Kiara is a web designer living in Illinois. She creates and sells a website to Gabrielle who is living in Germany. Gabrielle pays Kiara 5,000 euros for the website. If Kiara keeps the 5,000 euros at home, NCO

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Question restatement: Kiara (US resident in Illinois) sells a website to Gabrielle (in Germany) for 5,000 euros. If Kiara keeps the 5,000 euros at home, NCO rises.
Option 1: rises. This outcome makes sense because Net Capital Outflow (NCO) measures the net flow of funds for investments abroad by residents. If Kiara receives payment from a foreigner and holds that foreign currency (euros) rather than converting it to dollars or using it domestically, she is effectively increasing her holdings of foreign assets. That action represents an increase in US residents’ net capital outflow, since more funds are being tied up in foreign-denominated assets rather than being kept as domestic assets.
Option 2: doesn't change. Arguably, one might think the transaction has no effect on NCO if the money eventually returns to the US economy. However, the key point is the immediate change in asset holdings: holding foreign currency abroad (even if physically stored in the US) is a foreign asset for a US resident, which increases NCO. Therefore this option mischaracterizes the impact.
Option 3: falls. A fall in NCO would occur if US residents reduced their net purchases of foreign assets or increased purchases of domestic assets. Keeping euros at home does not reduce foreign asset holdings; it increases them relative to dollars held domestically, so NCO does not fall.
In summary, treating the act of holding foreign currency obtained from a foreign buyer as an increase in foreign-asset holdings aligns with the definition of NCO as the net purchase of foreign assets by a country’s residents, which explains why NCO would rise in this scenario.

2261 ECON 0110 SEC1400 Test 5

Kiara is a web designer living in Illinois. She creates and sells a website to Gabrielle who is living in Germany. Gabrielle pays Kiara 5,000 euros for the website. If Kiara keeps the 5,000 euros at home, NCO

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