestic currency appreciates
   2. B.The domestic currency depreciates
   3. C.The exchange rate becomes permanently fixed
   4. D.The balance of payments automatically becomes zero
   See the answer and solution
3. Question 3Q-C00C42

   Suppose a country's current account deficit is exactly matched by a surplus in its capital account, with no errors and omissions. What does this imply about its official foreign exchange reserves?

   1. A.They must increase
   2. B.They must decrease
   3. C.They remain unchanged
   4. D.They become equal to the current account deficit
   See the answer and solution
4. Question 4Q-B95A83

   Explain how depreciation of the domestic currency can affect a country's exports and imports, assuming other factors remain unchanged.

   See the answer and solution
5. Question 5Q-1609ED

   If the exchange rate changes from ₹83 per US dollar to ₹80 per US dollar, which statement is correct, assuming other factors remain unchanged?

   1. A.The Indian rupee has appreciated, making imports from the United States cheaper in rupee terms.
   2. B.The Indian rupee has depreciated, making imports from the United States cheaper in rupee terms.
   3. C.The US dollar has depreciated against the Indian rupee, making Indian exports more expensive in the United States.
   4. D.There has been no change in the relative value of the two currencies.
   See the answer and solution