Question 1

Suppose Bob, a Greek citizen, opens a restaurant in Vancouver. What are the effects of this action?

Accepted Answer

A)  It increases Canadian net capital outflow and has no effect on Greek net capital outflow. 
B)  It increases both Canadian and Greek net capital outflows. 
C)  It increases Canadian net capital outflow, but decreases Greek net capital outflow. 
D)  It decreases Canadian net capital outflow, but increases Greek net capital outflow. 
A)  It increases Canadian net capital outflow and has no effect on Greek net capital outflow. 
B)  It increases both Canadian and Greek net capital outflows. 
C)  It increases Canadian net capital outflow, but decreases Greek net capital outflow. 
D)  It decreases Canadian net capital outflow, but increases Greek net capital outflow.

Question 2

What imbalance does net capital outflow measure?

Accepted Answer

A)  an imbalance between a country's production and expenditure 
B)  an imbalance between a country's investment and saving 
C)  an imbalance between a country's sale of goods and services abroad and buying of foreign goods and services 
D)  an imbalance between a country's sale of domestic assets abroad and domestic purchase of foreign assets 
A)  an imbalance between a country's production and expenditure 
B)  an imbalance between a country's investment and saving 
C)  an imbalance between a country's sale of goods and services abroad and buying of foreign goods and services 
D)  an imbalance between a country's sale of domestic assets abroad and domestic purchase of foreign assets

Question 3

Suppose Judy, a Canadian citizen, opens an ice cream store in Bermuda. What would her expenditures be?

Accepted Answer

A)  Canadian foreign portfolio investment that would increase Canadian net capital outflow 
B)  Canadian foreign portfolio investment that would decrease Canadian net capital outflow 
C)  Canadian foreign direct investment that would increase Canadian net capital outflow 
D)  Canadian foreign direct investment that would decrease Canadian net capital outflow 
A)  Canadian foreign portfolio investment that would increase Canadian net capital outflow 
B)  Canadian foreign portfolio investment that would decrease Canadian net capital outflow 
C)  Canadian foreign direct investment that would increase Canadian net capital outflow 
D)  Canadian foreign direct investment that would decrease Canadian net capital outflow

Question 4

This problem considers the effect of currency conversion fees on foreign investment. Jonathan is considering investing $1000 in Canada, where he expects an interest rate of 5 percent, or in the U.K., where the expected interest rate would be 6 percent. The current exchange rate is £0.5/$, which could take by the end of the year any value between £0.4 and £0.6/$ with equal probability.
a) Where should Jonathan invest?
b) How does your answer change if there is a currency conversion fee of 3 percent?
c) What have you learned from this exercise?

Accepted Answer

a)Jonathan would have $1000(1 + 0.05)= $

Question 5

Why does purchasing-power parity theory NOT hold at all times?

Accepted Answer

A)  because countries use different currencies 
B)  because wages are higher in some countries and lower in others 
C)  because some goods and services cannot be traded 
D)  because prices are different across countries 
A)  because countries use different currencies 
B)  because wages are higher in some countries and lower in others 
C)  because some goods and services cannot be traded 
D)  because prices are different across countries

Question 6

A U.S. textbook publishing company sells texts to Canadian students. What are the effects of these sales?

Accepted Answer

A)  U.S. net exports increase, and U.S. net capital outflow increases. 
B)  U.S. net exports increase, and U.S. net capital outflow decreases. 
C)  U.S. net exports decrease, and U.S. net capital outflow increases. 
D)  U.S. net exports decrease, and U.S. net capital outflow decreases. 
A)  U.S. net exports increase, and U.S. net capital outflow increases. 
B)  U.S. net exports increase, and U.S. net capital outflow decreases. 
C)  U.S. net exports decrease, and U.S. net capital outflow increases. 
D)  U.S. net exports decrease, and U.S. net capital outflow decreases.

Question 7

Suppose the price level in Canada increases from P₁ to P₂, while the price level abroad (P*) and the nominal exchange rate (e) between the Canadian dollar and the foreign currency remain the same. Let the real exchange rate be X. What is the percentage change in the real exchange rate?

Accepted Answer

By definition, the real exchange rate is

Question 8

What does a trade surplus imply?

Accepted Answer

A) saving is greater than domestic investment and Y > C + I + G B) saving is greater than domestic investment and Y C + I + G D) saving is less than domestic investment and Y < C + I + G A) saving is greater than domestic investment and Y > C + I + G B) saving is greater than domestic investment and Y C + I + G D) saving is less than domestic investment and Y < C + I + G

Question 9

A British pharmacy buys drugs from a Canadian company and pays for them with British pounds. What are the effects of this transaction?

Accepted Answer

A)  It increases British net exports and increases Canadian capital outflow. 
B)  It increases British net exports and decreases Canadian capital outflow. 
C)  It decreases British net exports and increases Canadian capital outflow. 
D)  It decreases British net exports and decreases Canadian capital outflow. 
A)  It increases British net exports and increases Canadian capital outflow. 
B)  It increases British net exports and decreases Canadian capital outflow. 
C)  It decreases British net exports and increases Canadian capital outflow. 
D)  It decreases British net exports and decreases Canadian capital outflow.

