MACROECON chapter 18

Real exchange rate also =

(e x P)/P*

Real exchange rate =

(nominal exchange rate x domestic price)/foreign price

If the exchange rate is 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars costs

125 Egyptian pounds

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 is an example of US foreign direct investment?

A US based restaurant chain opens new restaurants in India

Real GDP is Y =

C + I + G + NX

I + NX =

S

NCO =

S-I

Other things the same, which of the following would both make foreigners more willing to engage in U.S. portfolio investment?

US interest rates rise, the default risk of US assets fall

NX =

X - M

S =

Y-C-G

A country sells more to foreign countries than it buys from them. It has

a trade surplus and positive net exports

When discussing exchange rates

always talking about the item on the bottom of the fraction

Closed economy

an economy that doesn't interact with other economies in the world

X - M

balanced trade

Other things the same, if the exchange rate changes from 30 Thai bhat per dollar to 25 Thai bhat per dollar, then the dollar has

depreciated and so buys fewer Thai goods

*

foreign

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of US currency must rise if the price level(s) in

foreign countries rise

A US firm buys bonds issued by a technology center in India. This purchase is an example of US

foreign portfolio investment. By itself it is an increase in US holdings of foreign bonds and increases US net capital outflow

Imports

goods and services produced abroad and then sold domestically

Exports

goods and services produced domestically and then sold abroad

When a currency appreciates (strengthens)

increase in the value of currency, can buy more foreign currency

Suppose that real interest rates in the US rise relative to real interest rates in other countries. This increase would make foreigners

more willing to purchase US bonds, so US net capital outflow would fall

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

Other things the same, the real exchange rate between American and Chinese goods would be higher if

prices of Chinese goods were lower, or the number of yuan a dollar purchased was higher

The ability to profit by purchasing wheat in the US and selling it in China implies that the

real exchange rate is less than 1

When the Mexican peso gets "stronger" relative to the dollar,

the US trade deficit with Mexico falls

If purchasing-power parity holds, the price level in the U.S. is 140, and the price level in Canada is 120, which of the following is true?

the nominal exchange rate is 120/140

If purchasing-power parity holds, the price level in the US is 250, and the price level in Japan is 260, which of the following is true?

the nominal exchange rate is 260/250

Net exports (NX)

the value of a nation's exports minus the value of its imports (trade balance)

Purchasing-power parity (PPP)

theory of exchange rates in which a unit of any given currency should be able to buy the same quantity of goods in all countries (real exchange rate should be 1)

X < M

trade deficit

X > M

trade surplus

Exchange rates influence what?

x, m, and NX

A country has $3 billion of domestic investment and net exports of $2 billion. What is its saving?

$5 billion

Suppose that a country imports $90 million worth of goods and services and exports $80 million worth of goods and services. What is the value of net exports?

-$10 million

If the exchange rate is 5 Egyptian pounds per US dollar, a watch that costs $25 US dollars costs

125 Egyptian pounds

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

2

In the US a candy bar costs $1. If the nominal exchange rate were 6 Chinese yuan per dollar and the real exchange rate were 1.2, then, what would be the price of a candy bar in China?

5 yuan

Y-C-G =

I + NX

S - I also =

NX

If a country has a trade deficit then

S< I and Y < C+I+G

Open economy

an economy that interacts freely with other economies around the world

NX = NCO

an identity

Other things the same, if the exchange rate changes from 6 Chinese yuan per dollar to 7 Chinese yuan per dollar, then the dollar

appreciates and buys more Chinese goods

Other things the same, if the exchange rate changes from .8 euros per dollar to .9 euros per dollar, the dollar

appreciates so US goods become more expensive relative to foreign goods

An American brewery sells dollars to obtain euros. It then uses the euros to buy brewing equipment from a German company. These transactions

decrease US net capital outflow because Germans obtain US assets

When a currency depreciates (weakens)

decrease in the value of currency, can buy less foreign currency

The purchase of US government bonds by Egyptians is an example of

foreign portfolio investment by Egyptians

A German mutual fund sells euros to a US bank for $20,000. The mutual fund then uses these dollars to purchase a bond issued by United Express, a US delivery company. As a result of these two transactions, what happened to US net capital outflow?

it was unchanged

If a country has Y > C + I + G, then it has

positive net capital outflow and positive net exports

What influences NCO?

real interest rates (on foreign and domestic assets), perceived risk of holding assets abroad, and government policies that affect foreign ownership of domestic assets

Other things the same, a country could move from having a trade surplus to having a trade deficit if either

saving fell or domestic investment rose

Negative net exports

savings is small or investment is high

Consider an identical basket of goods in both the US and Taiwan. For a given nominal exchange rate, in which case is it certain that the US real exchange rate with Taiwan falls?

the price of the basket of goods falls in the U.S. and rises in Taiwan

Net capital outflow (NCO)

the purchase of foreign assets by domestic residents (foreign direct investment and foreign portfolio investment) minus the purchase of domestic assets by foreigners

nominal exchange rate

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

Real exchange rate

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

Which of the following does purchasing-power parity conclude should equal 1?

the real exchange rate but not the nominal exchange rate

NX < 0

trade deficit (buying more to foreigners than selling to them, NCO < 0)

NX > 0

trade surplus (selling more to foreigners than buying from them, NCO > 0)

Savings

what we produce but don't consume

Arbitrage

when agents take advantage of prices differences for the same item in different markets