Chapter 18 study set

real exchange rate

(Nominal exhnage rate*domestic price index)÷foreign price index the rate at which a person can trade the goods and services of one country for the goods and services of another

If us saves 1,000 bullion and US net capital outflow is -200 billion, US domestic Investment is

1,200 Savings= domestic Investment+net capital 1,000=domestic investment+(-200) 1,000=I-200 +200= 1,200

the price of the dollar

1/price of dollar

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? Answer

2 dollars Price of dollar= 1/price of dollar price of dollar =1/0.5

trade deficit

An excess of imports over exports net capital outflow must be negative

If the case of Pespi costs $8 in the US and 720 yen in Japan, according to the purchasing power parity theory of exbngse rates the yen/dollar exhnage rate should be 5,760 yen/dollar

FALSE should be 90 yen/dollar 720/8=90

Valuable technology advanced goods are less likely to be traded internationally because shipping costs absorve too much of the potential profit

FALSE tech is MORE likely to be traded bc shipping costs are small portion of the total cost of the good

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?

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

If Japan exports more than it imports

Japans net capital outflow must be positive

Which of the following is an example of foreign direct investment?

McDonalds builds a restaurant in Moscow

What would increase US Capital net flow

Microsoft builds a new distribution facility in Sweden

What is a reaosm why US economy continues to engage in greater amounts of international trade excpet

NAFTA imposes requirements for increased trade between countries in North America

What isntru about a country with a. trade defeciet

Net exports are negative

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?

Net exports fall, and net capital outflow falls.

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 Stat

Nominal exhnage rate*domestic price index)÷foreign price index (100*2)/250=0.8

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?

Price in foreign country÷Lrice in domestic countr 1.5/0.50=3

nominal exchange rate

Price in foreign country÷Lrice in domestic country the rate at which a person can trade the currency of one country for the currency of another

For any country net exports are always equal to bet capital outflow bc every international transaction involves an exhnage of an equal value of some combination of goods and assets

TRUE

If purchasing power parity holds the real exhanve rate is always equal to 1

TRUE

If the yen/dollar exhnage rate rises the dollar is appreciated

TRUE

US net capital outflow falls when Toyota buys stock in Hitlon Hotel an American corporation

TRUE

If nominal exchange rate is 2 British pounds to the dollar and of the price of a big Mac is $2 in. the US and 6 pounds in Great Britain then the real echanhe rate is 2/3 British Big Mac per American Big Mac

TRUE Real interest rate=(Nominal exhnage rate*domestic price index)÷foreign price index (2×2)÷6=2/3 or 4/6

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 decrease in the ruble price of Russian vodka an increase in the dollar price of U.S. vodka an increase in the number of rubles for which the dollar can be exchanged

Purchasing Power Parity

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

Which of the following people or firms would be pleased by a depreciation of the dollar?

an Italian importer of U.S. steel

Artbitreage causes prices for same good to diverge form one another

converge form one another

Which of the following products would likely be the least accurate if used to calculate purchasing-power parity?

dental services

net exports

exports minus imports

Trade Surplus

if A country that exports more than imports net capital outflow must be positive

If a company based in the US prefers a strong dollar(a dollar with high exhanhe value) to

inprot than they export

Arbitrage

is the process of taking advantage of differences in prices of the same good by buying where the good is cheap and selling where its expensive

if great Britain money supply grows faster than Msxicod, the value of Brotichbpund should

rise relative to the value of the peso

Savings Equation

savings=Domestic investments +net capital

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,

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

For a given amount of US national saving an increase in US net capital outflow decreases US domestic investment

true