Question 10

When making investment decisions, which of the following are investors most likely to do?

Accepted Answer

A)  They compare the real interest rates offered on different bonds. 
B)  They compare the nominal, but not the real, interest rates offered on different bonds. 
C)  They purchase the highest-priced bond available. 
D)  They purchase the highest-interest bonds available. 
A)  They compare the real interest rates offered on different bonds. 
B)  They compare the nominal, but not the real, interest rates offered on different bonds. 
C)  They purchase the highest-priced bond available. 
D)  They purchase the highest-interest bonds available.

Question 11

Suppose the price of a standard pair of sport shoes is €60 in Spain and $85 in Canada, and the current exchange rate is 0.75 euro for one dollar. What is the purchasing-power parity exchange rate of the dollar?

Accepted Answer

A)  0.40 euro/dollar 
B)  0.53 euro/dollar 
C)  0.71 euro/dollar 
D)  1.53 euro/dollar 
A)  0.40 euro/dollar 
B)  0.53 euro/dollar 
C)  0.71 euro/dollar 
D)  1.53 euro/dollar

Question 12

Which of the following would be Canadian foreign direct investment?

Accepted Answer

A)  Your Canadian-based mutual fund buys shares of stock in Eastern European companies. 
B)  A Canadian citizen opens a Tim Hortons franchise in Hong Kong. 
C)  A Swiss bank buys a Canadian government bond. 
D)  A German tractor factory opens a plant in Victoria, British Columbia. 
A)  Your Canadian-based mutual fund buys shares of stock in Eastern European companies. 
B)  A Canadian citizen opens a Tim Hortons franchise in Hong Kong. 
C)  A Swiss bank buys a Canadian government bond. 
D)  A German tractor factory opens a plant in Victoria, British Columbia.

Question 13

According to purchasing-power parity theory, if the same fast-food hamburger costs $2.50 in Canada and 5 euros in France, what should the nominal exchange rate be?

Accepted Answer

A)  1/4 euros per dollar 
B)  1/2 euro per dollar 
C)  1 euro per dollar 
D)  2 euro per dollar 
A)  1/4 euros per dollar 
B)  1/2 euro per dollar 
C)  1 euro per dollar 
D)  2 euro per dollar

Question 14

Suppose Canadian wheat sells for $100 per bushel and Russian wheat sells for 1600 rubles per bushel.
a. If you believe that the purchasing-power parity theory holds, and if the current exchange rate is 12 rubles per dollar, would you expect the exchange rate to change? In what direction would it change?
b. If the current exchange rate is 12 rubles per dollar, how much is the real exchange rate, based on the prices of wheat?
c. If the exchange rate is 12, how could you make profit in this situation? How much profit per bushel could you make?

Accepted Answer

a. The PPP exchange rate is 1600/100 = 1

Question 15

A Canadian firm buys apples from New Zealand with Canadian currency. The New Zealand firm then uses this money to buy packaging equipment from a Canadian firm. How do these transactions affect net exports or net capital outflow?

Accepted Answer

A)  They increase New Zealand net capital outflow and New Zealand net exports. 
B)  They increase New Zealand net exports but not New Zealand net capital outflow. 
C)  They increase New Zealand net capital outflow but not New Zealand net exports. 
D)  They increase neither New Zealand net exports nor New Zealand capital outflow. 
A)  They increase New Zealand net capital outflow and New Zealand net exports. 
B)  They increase New Zealand net exports but not New Zealand net capital outflow. 
C)  They increase New Zealand net capital outflow but not New Zealand net exports. 
D)  They increase neither New Zealand net exports nor New Zealand capital outflow.

Question 16

A country has $80 million of domestic investment and net capital outflow of -$20 million. What is saving?

Accepted Answer

A)  -$80 million 
B)  -$60 million 
C)  $60 million 
D)  $80 million 
A)  -$80 million 
B)  -$60 million 
C)  $60 million 
D)  $80 million

Question 17

The country of Freedonia has a GDP of $4000, consumption of $1500, and government purchases of $900. What does this situation imply?

Accepted Answer

A)  Investment is equal to -$1600. 
B)  Investment plus net capital outflow is equal to $1600. 
C)  Investment plus net exports is equal to $2400. 
D)  Saving is equal to -$2400. 
A)  Investment is equal to -$1600. 
B)  Investment plus net capital outflow is equal to $1600. 
C)  Investment plus net exports is equal to $2400. 
D)  Saving is equal to -$2400.

Question 18

Suppose inflation is higher in Canada over the next few months than in foreign countries, and exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods Canadian goods buy. According to purchasing-power parity, what should we expect to see?

Accepted Answer

A)  Only the nominal exchange rate depreciates. 
B)  Both the real and nominal exchange rates appreciate. 
C)  Both the real and nominal exchange rates depreciate. 
D)  Only the real exchange rate appreciates. 
A)  Only the nominal exchange rate depreciates. 
B)  Both the real and nominal exchange rates appreciate. 
C)  Both the real and nominal exchange rates depreciate. 
D)  Only the real exchange rate appreciates.

