Exam 31: Open-Economy Macroeconomics: Basic Concepts

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

According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?

A country's trade balance

A U.S. mutual fund uses $1 million to buy yen from a Japanese bank. It then uses these yen to buy stocks in a Japanese electronics firm. The Japanese electronic firm then exchanges the $1 million dollars of yen for dollars from a U.S. bank. It uses these dollars to buy equipment manufactured by a company located in the U.S. As a result of these exchanges, by how much, if at all, and in which direction does: A. U.S. net exports change? B. U.S. net capital outflow change?

An open economy's GDP can be expressed by

The nominal exchange rate is 90 Pakistani rupees per dollar. The price of a shirt in Pakistan is 1800 rupees. The same shirt sells for $25 in the U.S. A. What is the real exchange rate? Show your work. B. Can arbitragers make a profit? C. If your answer to C is yes, where would they buy and where would they sell?

If a country's exports were 500 billion pesos and its imports were 300 billion pesos, what would its trade balance be?

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?

Last month a country sold more goods and services to residents of foreign countries than it purchased from them. What does this imply about this country's trade balance?

A country recently had GDP of $1,200 billion. Its consumption expenditures were $700 billion, its government spent $200 billion, and it had domestic investment of $175 billion. What was the value of this country's net capital outflow? Show your work.

If a country has Y > C + I + G, then it has

A country must have a positive net outflow of capital if it has a trade deficit.

In the U.S. a box of tea costs $5. The same box of tea in Uganda costs 10,000 schillings (the currency of Uganda). If the real exchange rate is 5/4, what is the nominal exchange rate? Show your work.

If a nation is selling more goods and services to foreigners than it is buying from them, then on net it must be buying assets abroad.

Last year residents of Country A purchased $600 billion of foreign assets. Foreigners purchased $425 billion dollars of assets and $375 billion of goods and services from country A. What was the value of Country A's imports?

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.

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?

You hold currency from a foreign country. If that country has a lower rate of inflation than the United States, then over time the foreign currency will buy

During 2011 the inflation rate in Brazil was about 6.6% while in the U.S. it was about 3.3%. At the start of 2011 the nominal exchange rate was about 1.7 Brazilian real per U.S. dollar. If purchasing-power parity holds, about what should the nominal exchange rate have been at the end of 2011? Show your work.

Last year a country had $700 billion of saving and $900 of investment. What was its net capital outflow? How is it possible for a country to have investment that exceeds saving?