Exam 18: Open Economy Macroeconomics Basic Concepts: Part B

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

A rational investor will always purchase the bond that pays the highest real interest rate.

Reductions in transportation costs help explain the increase in U.S.trade flows.

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

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

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.

If the price of a good in the U.S.is $10,the exchange rate is 2 units of foreign currency per dollar,and the foreign price of the same good is 30 units of foreign currency,then the real exchange rate is 2/3.

In an open economy,national saving can be less than investment.

If the exchange rate is 12.5 pesos per U.S.dollar,it is also 1/12.5 U.S.dollars per peso.

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

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

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.

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

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

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.

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.

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

If a country's trade surplus falls,its net capital outflow rises.

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.

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.