Question 19

Suppose that the real return from operating factories in Australia rises relative to the real rate of return in Canada. What are the effects of this transaction?

Accepted Answer

A)  This will increase Canadian net capital outflow and decrease Australian net capital outflow. 
B)  This will decrease Canadian net capital outflow and increase Australian net capital outflow. 
C)  This will only affect Canadian net capital outflow. 
D)  This will only affect Australian net capital outflow. 
A)  This will increase Canadian net capital outflow and decrease Australian net capital outflow. 
B)  This will decrease Canadian net capital outflow and increase Australian net capital outflow. 
C)  This will only affect Canadian net capital outflow. 
D)  This will only affect Australian net capital outflow.

Question 20

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

Accepted Answer

A)  because of differences in prices 
B)  because of differences in tax treatments of returns earned on financial assets 
C)  because of Ricardian nonequivalence 
D)  because of perfect capital mobility 
A)  because of differences in prices 
B)  because of differences in tax treatments of returns earned on financial assets 
C)  because of Ricardian nonequivalence 
D)  because of perfect capital mobility

Suppose Bob, a Greek citizen, opens a restaurant in Vancouver. What are the effects of this action?

What imbalance does net capital outflow measure?

Suppose Judy, a Canadian citizen, opens an ice cream store in Bermuda. What would her expenditures be?

Why does purchasing-power parity theory NOT hold at all times?

A U.S. textbook publishing company sells texts to Canadian students. What are the effects of these sales?

Suppose the price level in Canada increases from P₁ to P₂, while the price level abroad (P*) and the nominal exchange rate (e) between the Canadian dollar and the foreign currency remain the same. Let the real exchange rate be X. What is the percentage change in the real exchange rate?

What does a trade surplus imply?

A British pharmacy buys drugs from a Canadian company and pays for them with British pounds. What are the effects of this transaction?

When making investment decisions, which of the following are investors most likely to do?

Suppose the price of a standard pair of sport shoes is €60 in Spain and $85 in Canada, and the current exchange rate is 0.75 euro for one dollar. What is the purchasing-power parity exchange rate of the dollar?

Which of the following would be Canadian foreign direct investment?

According to purchasing-power parity theory, if the same fast-food hamburger costs $2.50 in Canada and 5 euros in France, what should the nominal exchange rate be?

A Canadian firm buys apples from New Zealand with Canadian currency. The New Zealand firm then uses this money to buy packaging equipment from a Canadian firm. How do these transactions affect net exports or net capital outflow?

A country has $80 million of domestic investment and net capital outflow of -$20 million. What is saving?

The country of Freedonia has a GDP of $4000, consumption of $1500, and government purchases of $900. What does this situation imply?

Suppose inflation is higher in Canada over the next few months than in foreign countries, and exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods Canadian goods buy. According to purchasing-power parity, what should we expect to see?

Suppose that the real return from operating factories in Australia rises relative to the real rate of return in Canada. What are the effects of this transaction?

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

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 12: Open-Economy Macroeconomics: Basic Concepts

Suppose Bob, a Greek citizen, opens a restaurant in Vancouver. What are the effects of this action?

What imbalance does net capital outflow measure?

Suppose Judy, a Canadian citizen, opens an ice cream store in Bermuda. What would her expenditures be?

Why does purchasing-power parity theory NOT hold at all times?

A U.S. textbook publishing company sells texts to Canadian students. What are the effects of these sales?

Suppose the price level in Canada increases from P₁ to P₂, while the price level abroad (P*) and the nominal exchange rate (e) between the Canadian dollar and the foreign currency remain the same. Let the real exchange rate be X. What is the percentage change in the real exchange rate?

What does a trade surplus imply?

A British pharmacy buys drugs from a Canadian company and pays for them with British pounds. What are the effects of this transaction?

When making investment decisions, which of the following are investors most likely to do?

Suppose the price of a standard pair of sport shoes is €60 in Spain and $85 in Canada, and the current exchange rate is 0.75 euro for one dollar. What is the purchasing-power parity exchange rate of the dollar?

Which of the following would be Canadian foreign direct investment?

According to purchasing-power parity theory, if the same fast-food hamburger costs $2.50 in Canada and 5 euros in France, what should the nominal exchange rate be?

A Canadian firm buys apples from New Zealand with Canadian currency. The New Zealand firm then uses this money to buy packaging equipment from a Canadian firm. How do these transactions affect net exports or net capital outflow?

A country has $80 million of domestic investment and net capital outflow of -$20 million. What is saving?

The country of Freedonia has a GDP of $4000, consumption of $1500, and government purchases of $900. What does this situation imply?

Suppose inflation is higher in Canada over the next few months than in foreign countries, and exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods Canadian goods buy. According to purchasing-power parity, what should we expect to see?

Suppose that the real return from operating factories in Australia rises relative to the real rate of return in Canada. What are the effects of this transaction?

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

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters