Chapter 18 quiz

If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is

-$100 billion and the U.S. has a trade deficit.

If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?

2

Which of the following equations is correct?

S = I + NCO

A farmer in Mexico purchases a tractor made in the U.S. This purchase is an example of

a U.S. export and a Mexican import

The law of one price states that

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

If the U.S. real exchange rate appreciates, U.S. exports

decrease and U.S. imports increase.

If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as

e(P/P*).

Net capital outflow is defined as the purchase of

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

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the differing

price levels in those countries.

If saving is greater than domestic investment, then

there is a trade surplus and Y > C + I + G.

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

80 florin

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

Both a and b are correct.

Suppose a McDonalds Big Mac costs $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing-power parity hold?

both the euro area and Australia

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?

e = P*/P

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

more domestic goods and fewer foreign goods.

A country has a trade deficit. Which of the following must also be true?

net capital outflow is negative and domestic investment is larger than saving

Over the past three decades, the United States has

persistently had a trade deficit.

If France had positive net exports last year, then it

sold more abroad than it purchased abroad and had a trade surplus.

You are staying in London over the summer and you have a number of dollars with you. If the dollar appreciates relative to the British pound, then other things the same,

the dollar would buy more pounds. The appreciation would encourage you to buy more British goods and services.