Question 1

The theory of purchasing-power parity primarily explains

Accepted Answer

A)   why trade deficits tend to move to zero over time.
B)   how foreign prices affect domestic prices.
C)   the determination of the real exchange rate.
D)   why a change in the real exchange rate changes a country's net exports.E) A) and B)
F) A) and C)

Question 2

If purchasing-power parity holds, when a country's central bank increases the money supply, a unit of money

Accepted Answer

A)   gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.
B)   gains value in terms of the domestic goods and services it can buy, but loses value in terms of the foreign currency it can buy.
C)   loses value in terms of the domestic goods and services it can buy, but gains value in terms of the foreign currency it can buy.
D)   loses value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.E) A) and D)
F) C) and D)

Question 3

If U.S. exports are $150 billion and U.S. imports are $100 billion, which of the following is correct?

Accepted Answer

A)   The U.S. has a trade surplus of $100 billion.
B)   The U.S. has a trade surplus of $50 billion.
C)   The U.S. has a trade deficit of $100 billion.
D)   The U.S. has a trade deficit of $50 billion.E) All of the above
F) B) and C)

Question 4

Net capital outflow is defined as the purchase of

Accepted Answer

A)   foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
B)   foreign assets by domestic residents minus the purchase of foreign goods and services by domestic residents.
C)   domestic assets by foreign residents minus the purchase of domestic goods and services by foreign residents.
D)   domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.E) B) and C)
F) C) and D)

Question 5

The country of Wiknam has net capital outflow of $1,000, government purchases of $5,000 and consumption of $20,000. Which of the following is correct?

Accepted Answer

A)   If its domestic investment is $1,000, its GDP is $26,000.
B)   If its domestic investment is $2,000, its GDP is $28,000.
C)   If its domestic investment is $5,000, its GDP is $29,000.
D)   None of the above are correct.E) A) and D)
F) None of the above

Question 6

A dozen eggs cost $2 in the U.S. and 12 pesos in Argentina. If the real exchange rate is 5/6, what is the nominal exchange rate? Show your work.

Accepted Answer

The real exchange rate = 5/6 =...

Question 7

If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net exports and U.S. net capital outflow decrease.

Accepted Answer

A) True 
 B)False

Question 8

Suppose that a country has $120 billion of national saving, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go?

Accepted Answer

This is possible for an open economy. Th...

Question 9

Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures

Accepted Answer

A)   increase U.S. and Israeli net capital outflow.
B)   increase U.S. net capital outflow, but decrease Israeli net capital outflow.
C)   decrease U.S. net capital outflow, but increase Israeli net capital outflow.
D)   None of the above is correct.E) C) and D)
F) All of the above

Question 10

According to purchasing-power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate?

Accepted Answer

A)   2 pounds per dollar
B)   1 pound per dollar
C)   1/2 pound per dollar
D)   None of the above is correctE) B) and D)
F) A) and B)

Question 11

A U.S. mutual fund buys stocks issued by a Columbian company. This purchase is an example of

Accepted Answer

A)   U.S. foreign direct investment. It increases Columbia's net capital outflow.
B)   U.S. foreign direct investment. It decreases Columbia's net capital outflow.
C)   U.S. foreign portfolio investment. It decreases Columbia's net capital outflow.
D)   U.S. foreign portfolio investment. It increases Columbia's net capital outflow.E) A) and B)
F) A) and C)

Question 12

Can purchasing-power parity be used to explain the fact that the U.S. dollar depreciated by more than 50 percent against the German mark between 1970 and 1998, but appreciated by more than 100 percent against the Italian lira during the same period? Defend your answer.

Accepted Answer

The theory of purchasing-power parity su...

Question 13

The large trade deficits in the U.S. during the 1990's were primarily associated with a rise in domestic investment spending rather than a rise in the budget deficit.

Accepted Answer

A) True 
 B)False

Question 14

According to purchasing-power parity theory, the nominal exchange rate between the U.S. and another country should equal the U.S. price level divided by the price level in the foreign country.

Accepted Answer

A) True 
 B)False

Question 15

From 1980 to 1987

Accepted Answer

A)   foreigners were buying more assets from the United States than Americans were buying abroad. The United States was going into debt.
B)   Americans were buying more assets abroad than foreigners were buying from the United States. The United States was going into debt.
C)   foreigners were buying more assets from the United States than Americans were buying abroad. The United States was moving into surplus.
D)   Americans were buying more assets abroad than foreigners were buying from the United States. The United States was moving into surplus.E) C) and D)
F) A) and C)

Question 16

A U.S. grocery chain buys bananas from Honduras and pays for them with U.S. dollars.

