Question 1

Which of the following does purchasing-power parity conclude should equal 1?

Accepted Answer

A)  both the nominal and the real exchange rate. 
B)  the nominal exchange rate but not the real exchange rate 
C)  the real exchange rate but not the nominal exchange rate 
D)  neither the nominal exchange rate nor the real exchange rate 
A)  both the nominal and the real exchange rate. 
B)  the nominal exchange rate but not the real exchange rate 
C)  the real exchange rate but not the nominal exchange rate 
D)  neither the nominal exchange rate nor the real exchange rate

Question 2

If Israel's domestic investment exceeds its national saving, then Israel has

Accepted Answer

A)  positive net capital outflows and negative net exports. 
B)  positive net capital outflows and positive net exports. 
C)  negative net capital outflows and negative net exports. 
D)  negative net capital outflows and positive net exports. 
A)  positive net capital outflows and negative net exports. 
B)  positive net capital outflows and positive net exports. 
C)  negative net capital outflows and negative net exports. 
D)  negative net capital outflows and positive net exports.

Question 3

All saving in the U.S. economy shows up as

Accepted Answer

A)  investment in the U.S. economy. 
B)  U.S. net capital outflow. 
C)  either investment in the U.S. economy or U.S. net capital outflow. 
D)  None of the above is correct. 
A)  investment in the U.S. economy. 
B)  U.S. net capital outflow. 
C)  either investment in the U.S. economy or U.S. net capital outflow. 
D)  None of the above is correct.

Question 4

Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are U.S.

Accepted Answer

A)  foreign portfolio investment that increase U.S. net capital outflow. 
B)  foreign portfolio investment that decrease U.S. net capital outflow. 
C)  foreign direct investment that increase U.S. net capital outflow. 
D)  foreign direct investment that decrease U.S. net capital outflow. 
A)  foreign portfolio investment that increase U.S. net capital outflow. 
B)  foreign portfolio investment that decrease U.S. net capital outflow. 
C)  foreign direct investment that increase U.S. net capital outflow. 
D)  foreign direct investment that decrease U.S. net capital outflow.

Question 5

Suppose a country's net capital outflow does not change, but its investment rises by $250 billion.

Accepted Answer

A)  Its saving must have risen by $250 billion so its net exports have risen. 
B)  Its saving must have risen by $250 billion, but its net exports are unchanged. 
C)  Its saving must have fallen by $250 billion, so its net exports have fallen. 
D)  Its saving must have fallen by $250 billion, but its net exports are unchanged. 
A)  Its saving must have risen by $250 billion so its net exports have risen. 
B)  Its saving must have risen by $250 billion, but its net exports are unchanged. 
C)  Its saving must have fallen by $250 billion, so its net exports have fallen. 
D)  Its saving must have fallen by $250 billion, but its net exports are unchanged.

Question 6

A country has a trade deficit. Which of the following must also be true?

Accepted Answer

A)  net capital outflow is positive and domestic investment is larger than saving 
B)  net capital outflow is positive and saving is larger than domestic investment 
C)  net capital outflow is negative and domestic investment is larger than saving 
D)  net capital outflow is negative and saving is larger than domestic investment 
A)  net capital outflow is positive and domestic investment is larger than saving 
B)  net capital outflow is positive and saving is larger than domestic investment 
C)  net capital outflow is negative and domestic investment is larger than saving 
D)  net capital outflow is negative and saving is larger than domestic investment

Question 7

The theory of purchasing-power parity primarily explains

Accepted Answer

A)  why trade deficits tend to move to zero over time. 
B)  how foreign prices affect domestic prices. 
C)  the determination of the real exchange rate. 
D)  why a change in the real exchange rate changes a country's net exports. 
A)  why trade deficits tend to move to zero over time. 
B)  how foreign prices affect domestic prices. 
C)  the determination of the real exchange rate. 
D)  why a change in the real exchange rate changes a country's net exports.

Question 8

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate?

Accepted Answer

Purchasing-power parity works well in he

Question 9

If a dollar buys more corn in the U.S. than in Mexico, then

Accepted Answer

A)  the real exchange rate is greater than 1; a profit might be made by buying corn in the U.S. and selling it in Mexico. 
B)  the real exchange rate is greater than 1; a profit might be made by buying corn in Mexico and selling it in the U.S. 
C)  the real exchange rate is less than 1; a profit might be made by buying corn in the U.S. and selling it in Mexico. 
D)  the real exchange rate is less than 1; a profit might be made by buying corn in Mexico and selling it in the U.S. 
A)  the real exchange rate is greater than 1; a profit might be made by buying corn in the U.S. and selling it in Mexico. 
B)  the real exchange rate is greater than 1; a profit might be made by buying corn in Mexico and selling it in the U.S. 
C)  the real exchange rate is less than 1; a profit might be made by buying corn in the U.S. and selling it in Mexico. 
D)  the real exchange rate is less than 1; a profit might be made by buying corn in Mexico and selling it in the U.S.

