Chapter 13: Open Economy Macroeconomics: Basic Concepts

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

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

false

which of the following is an example of foreign direct investment

mcdonald's builds a restaurant in moscow

net exports

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

if purchasing power partiy holds, the real exchange rate is always equal to 1

true

if the yen/dollar exchange rate rises, the dollar has appreciated

true

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

example of real exchange rate formula in use: suppose that a case of mexican beer is 20 pesos while a case of u.s. beer is $10 and the nominal exchange rate is 4 pesos per dollar. the real exchange rate of mexican beer to u.s. beer is

((4 pesos / 1 dollar) * ($10 / case u.s. beer)) / (20 pesos / case mexican beer)

real exchange rate formula

(nominal exchange rate * domestic price) / foreign price or (e * p) / p^*

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

depreciation

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

balanced trade

a situation in which exports equal imports

closed economy

an economy that does not interact with other economies

open economy

an economy that interacts with other economies

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 measured in terms of other currencies

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

an italian importer of u.s. steel

an economy that interacts with other economics 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 least accurate if used to calculate purchasing power parity

dental services

a country that exports more than imports is said to have a trade deficit

false

net exports are defined as imports minus exports

false

if japan exports more than it imports

japan's net capital outflow must be positive

arbitrage

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

trade surplus

the amount by which exports exceed imports

trade deficit

the amount by which imports exceed exports

if the exchange rate changes from 3 brazilian reals per dollar to 4 reals per dollar

the dollar has appreciated

net capital outflow

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

nominal exchange rate

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

real exchange rate

the rate at which people can trade the goods and services of one country for those of another country

purchasing power parity

the theory that a unit of a country's currency should buy the same quantity of goods in all countries

suppose the inflation rate over the last 20 years has been 10 percent of 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

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

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 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

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

true

u.s. net capital outflow falls when toyota buys stock in hilton hotels, an american corporation

true

gdp formula

y = c + i + g + nx

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

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

if a company based in the united states prefers a strong dollar (a dollar which a high exchange value), then the company likely exports more than it imports

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

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

false

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

exports

goods and services produced domestically and sold abroad

imports

goods and services produced in foreign countries and sold domestically

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

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

savings formula

y - c - g = i + nx or s = i + nx or s = i + nco