Macro Ch 18

A situation in which exports equal imports

Balance trade

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

D) an Italian importer of U.S. steel

Goods and services produced domestically and sold abroad

Exports

Goods and services produced in foreign countries and sold domestically

Imports

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners NCO = Co - Ci

Net capital outflow

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

Net exports

An economy that does not interact with other countries

Closed economy

If the nominal exchange rate between British pounds and dollars is 0.5 pound per dollar, how many can you get for a British pound? A) 2 dollars B) 1.5 dollars C) 1 dollar D) 0.5 of dollar E) None of the above is correct

A) 2 dollars Formula: 1/P 1/0.5 = 2 dollars

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) McDonald's builds a restaurant in Moscow

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

Appreciation

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

Arbitrage

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 States? A) 0.5 pound of Japanese hamburger / pound of American 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 E) none of the above

B) 0.8 pound of Japanese hamburger / pound of American hamburger Formula: Real Exchange Rate (100¥ x $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? 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 Formula: Nominal exchange rate = P^ / P P^ is the foreign price level P is the U.S. price level 1.5 £ / $0.50 = 3

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow? A) Saving is the sum investment and net capital outflow B) For a given amount of saving, an increase in net capital outflow must decrease domestic investment C) For a given amount of saving, an decrease in net capital outflow must decrease domestic investment D) An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged

C) For a given amount of saving, an decrease in net capital outflow must decrease domestic investment

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

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-technology 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 countries E) all of the above are reasons for increased trade by the United States

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

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) 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) None of the above will increase the real exchange rate

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

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

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

Depreciation

If the United States 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) $1,200 billion NCO = Saving - Investment NCO = 1000 - -200 NCO = 1200

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) an exchange rate index that accounts for many exchange rates.

An economy that interacts with other economies is known as A) a balanced trade economy B) an export economy C) an import economy D) a closed economy E) an open economy

E) an open economy

True/False: If Great Britain's money supply grows faster than Mexico's, the value of the British pound should rise relative to the value of the peso

False; the value of the British pound should fall relative to the peso "If a central bank creates more money, its currency will buy fewer goods and services and fewer units of other currencies. Thus, its currency will depreciate."

True/False: Valuable, technologically advanced goods are less likely to be traded internationally because shipping costs absorb too much of the potential profit

False; they are more likely to be traded because shipping costs are a small portion of the total cost of the good

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

Nominal exchange rate

An economy that interacts with other economies

Open economy

The theory that a unit of a country's currency should buy the same quantity of goods in all countries When nominal exchange rate = PPP, real exchange rate is 1 PPP = foreign cost of the basket / domestic cost of the basket

Purchasing-power parity

The amount by which imports exceeds exports

Trade deficit

True/False: 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 it is expensive

True

True/False: For every 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

True

True/False: If purchasing-power parity holds, the real exchange rate is always equal to 1

True

True/False: If the yen/dollar exchange rate rises, the dollar has appreciated

True

True/False: In order to increase domestic investment, a country must either increase its saving or decrease its net foreign investment

True

True/False: U.S. net capital outflow falls when Toyota buys stock in Hilton Hotels, an American corporation

True

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? A) net exports fall, and net capital outflow falls B) Net exports rise, and net capital outflow rises C) Net exports fall, and net capital outflow rises D) Net exports rise, and net capital outflow falls E) None of the above is true

A) net exports fall, and net capital outflow falls

Suppose the money supply in Mexico grows more quickly than the money supply in the United States. 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 of purchasing-power parity D) none of the above is true

A) the peso should depreciate relative to the dollar

Which of the following would directly increase U.S. 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 builds 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 positive B) net exports are negative C) net exports are positive D) exports exceeds imports E) none of the above is true

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 depending on what happened to relative prices in Brazil and the United States. 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 United States. If the 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 value of the pound and the yen B) the yen should have risen in value compared to the pound and fallen compared to the dollar C) the yen should have fallen in value compared to the pound and risen compared to the dollar D) the value of the pound should have risen compared to the value of the yen and the dollar E) none of the above is true

B) the yen should have risen in value 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 it is cheap and selling it where it is expensive, it is known as A) purchasing power-parity B) net capital outflow C) arbitrage D) net exports E) currency appreciation

C) arbitrage

True/False: Arbitrage tends to cause prices for the same good to diverge from one another

False; arbitrage causes prices to converge

True/False: If a country based in the United States prefers a strong dollar (a dollar with a high exchange value), then the economy likely exports more than it imports

False; companies preferring a strong dollar import more than they export

True/False: A country that exports more than it imports is said to have a trade deficit

False; if exports exceed imports, the country has a trade surplus

True/False: Net exports are defined as imports minus exports

False; net exports are exports minus imports

The rate at which people can trade the goods and services of one country for those of another country Formula: (e x P)/P^ e = nominal exchange rate P = domestic price index P^ = foreign price index

Real exchange rate

True/False: For a given amount of U.S. national saving, an increase in U.S. net capital outflow decreases U.S. domestic investment

True

True/False: If the nominal exchange rate is 2 British pounds to the dollar, and if the price of a Big Mac is $2 in the United States and 6 pounds in Great Britain, then the real exchange rate is 2/3 British Big Mac per American Big Mac

True Real exchange rate = (nominal exchange rate x domestic price) / foreign price Real exchange rate = (2 x $2)/6 = 2/3

True/False: If a case of Pepsi costs $8 in the United States and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/dollar exchange rate should be 5,760 yen/dollar

False; the exchange rate should be 90 yen/dollar 720¥ / $8 = 90 yen/dollar

The amount by which exports exceeds imports

Trade surplus