econ

A debtor nation must be a net borrower nation.

20. F A debtor nation might currently be a net loaner nation, which would thereby reduce its overall indebtedness.

If investment is greater than saving, the private sector has a deficit.

21. T The private sector's surplus equals S - I, so if investment exceeds saving, the private sector has a deficit.

X - M equals (T - G) + (S - I).

22. T The result that X - M = (T - G) + (S - I) provides a framework for understanding the factors that affect the net exports balance, X - M.

For the last ten years, the United States has had both a current account deficit and a capital account deficit.

23. F Setting aside changes in official reserves, a current account deficit must be matched by an equal capital and financial account surplus. In the 1990s and the 2000s, the United States had a current account deficit and a capital and financial account surplus.

In the United States, a larger government sector deficit immediately leads to a larger net exports deficit.

24. F The net exports deficit is only weakly related to the government sector's surplus or deficit.

An increase in the U.S. demand for imports increases the demand for U.S. dollars.

F An increase in the U.S. demand for imports increases the supply of demand U.S. dollars.

In the short run, if the U.S. nominal exchange rate rises then the U.S. real exchange rate falls.

F In the short run, any change in the nominal exchange rate leads to a similar change in the real exchange rate.

In order to keep its exchange rate fixed, over the last decade the People's Bank of China has bought billions of yuan per year.

F The People's Bank was forced to buy billions of dollars not billions of yuan.

The United States uses a crawling peg exchange rate policy.

F The United States follows a flexible exchange rate policy

If the exchange rate between the U.S. dollar and the Japanese yen changes from 90 yen per dollar to 80 yen per dollar, the U.S. dollar has appreciated.

F The fall in the exchange rate means that the U.S. dollar has depreciated.

The formula for the real exchange rate is RER = E (P P*) where RER is the real exchange rate, E is the nominal exchange rate, P is the U.S. price level, and P* is the foreign price level.

F The formula for the real exchange rate is RER = E (P/P*).

The sum of the current account plus capital and financial account plus official settlements account is positive for a nation that is a net lender.

F The sum of the current account, capital and financial account, and official settlements account is always zero.

The supply curve for U.S. dollars is vertical in the foreign exchange market.

F The supply curve for U.S. dollars is upward sloping, not vertical.

If the U.S. exchange rate rises, the demand curve for U.S. dollars shifts rightward.

F There is a movement upward along the demand curve but the demand curve does not shift.

People demand U.S. dollars to buy U.S.-produced goods and services but dollars are not needed to buy U.S. assets.

F U.S. dollars are needed to buy U.S. securities as well as U.S.-produced goods and services.

If the U.S. interest rate differential rises, the demand for U.S. dollars increases.

T An increase in the U.S. interest rate differential means that the interest rate paid on U.S. assets has risen relative to interest rates paid on foreign assets, which increases the demand for U.S. dollars.

If the Federal Reserve buys U.S. dollars, the U.S. exchange rate rises.

T By buying U.S. dollars, the Fed increases the demand for dollars, thereby raising the U.S. exchange rate.

For a given expected future exchange rate, the lower the U.S. exchange the larger the expected profit from holding US dollars

T If the expected future exchange rate does not change, then as the U.S. exchange rate falls, it becomes more profitable to buy U.S. dollars to sell in the future.

Purchasing power parity means that if the U.S. dollar can buy more goods in Japan than in the United States, the U.S. exchange rate will fall.

T In the case outlined in the question, U.S. residents will supply more dollars to buy yen, which thereby drives down the U.S. exchange rate.

In the long run, if the U.S. price level rises the U.S. nominal exchange rate depreciates

T In the long run, any change in the U.S. price level leads to an offsetting change in the U.S. nominal exchange rate, so a rise in the U.S. price level leads to a fall in the U.S. nominal exchange rate.

If the U.S. exchange rate is expected to appreciate in the future, the current supply of U.S. dollars decreases.

T Suppliers want to hold — not sell — more U.S. dollars in order to reap the expected profit from An increase in the U.S. demand for imports increases the demand for U.S. dollars.

If the demand for U.S. dollars decreases and the supply increases, the exchange rate definitely falls.

T The changes outlined in the question occurred in 2007-2012 when the U.S. dollar exchange rate depreciated.

An increase in the U.S. interest rate differential raises the U.S. exchange rate.

T The demand for U.S. dollars increases and the supply decreases, both of which appreciate the U.S. exchange rate.

The lower the exchange rate, the cheaper foreigners find U.S.-produced goods and services.

T The lower the exchange rate, are fewer units of foreign currency needed to buy a U.S. dollar and so the less expensive are U.S.-produced goods and services to foreigners.

12. If the exchange rate ____, then the exchange rate has ____. a. falls; depreciates b. falls; appreciates c. rises; depreciates d. None of the above answers is correct.

a When the exchange rate falls, it has depreciated; when it rises, it has appreciated.

11. Foreigners demand U.S. dollars to a. sell the goods imported into the United States. b. buy the goods exported from the United States. c. take advantage of higher U.S. prices. d. for reasons that are not given in the previous answers.

b The demand for U.S. dollars is derived from the demand from foreigners for U.S. goods and U.S. assets.

16. An increase in the demand for U.S. exports ____ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ____. a. increases; rightward b. increases; leftward c. decreases; rightward d. decreases; leftward

c Answer (c) is essentially the definition of purchasing power parity.

14. If the U.S. exchange rate falls, the price to foreigners of U.S.-produced goods and services ____ and the quantity of U.S. dollars demanded ____. a. rises; increases b. rises; decreases c. falls; increases d. falls; decreases

c When the U.S. exchange rate falls, the price to foreigners of U.S.-produced products falls, so their demand for U.S.-produced products increases which increases the quantity of U.S. dollars demanded.

13. When the exchange rate rises, the demand curve for foreign exchange shifts ____ and the supply curve of foreign exchange shifts ____. a. rightward; rightward b. leftward; leftward c. rightward; leftward d. None of the above answers is correct because a change in the exchange rate does not shift either curve.

d A change in the exchange rate leads to a movement along the demand and supply curves not a shift in the curves.

If the U.S. exchange rate falls and expected future exchange rate does not change, the ____ the expected profit from selling U.S. dollars today and so the ____ the quantity of U.S. dollars supplied today. a. larger; larger b. larger; smaller c. smaller; larger d. smaller; smaller

d The fall in the exchange rate with no change in the expected future exchange rate means that the expected profit from holding dollars rises. The rise in the expected profit decreases the quantity of dollars supplied because investors see a higher expected profit from holding dollars.