Ch.18 Practice

Students in Paris flock to see the latest movie from Hollywood.

When students in Paris flock to see the latest movie from Hollywood, foreigners are buying a U.S. good, so U.S. exports increase, imports are unchanged, and net exports increase.

If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate? a. 1/4 euro per dollar b. 1/3 euro per dollar c. 4 euros per dollar d. 3 euros per dollar

b. 1/3 euro per dollar

If a nation's currency doubles in value on foreign exchange markets, the currency is said to ________, reflecting a change in the ________ exchange rate. a. depreciate; nominal b. depreciate; real c. appreciate; nominal d. appreciate; real

c. appreciate; nominal

Which of the following products would likely be the least accurate if used to calculate purchasing-power parity? a. dental services b. automobiles c. diamonds d. gold

a. dental services

An American art professor spends the summer touring museums in Europe.

US exports: unchanged US imports: increase When an American art professor spends the summer touring museums in Europe, she spends money buying foreign goods and services, so U.S. exports are unchanged, imports increase, and net exports decrease.

If the nominal exchange rate between British pounds and dollars is 0.5 pound per dollar, how many dollars can you get for a British pound? a. 2 dollars b. 1.5 dollars c. 1 dollar d. 0.5 of a dollar e. None of the above is correct.

a. 2 dollars

Which of the following would directly increase U.S. net capital outflow? a. Microsoft builds a new distribution facility in Sweden. b. Honda builds a new plant in Ohio. c. Toyota buys stock in AT&T. d. General Electric sells an aircraft engine to Airbus in Great Britain.

a. Microsoft builds a new distribution facility in Sweden.

Suppose a U.S. resident buys a Jaguar automobile from Great Britain and the British exporter uses the receipts to buy stock in General Electric. Which of the following statements is true from the perspective of the United States? a. Net exports fall, and net capital outflow falls. b. Net exports rise, and net capital outflow rises. c. Net exports fall, and net capital outflow rises. d. Net exports rise, and net capital outflow falls. e. None of the above is true.

a. Net exports fall, and net capital outflow falls.

An economy that interacts with other economies is known as a. an open economy. b. an import economy. c. an export economy. d. a balanced trade economy. e. a closed economy.

a. an open economy.

Suppose the money supply in Mexico grows more quickly than the money supply in the United States. We would expect that a. the peso should depreciate relative to the dollar. b. the peso should appreciate relative to the dollar. c. the peso should maintain a constant exchange rate with the dollar because of purchasing-power parity. d. none of the above is true.

a. the peso should depreciate relative to the dollar.

Suppose the nominal exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. Further, suppose that a pound of hamburger costs $2 in the United States and 250 yen in Japan. What is the real exchange rate between Japan and the United States? a. 0.5 pound of Japanese hamburger/pound of American hamburger b. 0.8 pound of Japanese hamburger/pound of American hamburger c. 1.25 pounds of Japanese hamburger/pound of American hamburger d. 2.5 pounds of Japanese hamburger/pound of American hamburger e. none of the above

b. 0.8 pound of Japanese hamburger/pound of American hamburger

The dollar-yen exchange rate falls from 100 to 80 yen per dollar. At the same time, the price level in the United States rises from 180 to 200, and the price level in Japan remains the same. As a result, a. American goods have become more expensive relative to Japanese goods. b. American goods have become less expensive relative to Japanese goods. c. the relative price of American and Japanese goods has not changed. d. both American and Japanese goods have become relatively less expensive.

b. American goods have become less expensive relative to Japanese goods.

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow? a. For a given amount of saving, an increase in net capital outflow must decrease domestic investment. b. For a given amount of saving, a decrease in net capital outflow must decrease domestic investment. c. An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged. d. Saving is the sum of investment and net capital outflow.

b. For a given amount of saving, a decrease in net capital outflow must decrease domestic investment.

Which of the following statements is true about a country with a trade deficit? a. Net capital outflow must be positive. b. Net exports are negative. c. Net exports are positive. d. Exports exceed imports. e. None of the above is true.

b. Net exports are negative.

Which of the following people or firms would be pleased by a depreciation of the dollar? a. a Saudi Arabian prince exporting oil to the United States b. an Italian importer of U.S. steel c. a French exporter of wine to the United States d. a U.S. importer of Russian vodka e. a U.S. tourist traveling in Europe

b. an Italian importer of U.S. steel

If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar, a. the dollar has depreciated. b. the dollar has appreciated. c. the dollar could have appreciated or depreciated depending on what happened to relative prices in Brazil and the United States. d. none of the above is true.

b. the dollar has appreciated.

