Question 1

Suppose that Bill,a resident of the U.S. ,buys software from a company in Japan.Explain why and in what directions this changes U.S.net exports and U.S.net capital outflow.

Accepted Answer

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Question 2

Derive the relation between savings,domestic investment,and net capital outflow using the national income accounting identity.

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Question 3

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

According to the purchasing power parity (PPP) theory, if the purchasing power of the dollar is the same at home and abroad, then the nominal exchange rate should adjust to reflect differences in inflation rates between the U.S. and foreign countries. If the U.S. price level rises more than the price level in foreign countries, this means that inflation is higher in the U.S. and the dollar will depreciate relative to foreign currency, resulting in a decrease in the nominal exchange rate (i.e. more units of foreign currency are required to purchase one U.S. dollar). Therefore, the statement is true.

Question 4

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 5

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 suggests that exchange rates will eventually adjust to equalize the price levels between two countries. In the long run, this theory is believed to hold true by many economists.

Question 6

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

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Question 7

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

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Question 8

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 9

Why are net exports and net capital outflow always equal?

Accepted Answer

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Question 10

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?

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Question 11

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 the definition of purchasing power parity.

Question 12

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

This is because an increase in the supply of a currency without a corresponding increase in demand leads to inflation and the decrease in the value of the currency. When a currency loses value, the prices of goods and services denominated in that currency rise, making it more expensive for consumers to purchase them. Additionally, a weaker currency can buy fewer units of foreign currencies, making imports more expensive and potentially leading to a trade deficit.

Question 13

What is the logic behind the theory of purchasing-power parity?

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Question 14

Suppose a bottle of wine costs 20 euros in France and 25 dollars in the United States.If the exchange rate is .80 euros per dollar,what is the real exchange rate?

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Question 15

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

Accepted Answer

If prices in Thailand rise less than prices in the United States, according to the doctrine of purchasing-power parity, the U.S. nominal exchange rate should fall, not rise. This is because the relative purchasing power of the two currencies would shift in favor of the Thai baht.

Question 16

If over the next year the price level in Turkey increases and the price level in Japan falls,then the Turkish lira should depreciate relative to the Japanese Yen.

Accepted Answer

When the price level in a country increases, its currency tends to depreciate relative to other currencies because its purchasing power decreases. Conversely, when the price level in a country falls, its currency tends to appreciate relative to other currencies because its purchasing power increases. Therefore, if the price level in Turkey increases and the price level in Japan falls, the Turkish lira should depreciate relative to the Japanese yen.

Question 17

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

Accepted Answer

The answer of How do the nominal exchange rate and...

Question 18

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 19

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 fall.

Accepted Answer

According to the theory of purchasing-power parity, if a country experiences a higher rate of inflation than its trading partner, its currency should depreciate relative to the other currency in order to restore the balance of purchasing power. This would cause the U.S. nominal exchange rate to fall if prices in the U.S. rise faster than prices in the United Kingdom.

Question 20

Colonial America had little industry and so had mostly raw materials to export.At the same time,there were many opportunities to purchase capital goods and earn a high rate of return because there was little existing capital so that the marginal product of capital was relatively high.What does this suggest about net exports and net capital outflow in colonial America?

Accepted Answer

The answer of Colonial America had little industry and so...

Quiz 31: Open-Economy Macroeconomic Models