Homework 7

Purchasing-power parity theory does not hold at all times because

many goods are not easily transported and the same goods produced in different countries may be imperfect substitutes.

A depreciation of the U.S. real exchange rate induces U.S. consumers to buy

more domestic goods and fewer foreign goods

You are planning a graduation trip to Mexico. Other things the same, if the dollar appreciates relative to the peso, then the dollar buys

more pesos. Your hotel room in Mexico will require fewer dollars.

Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners

more willing to purchase U.S. bonds, so U.S. net capital outflow would fall.

If a country has positive net capital outflows, then its net exports are

positive and its saving is larger than its domestic investment.

If a country has Y > C + I + G, then it has

positive net capital outflow and positive net exports

Jen and Alica are both U.S. citizens. Jen opens a cafe in France. Alicia buys equipment from a company in Canada to use in a U.S.-based factory. Whose action is an example of U.S. foreign direct investment?

Jen's but not Alicia's

Which of the following equations is correct?

S = I + NCO

The "law of one price" states that

a good must sell at the same price at all locations.

Purchasing-power parity describes the forces that determine

exchange rates in the long run.

If the real exchange rate for coal is 1.5, the price of coal in the United States is $50 per ton, and the price of coal in Britain is 20 British pounds per ton, what is the nominal exchange rate?

3/5 or 0.6 pounds per dollar

According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money

gains value in both terms of the domestic goods and services it can buy in terms of the foreign currency it can buy.

When Microsoft, a U.S. company, establishes a distribution center in France, U.S. net capital outflow

increases because Microsoft makes a foreign direct investment in France.

When Jamie, a U.S. citizen, purchases a wool jacket made in Ireland, the purchase is

the U.S. import and an Irish export.

Last year a country had exports of $100 billion, imports of $70 billion, and purchased $60 billion worth of foreign assets. What was the value of domestic assets purchased by foreigners?

$30 billion

If you are vacationing in France and the dollar depreciates relative to the euro, then the dollar buys

fewer euros. It will take more dollars to buy a good that cost 50 euros.

Suppose that a country imports $90 million worth of goods and services and exports $80 million worth of goods and services. What is the value of net exports?

-$10 million

Which of the following is correct? Since 1950

U.S. exports and U.S. imports each have increased significantly.

Suppose a Starbucks tall latte costs $4.00 in the United States and 2.50 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area. If the nominal exchange rate is 0.80 euros per dollar, which goods have prices that are consistent with purchasing-power parity?

the Big Mac but not the tall latte