Accepted Answer

A)   The purchase of the bananas increases U.S. net exports and the payment with dollars increases U.S. net capital outflow.
B)   The purchase of bananas increases U.S. net exports and the payment with dollars decreases U.S. net capital outflow.
C)   The purchase of bananas decreases U.S. net exports and the payment with dollars increases U.S. net capital outflow.
D)   The purchase of bananas decreases U.S. net exports and the payment with dollars decreases U.S. net capital outflow.E) A) and C)
F) A) and B)

Question 17

According to purchasing-power parity, if the Federal Reserve increased the money supply

Accepted Answer

A)   U.S. prices would rise and the nominal exchange rate would rise.
B)   U.S. prices would rise and the nominal exchange rate would fall.
C)   U.S. prices would fall and the nominal exchange rate would rise.
D)   U.S. prices and the nominal exchange rate would fall.E) A) and B)
F) All of the above

Question 18

If Germany purchased more goods and services abroad than it sold abroad last year, then it had

Accepted Answer

A)   positive net exports which is a trade surplus.
B)   positive net exports which is a trade deficit.
C)   negative net exports which is a trade surplus.
D)   negative net exports which is a trade deficit.E) A) and B)
F) A) and C)

Question 19

If a country were to save more, but its domestic investment remained the same, then which of the following would rise?

Accepted Answer

A)   both net capital outflow and net exports
B)   net capital outflow but not net exports
C)   net exports but not net exports
D)   neither net exports nor net capital outflowE) All of the above
F) A) and B)

Question 20

If a county has 25 billion euros of imports, 15 billion euros of exports, and sells 20 billion euros of assets to foreigners, how many foreign assets do domestic residents purchase?

Accepted Answer

A)   5 billion euros
B)   10 billion euros
C)   30 billion euros
D)   None of the above are correct.E) None of the above
F) B) and D)

Exam 31: Open-Economy Macroeconomics: Basic Concepts

Net capital outflow is defined as the purchase of

Correct AnswerverifiedShow Answer

A dozen eggs cost $2 in the U.S. and 12 pesos in Argentina. If the real exchange rate is 5/6, what is the nominal exchange rate? Show your work.

Correct AnswerverifiedThe real exchange rate = 5/6 =...View AnswerShow Answer

The large trade deficits in the U.S. during the 1990's were primarily associated with a rise in domestic investment spending rather than a rise in the budget deficit.

Correct AnswerverifiedShow Answer

According to purchasing-power parity, if the Federal Reserve increased the money supply

Correct AnswerverifiedShow Answer

The country of Wiknam has net capital outflow of $1,000, government purchases of $5,000 and consumption of $20,000. Which of the following is correct?

Correct AnswerverifiedShow Answer

Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures

Correct AnswerverifiedShow Answer

A U.S. mutual fund buys stocks issued by a Columbian company. This purchase is an example of

Correct AnswerverifiedShow Answer

From 1980 to 1987

Correct AnswerverifiedShow Answer

A U.S. grocery chain buys bananas from Honduras and pays for them with U.S. dollars.

Correct AnswerverifiedShow Answer

If purchasing-power parity holds, when a country's central bank increases the money supply, a unit of money

Correct AnswerverifiedShow Answer

According to purchasing-power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate?

Correct AnswerverifiedShow Answer

Can purchasing-power parity be used to explain the fact that the U.S. dollar depreciated by more than 50 percent against the German mark between 1970 and 1998, but appreciated by more than 100 percent against the Italian lira during the same period? Defend your answer.

Correct AnswerverifiedThe theory of purchasing-power parity su...View AnswerShow Answer

If a country were to save more, but its domestic investment remained the same, then which of the following would rise?

Correct AnswerverifiedShow Answer

If a county has 25 billion euros of imports, 15 billion euros of exports, and sells 20 billion euros of assets to foreigners, how many foreign assets do domestic residents purchase?

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If U.S. exports are $150 billion and U.S. imports are $100 billion, which of the following is correct?

Correct AnswerverifiedShow Answer

If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net exports and U.S. net capital outflow decrease.

Correct AnswerverifiedShow Answer

The theory of purchasing-power parity primarily explains

Correct AnswerverifiedShow Answer

Suppose that a country has $120 billion of national saving, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go?

Correct AnswerverifiedThis is possible for an open economy. Th...View AnswerShow Answer

According to purchasing-power parity theory, the nominal exchange rate between the U.S. and another country should equal the U.S. price level divided by the price level in the foreign country.

Correct AnswerverifiedShow Answer

If Germany purchased more goods and services abroad than it sold abroad last year, then it had

Correct AnswerverifiedShow Answer

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The real exchange rate = 5/6 =...
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The theory of purchasing-power parity su...
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This is possible for an open economy. Th...
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