Question

7. According to the textbook, which of the following statements is (are) correct?
(x) If net exports are zero, the country has balanced trade.
(y) If a country sells $50 billion of goods and services to people overseas and buys $45 billion of goods and services from them, then it has a trade surplus.
(z) If a country has $2.4 billion of net exports and purchases $4.8 billion of goods and services from foreign countries, then it has $7.2 billion of exports and $4.8 billion of imports.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Which of the following would be foreign direct investment (capital outflow) for Canada?
(x) A Canadian hotel chain opens a new hotel in the state of Washington in the United States.
(y) Game Time, Inc., a Canadian company, builds a new amusement park near Detroit, Michigan.
(z) A citizen of Canada buys a bond issued by Volkswagen, a German corporation.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

While making portfolio investment decisions, buyers of bonds
A. compare the nominal, but not the real, interest rates offered on different bonds.
B. compare the real interest rates offered on different bonds.
C. purchase the highest-priced bond available.
D. All of the above are correct.
E. A and C, only

Answer 1

7. Option A

Explanation: When a country has a trade balance, its total imports equals its total exports. In that case, the net export (which is export minus import) are zero.

A country has a trade surplus when it exports more than it imports.

Net export = export - import = $7.2 billion - $4.8 billion = $2.4 billion.

So, all three statements are true.

8. Option B

Explanation: In foreign direct investment, a foreign company makes investment in new business interests in another country. So, option z is not a foreign direct investment as buying bonds is not the same as investing in new business interests.

9. Option B

Explanation: Real interest = nominal interest - inflation rate. An investor is more interested on the real interest rates as it shoes the real income potential of a bond.