Question 1

Suppose that a country has $80 billion of national saving and $80 billion of domestic investment. Is this possible? Where did the other $60 billion of national saving go?

Accepted Answer

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Question 2

If the purchasing power of the dollar is always the same at home and abroad, then the nominal exchange rate defined as foreign goods per unit of Canadian goods decreases if the Canadian price level rises more than the price level in foreign countries.

Accepted Answer

If the purchasing power of the dollar is always the same at home and abroad, then the law of one price holds. In other words, if the Canadian price level rises more than the price level in foreign countries, then Canadian goods become relatively more expensive compared to foreign goods. Hence, the nominal exchange rate defined as foreign goods per unit of Canadian goods decreases.

Question 3

How do we find the real exchange rate from the nominal exchange rate?

Accepted Answer

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Question 4

As an open economy, Canadian national saving can be less than Canadian investment.

Accepted Answer

In an open economy, national saving can come from both domestic saving and foreign saving, such as foreign investment. Therefore, Canadian investment can be partially funded through foreign saving, allowing for Canadian national saving to be less than investment.

Question 5

According to the theory of purchasing-power parity, the real exchange rate defined as foreign goods per unit of Canadian goods will equal the domestic price level divided by the foreign price level.

Accepted Answer

The theory of purchasing-power parity (PPP) suggests that in the long run, exchange rates should adjust to equalize the price of identical goods and services in any two countries. The real exchange rate, however, is typically defined as the nominal exchange rate adjusted for differences in price levels between countries, not as the domestic price level divided by the foreign price level. The PPP implies that the real exchange rate should approach unity (or one) when price levels are adjusted, meaning the purchasing power is equalized, but it does not define the real exchange rate in the manner described.

Question 6

From 1970 to 1998, the Canadian dollar depreciated against the German mark and appreciated against the Italian lira because Canada experienced more inflation than Germany but less inflation than Italy.

Accepted Answer

This is because inflation has a direct impact on the value of a currency. When a country experiences higher inflation than another country, its currency tends to depreciate against the other country's currency. Therefore, since Canada experienced more inflation than Germany but less inflation than Italy during this period, the Canadian dollar depreciated against the German mark and appreciated against the Italian lira.

Question 7

The theory of purchasing-power parity states that a unit of any given currency should be able to buy the same quantity of goods in all countries.

Accepted Answer

The theory of purchasing-power parity (PPP) suggests that the exchange rate between two countries should equal the ratio of the two countries' price levels for a given basket of goods and services. This implies that a unit of any given currency should be able to buy the same quantity of goods in all countries.

Question 8

Why are net exports and net capital outflow always equal?

Accepted Answer

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Question 9

When the central bank prints large quantities of money, that money loses value both in terms of the goods and services it buys and in terms of the amount of foreign currencies it can buy.

Accepted Answer

This is because an increase in the money supply can lead to inflation, where the prices of goods and services rise due to the increase in available currency. Additionally, the devaluation of the currency can lead to a decrease in its exchange rate with foreign currencies.

Question 10

Suppose a bottle of wine costs 45 euros in France and $30 in Canada. If the exchange rate is 1.50 euros per dollar, what is the real exchange rate?

Accepted Answer

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Question 11

Suppose that Colby, a resident of Canada, buys video games from a company in Japan. Explain why and in what directions this changes Canadian net exports and Canadian net capital outflow.

Accepted Answer

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Question 12

If the real exchange rate of the Canadian dollar falls, Canadian net exports will fall.

Accepted Answer

If the real exchange rate of the Canadian dollar falls, it means that the Canadian dollar has depreciated in value, making exports cheaper and more competitive. This should increase Canadian net exports as foreign buyers find Canadian goods more affordable. Therefore, a fall in the real exchange rate of the Canadian dollar would likely lead to an increase in Canadian net exports, not a fall.

Question 13

List the factors that might influence a country's exports, imports, and trade balance.

Accepted Answer

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Question 14

When Canada increases its net capital outflow, it causes Canadian national saving to decrease.

Accepted Answer

An increase in net capital outflow does not cause Canadian national saving to decrease; instead, it reflects the use of national saving for investment abroad rather than at home. National saving is determined by domestic factors like income and consumption, not by how those savings are invested (domestically or abroad).

Question 15

If the exchange rate is 5 pesos per dollar, it is also 0.2 dollars per peso.

Accepted Answer

To convert from pesos to dollars, divide the amount of pesos by the exchange rate (5 pesos per dollar). So, 1 peso/5 pesos per dollar = 0.2 dollars per peso.

Question 16

How do the nominal exchange rate and the real exchange rate differ?

Accepted Answer

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Question 17

The large, positive net capital outflow in Canada from 1999 until 2009 was primarily the result of government budget surpluses.

Accepted Answer

When a government runs a budget surplus, it means that it is saving more money than it is spending. This excess savings can be invested abroad, resulting in a net capital outflow. Therefore, government budget surpluses can contribute to a large, positive net capital outflow in a country.

Question 18

Many economists believe that the theory of purchasing-power parity describes the forces that determine exchange rates in the long run.

Accepted Answer

The theory of purchasing-power parity states that exchange rates should eventually adjust to equalize the prices of an identical basket of goods and services in different countries. This suggests that exchange rates are determined by long-run factors such as inflation rates and productivity levels. Therefore, many economists believe that purchasing-power parity can help explain exchange rate movements over time.

Question 19

According to purchasing-power parity theory, the real exchange rate should equal the nominal exchange rate.

Accepted Answer

According to purchasing-power parity theory, the real exchange rate equals the nominal exchange rate multiplied by the ratio of the price level in the foreign country to the price level in the home country. Therefore, the real exchange rate can differ from the nominal exchange rate if there are differences in price levels between the two countries.

Question 20

How can one derive the identity that saving equals the sum of domestic investment and net capital outflow from the national income accounting identity?

Accepted Answer

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Quiz 12: Open-Economy Macroeconomics: Basic Concepts