Chapter 31

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

True

real exchange rate

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

If the United States saves $1,000 billion and U.S. net capital outflow is -$200 billion, U.S. domestic investment is

$1,200 billion.

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?

0.8 pound of Japanese hamburger/pound of American hamburger

If the nominal exchange rate between British pounds and dollars is 0.5 pound per dollar, how many dollars can you get for a British pound?

2 dollars

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?

3 euros per dollar

Depreciation

A decrease or loss in value

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)?

All of the above will increase the real exchange rate.

trade deficit

An excess of imports over exports

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

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.

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.

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?

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

If Japan exports more than it imports,

Japan's net capital outflow must be positive.

Which of the following is an example of foreign direct investment?

McDonald's builds a restaurant in Moscow.

Which of the following would directly increase U.S. net capital outflow?

Microsoft builds a new distribution facility in Sweden

Each of the following is a reason why the U.S. economy continues to engage in greater amounts of international trade except which one?

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

Which of the following statements is true about a country with a trade deficit?

Net exports are negative.

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?

Net exports fall, and net capital outflow falls.

Arbitrage

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

nominial 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

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

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.

True

If purchasing-power parity holds, the real exchange rate is always equal to 1.

True

If the yen/dollar exchange rate rises, the dollar has appreciated.

True

In order to increase domestic investment, a country must either increase its saving or decrease its net foreign investment.

True

balanced trade

a situation in which exports equal imports

Which of the following people or firms would be pleased by a depreciation of the dollar?

an Italian importer of U.S. steel

closed economy

an economy that does not interact with other economies in the world

open economy

an economy that interacts freely with other economies around the world

If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar,

an exchange rate index that accounts for many exchange rates.

The most accurate measure of the international value of the dollar is

an exchange rate index that accounts for many exchange rates.

appreciation

an increase in the value of a currency as measured by the amount of foreign currency it can buy

An economy that interacts with other economies is known as

an open economy

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

arbitrage

Which of the following products would likely be the leastaccurate if used to calculate purchasing-power parity?

dental services

Net exports

exports - imports

If a company based in the United States prefers a strong dollar (a dollar with a high exchange value), then the company likely exports more than it imports.

false, companies preferring a strong dollar import more than they export.

Arbitrage tends to cause prices for the same good to diverge from one another.

false. arbitrage causes prices to converge.

Imports

goods produced abroad and sold domestically

Exports

goods produced domestically and sold abroad

Net exports are defined as imports minus exports.

net exports are exports minus imports.

trade surplus

the amount by which the value of a country's exports exceeds the cost of its imports.

Suppose the money supply in Mexico grows more quickly than the money supply in the United States. We would expect that

the peso should depreciate relative to the dollar.

net capital outflow

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

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 purchasing-power parity holds, which of the following statements is true? Over this period,

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

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

they are more likelt to be traded because shipping cost are a small portion of the total cost of the good.

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

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