Macro-Econ Chapter 18

e x P/P*

Calculating the real exchange rate

b

If Japan's national saving exceeds its domestic investment, then Japan has a. positive net capital outflows and negative net exports. b. positive net capital outflows and positive net exports. c. negative net capital outflows and negative net exports. d. negative net capital outflows and positive net exports

d

If a U.S. shirt maker purchases cotton from Egypt, U.S. net exports a. increase, and U.S. net capital outflow increases. b. increase, and U.S. net capital outflow decreases. c. decrease, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases.

a

If a country has Y > C + I + G, then it has a. positive net capital outflow and positive net exports. b. positive net capital outflow and negative net exports. c. negative net capital outflow and positive net exports. d. negative net capital outflow and negative net exports.

d

If the United States had negative net exports last year, then it a. sold more abroad than it purchased abroad and had a trade surplus. b. sold more abroad than it purchased abroad and had a trade deficit. c. bought more abroad than it sold abroad and had a trade surplus. d. bought more abroad than it sold abroad and had a trade deficit.

a

In Ireland, a pint of beer costs 2.2 Irish pounds. In Australia, a pint of beer costs 4 Australian dollars. If the exchange rate is .5 pounds per Australian dollar, what is the real exchange rate? a. .91 pints of Irish beer per pint of Australian beer b. 1.1 pint of Irish beer per pint of Australian beer c. 3.64 pints of Irish beer per pint of Australian beer d. 4.4 pints of Irish beer per pint of Australian beer

d

Jill, a U.S. citizen, uses some euros to purchase a bond issued by a French vineyard. This exchange a. decreases U.S. net capital outflow. b. increases U.S. net capital outflow by more than the value of the bond. c. increases U.S. net capital outflow by the value of the bond. d. does not change U.S. net capital outflow.

capital inflow

NCO<0; foreign purchases of domestic assets exceed domestic purchases of foreign assets

capital outflow

NCO>0; domestic purchases of foreign assets exceed foreign purchases of domestic assets

b

Net capital outflow measures a. foreign assets held by domestic residents minus domestic assets held by foreign residents. b. the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by for c. the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic goods and services sold to foreigners. d. None of the above is correct.

a

Other things the same, if the dollar depreciates relative to the British pound, then a. the exchange rate falls. It will cost fewer pounds to travel in the U.S. b. the exchange rate falls. It will cost more pounds to travel in the U.S. c. the exchange rate rises. It will cost fewer pounds to travel in the U.S. d. the exchange rate rises. It will cost more pounds to travel in the U.S.

d

Other things the same, if the exchange rate changes from 125 yen per dollar to 115 yen per dollar, the dollar has a. appreciated and so buys more Japanese goods. b. appreciated and so buys fewer Japanese goods. c. depreciated and so buys more Japanese goods. d. depreciated and so buys fewer Japanese goods.

a

Other things the same, the real exchange rate between U.S. and South African goods would be higher if a. prices in the U.S. were higher, or the number of South African rand the dollar purchased were higher. b. prices in the U.S. were higher, or the number of South African rand the dollar purchased were lower. c. prices in the U.S. were lower, or the number of South African rand the dollar purchased were higher. d. prices in the U.S. were lower, or the number of South African rand the dollar purchased were lower.

depreciation

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

purchasing power parity

a theory of exchange rated whereby a unit of any currency should be able to buy the same quantity of good in all countries (based on law of one price) e x P = P*

appreciation

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

variables that influence net exports

consumer preference prices of goods at home and abroad change rates transportation costs government policies

closed economy

do not interact with other economies in the world (Y= C+I+G)

net capital outflow (NCO)

domestic purchases of foreign assets minus foreigners purchases of domestic assets

foreign direct investment

domestic residents actively manage the foreign investment

foreign portfolio investment

domestic residents purchase foreign stocks or bonds, supplying "loanable funds" to a foreign firm

exports

domestically produced goods and services sold abroad

true

every transaction that affects net exports also affects net capital outflow by the same amount. True or False?

foreign currency per unit of domestic currency

exchange rates are expressed as _____________

net exports (NX)

exports - imports = ________________

trade deficit

exports < imports excess of imports over exports

balanced trade

exports = imports

trade surplus

exports > imports excess of exports over imports

imports

foreign produced goods and services sold domestically

Savings = Investment

in a closed economy ________= _________

saving = investment + net capital outflow

in an open economy _________= __________

open economy

interact freely with other economies around the world (Y= C+I+G+NX)

variables that influence NCO

real interest rates paid on foreign assets real interest rates pain on domestic assets perceived risks of holding foreign assets government policies affecting foreign ownership of domestic assets

law of one price

the notion that a food should sell for the same price in all markets

nominal exchange rate

the rate at which one countries currency trades for another

real exchange rate

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

S<I; NCO<0

when _______, then ________; foreigners are financing some of the countries investment

S>I; NCO>0

when ________, then ________ and the excess loanable funds flow abroad in the form of positive NCO

domestic price foreign price nominal exchange rate

when calculating real exchange rate: P= P*= e=