Question 1

Jason plans to buy shrimp in Florida and sell them in Manhattan,Kansas where the price is higher.Jason plans to engage in arbitrage.

Accepted Answer

Jason is buying a product in a location where the price is lower and selling it in a location where the price is higher, which is the definition of arbitrage.

Question 2

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

According to purchasing-power parity (PPP) theory, the nominal exchange rate between two countries should equal the ratio of the foreign price level to the U.S. price level, not the U.S. price level divided by the foreign price level.

Question 3

Other things the same,an increase in the foreign price level leads to an increase in the real exchange rate.

Accepted Answer

An increase in the foreign price level, other things being equal, would decrease the real exchange rate, as the real exchange rate is the relative price of domestic goods in terms of foreign goods. Higher foreign prices make foreign goods more expensive relative to domestic goods.

Question 4

Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.

Accepted Answer

Purchasing-power parity (PPP) theory states that in the long run, exchange rates should adjust so that the same basket of goods costs the same amount in two different countries when priced in the same currency. It does not imply that the nominal exchange rate must equal the real exchange rate; rather, it suggests that the real exchange rate should approach parity (equality in purchasing power) over time.

Question 5

Other things the same,an increase in the real exchange rate raises U.S.net exports.

Accepted Answer

An increase in the real exchange rate makes U.S. goods more expensive relative to foreign goods, which tends to decrease U.S. exports and increase imports, thereby reducing U.S. net exports.

Question 6

If over the next year the inflation rate in the euro area is higher than the inflation rate in Japan,then the euro should depreciate relative to the Japanese yen.

Accepted Answer

Higher inflation rate in the euro area compared to Japan would lead to a decrease in the purchasing power of the euro, causing a decrease in demand for the currency, which in turn would result in the depreciation of the euro relative to the Japanese yen.

Question 7

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

Accepted Answer

This is correct, as the purchasing power parity theory states that in the long run, the exchange rate between two countries should adjust to equalize the prices of an identical basket of goods and services in each country. This means that the nominal exchange rate should be determined based on the relative price levels of the two countries.

Question 8

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

Accepted Answer

If the purchasing power of the dollar is the same at home and abroad, then an increase in the U.S. price level relative to foreign countries' price levels would mean a decrease in the value of the dollar relative to those foreign currencies, resulting in a decrease in the nominal exchange rate.

Question 9

Other things the same,an increase in foreign prices raises the real exchange rate.

Accepted Answer

An increase in foreign prices relative to domestic prices would actually lower the real exchange rate, making domestic goods relatively more expensive compared to foreign goods.

Question 10

In the 1970s and 1980s the U.S.dollar depreciated against the German mark and appreciated against the Italian lira because U.S.inflation was lower than in Germany but higher than in Italy.

Accepted Answer

The U.S. dollar would depreciate against a currency from a country with lower inflation and appreciate against a currency from a country with higher inflation, due to the purchasing power parity theory.

Question 11

Other things the same,an increase in domestic prices raises the real exchange rate.

Accepted Answer

An increase in domestic prices will lead to a decrease in the purchasing power of domestic currency and therefore an increase in the real exchange rate. This is because foreign goods become relatively cheaper and more attractive to domestic consumers, leading to an increase in demand for foreign currency to buy those goods.

Question 12

If prices in the U.S.rise faster than prices in the United Kingdom,then according to the doctrine of purchasing-power parity the U.S.nominal exchange rate should rise

Accepted Answer

According to the doctrine of purchasing-power parity, if prices rise faster in one country compared to another, the nominal exchange rate should adjust to equalize the purchasing power of the two currencies. This means that the currency of the country with higher inflation should depreciate relative to the currency of the country with lower inflation. Therefore, the U.S. nominal exchange rate should fall, not rise, relative to the United Kingdom in this scenario.

Question 13

If U.S.residents purchase $450 billion of foreign assets and foreigners purchase $575 billion of U.S.assets,then the U.S.has net capital outflows of -$125 billion and a trade deficit of $125 billion.

Accepted Answer

Net capital outflows represent the difference between domestic residents' purchases of foreign assets and foreign residents' purchases of domestic assets. If U.S. residents purchase $450 billion of foreign assets and foreigners purchase $575 billion of U.S. assets, the U.S. has a net capital outflow of -$125 billion. This means that the U.S. is investing more abroad than it is attracting in foreign investment. This does not necessarily mean there is a trade deficit, as that would depend on the balance of trade in goods and services.

Question 14

If prices in Mexico rise at a higher rate than prices in the U.S. ,then according to purchasing-power parity the U.S.nominal exchange rate with Mexico should rise.

Accepted Answer

The answer of If prices in Mexico rise at a...

Question 15

Other things the same,an increase in the U.S.real exchange rate makes U.S.goods more expensive relative to foreign goods.

Accepted Answer

An increase in the U.S. real exchange rate means that the U.S. dollar has appreciated relative to foreign currencies. This, in turn, means that it will take more foreign currency to purchase U.S. dollars. As a result, U.S. goods will be relatively more expensive to foreign buyers compared to foreign goods.

Question 16

The theory of purchasing-power parity states that a unit of a country's currency should be able to buy the same quantity of goods in foreign countries as it does in the domestic economy.

Accepted Answer

The theory of purchasing-power parity (PPP) suggests that exchange rates should adjust in such a way that the same basket of goods (taking into account inflation and other factors) would have the same cost regardless of location. This is based on the idea that in an efficient market, identical goods should have the same price in different countries when measured in the same currency.

Question 17

When the central bank of some country prints large quantities of money,that county's currency 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

When the central bank prints large quantities of money, it increases the supply of money in circulation. With an increase in supply and no corresponding increase in demand, the currency loses its value. This means that the prices of goods and services denominated in that currency go up, as well as the prices of foreign currencies in relation to that currency. Therefore, both the domestic and international purchasing power of the currency decreases.

Question 18

If foreign residents purchase 30 billion pesos of Mexican assets and Mexican residents purchase 25 billion pesos of foreign assets,then Mexico has a net capital outflow of 5 billion pesos.

Accepted Answer

The net capital outflow is calculated by subtracting foreign purchases of Mexican assets from Mexican purchases of foreign assets. Therefore, the calculation would be 25 billion (Mexican purchases of foreign assets) - 30 billion (foreign purchases of Mexican assets) = -5 billion. This means that Mexico actually has a net capital inflow of 5 billion pesos, not a net capital outflow.

Question 19

If the U.S.real exchange rate is greater than 1,then there is the possibility of arbitraging by buying foreign goods to sell in the U.S.

Accepted Answer

If the U.S. real exchange rate is greater than 1, it means that foreign goods are relatively cheaper compared to U.S. goods. This creates an opportunity for arbitrage, where individuals or firms can buy foreign goods at a lower price and sell them in the U.S. market at a higher price, earning a profit from the price difference.

Question 20

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

Accepted Answer

Purchasing-power parity theory suggests that the exchange rates between two currencies will eventually equalize the purchasing power of those currencies in their respective countries. Over the long run, many economists believe that exchange rates are determined by such forces.

Quiz 18: Open Economy Macroeconomics Basic Concepts: Part B