ECON - Chapter 10 Exam

The following table provides nominal exchange rates for the US dollar. Canada - Foreign currency/dollar 1.488 and Dollar/foreign currency .672 Mexico - Foreign currency/dollar 9.259 and Dollar/foreign currency .108 Based on this data, the nominal exchange rate equals approximately ___ pesos per Canadian dollar or, equivalently, ___Canadian dollars per peso.

6.222; 0.161

Purchasing power parity is the theory that nominal exchange rates are deteremined:

as necessary for the law of one price to hold

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n):

capital inflow

When a Peruvian buys a U.S. government bond, from the perspective of Peru, this is a(n):

capital outflow

When an American buys stock in a French company, from the perspective of the US this is a(n)

capital outflow

In an open economy with a given level of real interest rates and risk, and increase in real interest rates abroad will ___ capital inflows and ___ the equilibrium domestic real interest rate.

decrease; increase

A decrease in the nominal exchange rate, e. defined as the number of units of foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ___ relative to the foreign currency.

depreciated

A decrease in the value of a currency relative to other currencies is called a(n)

depreciation

All else being equal if the prospect of a recession leads the Fed to ease monetary policy, the equilibrium value of the exchange rate for the US dollar will:

fall

As U.S. real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar.

fewer; appreciation

The gold standard is an example of a ___ exchange rate system

fixed

Holding all else constant, an increase in Mexican real GDP will ___ the demand for dollars in the foreign exchange market and ___ the equilibrium Mexican peso/US dollar exchange rate.

increase; increase

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate.

increases

The benefits of net capital inflows to a country include all of the following except:

interest and dividend payments owed to foreign investors

Large economies, such as the US should ___ adopt a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy___.

nearly always; comes with a high cost

An economy with a trade surplus must also have:

positive net capital outflows

If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession:

the two countries will disagree about the approach to monetary policy

A country's trade balance equals:

the value of exports minus the value of imports

If domestic savings is less than domestic investments, then a country will have a ___ and positive net capital ___.

trade deficit; inflows

A flexible exchange rate is an exchange rate whose value:

varies according to supply and demand for the currency in the foreign exchange market