Chapter 18

real exchange rate =

(nominal exchange rate x domestic price)/foreign price

•Factors that might influence a country's exports, imports, and net exports: *

-Tastes of consumers for domestic & foreign goods -Prices of goods at home and abroad Exchange rates at which people can use domestic currency to buy foreign currencies

Saving =

Domestic investment + Net capital outflow

-Rate at which a person can trade currency of one country for currency of another

Nominal exchange rate

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

a. 2 dollars

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.

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

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.

a. the peso should depreciate relative to the dollar.

Suppose the price of a new car is $25,000 in the United States, and the nominal exchange rate between South African and the United States is 10 South African rands per U.S. dollar. If purchasing-power parity holds, the price of the same car in South Africa will be a.250,000 rands. b.10,000 rands. c.100,000 rands

a.250,000 rands

an increase in the value of a currency as measured by the amount of foreign currency it can buy

appreciation

-Take advantage of price differences for the same item in different markets

arbitrage

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

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

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow? a. 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. c. An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged.

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.

b. Net exports are negative.

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

b. an open economy.

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

b. dental services

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.

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.

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

a situation in which exports equal imports

balance trade

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

c. 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 stock in Volvo. c. McDonald's builds a restaurant in Moscow.

c. McDonald's builds a restaurant in Moscow.

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.

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

an economy that does not interact with other economies in the world

closed economy

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. 1.5 euros per dollar b. 0.75 euro per dollar c. 1/3 euro per dollar d. 3 euros per dollar

d. 3 euros per dollar

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

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

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

d. Microsoft builds a new distribution facility in Sweden.

a decrease in the value of a currency as measured by the amount of foreign currency it can buy

depreciation

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

e. $1,200 billion.

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. a French exporter of wine to the United States c. a U.S. tourist traveling in Europe d. a U.S. importer of Russian vodka e. an Italian importer of U.S. steel

e. an Italian importer of U.S. steel

The most accurate measure of the international value of the dollar is a. the Brazilian real/dollar exchange rate. b. the British pound/dollar exchange rate. c. the yen/dollar exchange rate. d. the peso/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.

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. net exports. c. net capital outflow. d. currency appreciation. e. arbitrage.

e. arbitrage.

-Goods and services that are produced domestically and sold abroad

exports

-Arises when a government prints money to pay for large amounts of government spending

hyperinflation

-Nominal exchange rates change when price levels change

implications

-Goods and services that are produced abroad and sold domestically

imports

S = Y - C - G

national saving

the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

net capital outflow

-Value of a nation's exports minus the value of its imports

net exports

the rate at which a person can trade the currency of one country for the currency of another

nominal exchange rate

Y = C + I + G + NX

open economy

an economy that interacts freely with other economies around the world

open economy

Value of money in terms of quantity of goods it can buy

purchasing-power

a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries

purchasing-power parity

-Rate at which a person can trade goods and services of one country

real exchange rate

the rate at which a person can trade the goods and services of one country for the goods and services of another

real exchange rate

-Advances in telecommunications

telephone, e-mail

the value of a nation's exports minus the value of its imports; also called net exports

trade balance

Exports < Imports

trade deficit

an excess of imports over exports

trade deficit

Exports > Imports

trade surplus

an excess of exports over imports

trade surplus