Exam 12: Open-Economy Macroeconomics: Basic Concepts

Can purchasing-power parity be used to explain the fact that the Canadian dollar depreciated by more than 50 percent against the German mark from 1970 to 2001, but appreciated by more than 100 percent against the Italian lira during the same period? Defend your answer.

-Refer to Table 12-1. What currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity?

What does purchasing-power parity imply for the exchange rate?

In 2019, Sierra Leone had $5 billion of net exports and bought $1 billion of goods from foreign countries. What were Sierra Leone's components of net exports?

If goods in Canada cost the same number of dollars as German goods cost in euros, the real exchange rate would be computed as how many German goods per Canadian goods?

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

Dan, a Canadian citizen, opens and operates an antique store in the U.S.. What is this an example of?

Andi is considering investing $1000 in Canada, where she expects an interest rate of 3 percent, or in the U.K., where the expected interest rate would be 5 percent. The current exchange rate is 0.6 £/$, which could take by the end of the year any value between 0.4 and 0.7£/$ with equal probability. What should Andi do?

Which statement best defines net capital outflow?

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, what is implied by purchasing-power parity?

If the exchange rate changes from .50 pounds per dollar to .75 pounds per dollar, what has happened to the dollar?

What does a trade deficit imply?

Suppose that the dollar buys less cotton in Canada than in Egypt. How could traders make a profit?

Suppose the real exchange rate X between Canada and the U.S. is constant. Let the price level in Canada be P, the price level in the U.S. be P*, and the nominal exchange rate be e. Suppose the price level in Canada increases from P1 to P2 and the price level in the U.S. increases from P1* to P2*. Show that the rate of change in e, which is equal to (e2 - e1)/e1 × 100 is approximately equal to the difference in the inflation rates in the two countries. Note that the nominal exchange rate is e = XP*/P. What have you learned from this exercise?

Net capital outflow is the purchase of domestic assets purchased by foreign residents minus the purchase of foreign assets by domestic residents.

A country's exports are $400 billion, and imports are $700 billion. What is the country's trade balance?

What is the formula for saving in an open economy?

How are net exports of a country determined?

Why is interest rate parity NOT a perfect theory of real interest rate determination in a small open economy?

Suppose that the real exchange rate between Canada and Tanzania is defined in terms of baskets of goods. What will increase the real exchange rate (that is, increase the number of baskets of Tanzanian goods a basket of Canadian goods buys)?