Question

_____ 9. An American buying stock in a foreign company would describe would type of investment.

1. Foreign liquid investment
2. Foreign direct investment
3. Portfolio investment
4. Diversification investment

_____ 10. Capital inflow has the following effects on the economy:

1. Decreases net capital outflow which leads to a decrease in real interest rates
2. Increases net capital outflow which leads to an increase in real interest rates
3. Causes the domestic currency to appreciate which leads to increase in exports and a decrease in imports
4. Causes the domestic currency to depreciate which leads to decrease in exports and an increase in imports

_____ 11. In the loanable funds market equilibrium occurs:

1. Savings=foreign investment + net capital outflows
2. Savings=foreign investment + net capital inflows
3. Savings=domestic investment + net capital inflows
4. Savings=domestic investment + net capital outflows

_____ 12. In the market for foreign currency exchange equilibrium occurs:

1. Net capital outflow = net imports
2. Net capital outflow = net exports
3. Net capital inflow=net imports
4. Net capital inflow=net exports

Answer 1

9) It is a portfolio investment because the individual investor is buying stocks and expanding his investment portfolio. Assets such as stocks and bonds are a part of portfolio. It is not FDI or FLI because there are stocks involved. Option C

10) Capital inflow would occur because of a higher real interest rates that would increase demand for domestic currency, thereby appreciating it. This reduces exports and increases imports. Net exports fall as net capital outflow decreases. Option A

11) Loanable funds market has national savings = domestic demand for funds + Net capital outflow. Option C

12) Net capital outflow should be equal to net exports so that CA is balanced. Option B