Question

Can you explain more about Question 5? I don't understand why it is the answer.

Suppose that more Chinese decide to vacation in the U.S. and that the Chinese purchase more U.S. Treasury bonds. Ignoring how payments are made for these purchases,

Select one:

a. the first action by itself raises U.S. net exports, the second action by itself raises U.S. net capital outflow.

b. the first action by itself raises U.S. net exports, the second action by itself lowers U.S. net capital outflow.

c. the first action by itself lowers U.S. net exports, the second action by itself raises U.S. net capital outflow.

d. the first action by itself lowers U.S. net exports, the second action by itself lowers U.S. net capital outflow.

Answer 1

5) When Chinese decide to vacation in USA, they would purchase more US goods and services and this would increase the exports of USA because these goods would be taken back to China or used by Chinese.

When Chinese are buying more USA treasury bonds, they would be paying in dollars. So this would result in reduction in net outflow of capital.

Hence the first action would increase exports and s second would reduce net capital outflow.

Answer would be option B)

(You can comment for doubts)