Suppose the inflation rate over the last 20 years has been 10 percent in Great Britain, 7 percent in Japan, and 3 percent in the United States. If purchasing-power parity holds, which of the following statements is true? Over this period, a. the value of the dollar should have fallen compared to the value of the pound and the yen. b. the yen should have risen in value compared to the pound and fallen compared to the dollar. c. the yen should have fallen in value compared to the pound and risen compared to the dollar. d. the value of the pound should have risen compared to the value of the yen and the dollar. e. None of the above is true.

b. the yen should have risen in value compared to the pound and fallen compared to the dollar.

Suppose a cup of coffee is 1.5 euros in Germany and $0.50 in the United States. If purchasing-power parity holds, what is the nominal exchange rate between euros and dollars? a. 0.75 euro per dollar b. 1/3 euro per dollar c. 3 euros per dollar d. 1.5 euros per dollar

c. 3 euros per dollar

Each of the following is a reason why the U.S. economy continues to engage in greater amounts of international trade except which one? a. There are larger cargo ships and airplanes. b. High-technology goods are more valuable per pound and, thus, more likely to be traded. c. NAFTA imposes requirements for increased trade between countries in North America. d. There have been improvements in technology that have improved telecommunications between countries. e. All of the above are reasons for increased trade by the United States.

c. NAFTA imposes requirements for increased trade between countries in North America.

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as a. purchasing-power parity. b. currency appreciation. c. arbitrage. d. net exports. e. net capital outflow.

c. arbitrage.

In an open economy, national saving equals domestic investment a. plus the government's budget deficit. b. minus the net exports of goods and services. c. plus the net outflow of capital. d. minus foreign portfolio investment.

c. plus the net outflow of capital.

If the United States saves $1,000 billion and U.S. net capital outflow is -$200 billion, U.S. domestic investment is a. -$200 billion. b. $800 billion. c. $1,000 billion. d. $1,200 billion. e. $200 billion.

d. $1,200 billion.

Suppose the real exchange rate between Russia and the United States is defined in terms of bottles of Russian vodka per bottle of U.S. vodka. Which of the following will increase the real exchange rate (that is, increase the number of bottles of Russian vodka per bottle of U.S. vodka)? a. a decrease in the ruble price of Russian vodka b. an increase in the dollar price of U.S. vodka c. an increase in the number of rubles for which the dollar can be exchanged d. All of the above will increase the real exchange rate. e. None of the above will increase the real exchange rate.

d. All of the above will increase the real exchange rate.

If Japan exports more than it imports, a. Japan is running a trade deficit. b. Japan's net capital outflow must be negative. c. Japan's net exports are negative. d. Japan's net capital outflow must be positive.

d. Japan's net capital outflow must be positive.

Which of the following is an example of foreign direct investment? a. Columbia Pictures sells the rights to a movie to a Russian movie studio. b. General Motors buys steel from Japan. c. General Motors buys stock in Volvo. d. McDonald's builds a restaurant in Moscow

d. McDonald's builds a restaurant in Moscow

If the value of a nation's imports exceeds the value of its exports, which of the following is NOT true? a. Net exports are negative. b. Domestic investment is greater than national saving. c. GDP is less than the sum of consumption, investment, and government purchases. d. The nation is experiencing a net outflow of capital.

d. The nation is experiencing a net outflow of capital. -> net inflow of capital because the nation needs to sell more to finance their foreign purchases

If the U.S. dollar appreciates and prices remain the same at home and abroad, foreign goods become ________ expensive relative to American goods, pushing the U.S. trade balance toward ________. a. less; surplus b. more; surplus c. more; deficit d. less; deficit

d. less; deficit

If the U.S. nominal exchange rate is unchanged, but prices rise faster abroad than in the United States, the real exchange rate increases/decreases

decreases Real Exchange Rate= Nominal Exchange Rate×(Domestic Price Level/ ForeignPrice Level)

The most accurate measure of the international value of the dollar is a. the yen/dollar exchange rate. b. the peso/dollar exchange rate. c. the Brazilian real/dollar exchange rate. d. the British pound/dollar exchange rate. e. an exchange rate index that accounts for many exchange rates.

e. an exchange rate index that accounts for many exchange rates.

The theory of purchasing-power parity says that higher inflation in a nation causes the nation's currency to ________, leaving the ________ exchange rate unchanged. a. appreciate, nominal b. depreciate, real c. appreciate, real d. depreciate, nominal

b. depreciate, real