ECON 202 Chapter 18

Net capital outflow

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

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

e. an open economy

Closed economy

An economy that chooses to not interact with other economies

Trade surplus

The amount by which exports exceed imports

Depreciation

A decrease in the value of a currency measured in terms of other currencies

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

A. MacDonald's builds a new restaurant in Moscow.

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 D. Japan is running a trade deficit

C. Japan's net capital outflow must be positive

Trade deficit

The amount by which imports exceed exports

If the yen/dollar exchange rate rises the dollar has appreciated (T/F)

True

If the nominal exchange rate between British pounds and dollars in 0.5 pound per dollar how many dollars can you get for one pound? A. 2 dollars B. 1.5 dollars C. 1 dollar D. 0.5 of a dollar E. none of the above

A. 2 dollars

Suppose a US 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 US? A. net exports fall, and net capital outflow falls b. net exports rise, and net capital outflow rises C. net exports rise, and net capital outflow falls D. net exports rise, and net capital outflow falls E. none of the above are true

A. net exports fall, and net capital outflow falls

Suppose the money supply in Mexico grows more quickly than the money supply more quickly than the money supply in the US. 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

A. the peso should depreciate relative to the 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-tech 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 countires

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

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 and increase n net capital outflow must decrease domestic investment C. for a given amount of saving, a decrease in net capital outflow must decrease domestic investment D. An increase in saving associated with an equal increase in net capital leaves domestic investment unchanged

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

Suppose the real exchange rate between Russia and the U.S. is defined in terms of bottles of Russian vodka per U.S. bottle of vodka. Which of the following will increase the real exchange rate (that is, increase the number 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. non of the above will increase the real exchange rate

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

Which of the following people or firms would be pleased by a depreciation of the dollar? A. a US tourist traveling in Europe B. a US importer of Russian vodka C. a french exporter of wine to the US D. an Italian importer of US steel E. a Saudi Arabian prince exporting oil to the US

D. an Italian importer of US steel

Which of the following products would likely be the least accurate if used to calculate purchasing power parity? A. gold B. automobiles C. diamonds D. dental services

D. dental services

If the United State saves $1,000 billion and U.S. net capital outflow is -$200 billion, U.S. domestic investment is A. -$200 billion B $200 billion C. $800 billion D. $1,000 billion E. $1,200 billion

E. $1200 billion

The most accurate measure of the international value of the dollar is A. the yen/dollar exchange rate B. the Brazilian real/dollar exchange rate C. the peso/dollar exchange rate D. the British pound/dollar exchange rate E. an exchange rate index that accounts for many exchange rates

E. the British pound/dollar exchange rate

A country that exports more than it imports is said to have a trade deficit (T/F)

False

Arbitrage tends to cause prices for the same good to diverge from one another (T/F)

False

If Great Britain's money supply grows faster than Mexico's, the value of the English pound should rise relative to the value of the peso (T/F)

False

If a case of Pepsi costs $8 in the U.S. and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/dollar exchange rate should be 5760 yen/dollar (T/F)

False

If a company based in the U.S. prefers a strong dollar (a dollar with a high exchange value), then it likely exports more than it imports (T/F)

False

Net exports are defined as imports minus exports (T/F)

False

Valuable, technology advanced goods are less likely to be traded internationally because shipping costs absorb too much of the potential profit (T/F)

False

Exports

Goods and services produced domestically and sold abroad

Imports

Goods and services produced in foreign countries and sold domestically

Arbitrage

Taking advantage of two prices for the same commodity by buying where it is cheap and selling where it is expensive

Real exchange rate

That rate at which people can trade the goods and services of one country for those of another country

Nominal Exchange rate

The rate at which people can trade one currency for another currency

Purchasing-power parity

The theory that a unit of a country's currency should buy the same quantity of goods in all countries

Net exports

The value of exports minus the value of imports or the trade balance

Arbitrage is the process of taking advantage of differences in the prices of the same good by buying where the good is cheap and selling where the good is expensive (T/F)

True

For a given amount of U.S. national saving, and increase in U.S. net capital outflow decreases U.S. domestic investment (T/F)

True

For any country, net exports are always equal to net capital outflow because every international transaction involves an exchange of an equal value of some combination of goods and assets. (T/F)

True

If the nominal exchange rate is 2 British pounds to the dollar, and if the price of a Big Mac is $2 in the U.S. and 6 pounds in Great Britain, then the real exchange rate is 2/3 British Big Mac per American Big Mac (T/F)

True

In order to increase domestic investment, a country must either increase its saving or decrease its net foreign investment (T/F)

True

U.S. net capital outflow falls when Toyota buys stock in Hilton Hotels, an American corporation (T/F)

True

if purchasing power parity holds, the real exchange rate is always equal to 1 (T/F)

True

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 U.S. and 250 yen in Japan. What is the real exchange rate between Japan and the US? 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

Suppose a couple of coffee is 1.5 euros and $0.50 in the US. If the purchasing-price power parity holds, what is the nominal exchange rate between euros and dollars? A. 1/3 euro per dollar B. 3 euros per dollar C. 1.5 euros per dollar D. 0.75 euro per dollar

B. 3 euros per dollar

Which of the following would directly increase the United State net capital outflow A. General Electric sells an aircraft engine to Airbus in Great Britain B. Microsoft builds a new distribution facility in Sweden C. Honda builds a new plant in Ohio D. Toyota buys stock in AT&T

B. Microsoft buys a new distribution facility in Sweden

Which of the following statements is true about a country with a trade deficit? A. net capital outflow must be negative B. net exports are negative C. net exports are positive D. exports exceed imports E. none of the above

B. net exports are negative

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 U.S. D. none of the above

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 US. 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 pound and the yen B. the yen should have fallen compared to the pound and fallen compared to the yen C. the yen should have fallen compared to the pound, and risen compared to the dollar D. the value of the pound should have risen compared to the yen and the dollar. E. none of the above

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

When people take advantage of differences in prices for the same good by buying it where its is chap and selling it where it is expensive, it is known as A. purchasing power B. net capital outflow C. Arbitrage D. currency appreciation

C. Arbitrage

Balanced trade

A situation in which exports equals imports

Open economy

An economy that interacts with other countries

Appreciation

An increase in the value of our currency measured in terms of other currencies