Question 10

According to purchasing-power parity, if prices in the United States increase by a smaller percentage than prices in the United Kingdom, then the

Accepted Answer

A)  real exchange rate rises. 
B)  nominal exchange rate rises. 
C)  real exchange rate falls. 
D)  nominal exchange rate falls. 
A)  real exchange rate rises. 
B)  nominal exchange rate rises. 
C)  real exchange rate falls. 
D)  nominal exchange rate falls.

Question 11

A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is

Accepted Answer

A)  1.106. If purchasing-power parity held the nominal exchange rate would be higher. 
B)  1.106. If purchasing-power parity held the nominal exchange rate would be lower. 
C)  .904. If purchasing power parity held the nominal exchange rate would be higher. 
D)  .904. If purchasing-power parity held the nominal exchange rate would be lower. 
A)  1.106. If purchasing-power parity held the nominal exchange rate would be higher. 
B)  1.106. If purchasing-power parity held the nominal exchange rate would be lower. 
C)  .904. If purchasing power parity held the nominal exchange rate would be higher. 
D)  .904. If purchasing-power parity held the nominal exchange rate would be lower.

Question 12

A U.S. firm buys sardines from Morocco and pays for them with U.S. dollars. Other things the same, U.S. net exports

Accepted Answer

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

Question 13

Purchasing-power parity theory does not hold at all times because

Accepted Answer

A)  many goods are not easily transported. 
B)  the same goods produced in different countries may be imperfect substitutes for each other. 
C)  Both a and b are correct. 
D)  prices are different across countries. 
A)  many goods are not easily transported. 
B)  the same goods produced in different countries may be imperfect substitutes for each other. 
C)  Both a and b are correct. 
D)  prices are different across countries.

Question 14

Domestic saving must equal domestic investment in

Accepted Answer

A)  both closed and open economies. 
B)  closed, but not open economies. 
C)  open, but not closed economies. 
D)  neither closed nor open economies. 
A)  both closed and open economies. 
B)  closed, but not open economies. 
C)  open, but not closed economies. 
D)  neither closed nor open economies.

Question 15

Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.40 in the United States and 5.50 euros in Euro area. If the nominal exchange rate is .80 euros per dollar, the prices of which goods have prices that are consistent with purchasing-power parity?

Accepted Answer

A)  both the tall latte and the Big Mac 
B)  the tall latte but not the Big Mac 
C)  the Big Mac but not the tall latte 
D)  neither the tall latte nor the Big Mac 
A)  both the tall latte and the Big Mac 
B)  the tall latte but not the Big Mac 
C)  the Big Mac but not the tall latte 
D)  neither the tall latte nor the Big Mac

Question 16

The real exchange rate is the nominal exchange rate, defined as foreign currency per dollar, times

Accepted Answer

A)  U.S. prices minus foreign prices. 
B)  U.S. prices divided by foreign prices. 
C)  foreign prices divided by U.S. prices. 
D)  None of the above is correct. 
A)  U.S. prices minus foreign prices. 
B)  U.S. prices divided by foreign prices. 
C)  foreign prices divided by U.S. prices. 
D)  None of the above is correct.

Question 17

Prices in both the U.S. and China rise, but prices in China increase by a larger percentage. According to purchasing- power parity, the U.S. dollar

Accepted Answer

A)  gains value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy. 
B)  gains value in terms of the domestic goods and services it can buy, but loses value in terms of the Chinese currency it can buy. 
C)  loses value in terms of the domestic goods and services it can buy, but gains value in terms of the Chinese currency it can buy. 
D)  loses value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy. 
A)  gains value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy. 
B)  gains value in terms of the domestic goods and services it can buy, but loses value in terms of the Chinese currency it can buy. 
C)  loses value in terms of the domestic goods and services it can buy, but gains value in terms of the Chinese currency it can buy. 
D)  loses value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy.

Question 18

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

A) True 
 B)False

Question 19

When U.S. national saving rises, domestic investment also necessarily rises.

Accepted Answer

A) True 
 B)False

Question 20

Other things the same, if the U.S. real exchange rate appreciates, U.S. net exports

Accepted Answer

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

Exam 18: Open-Economy Macroeconomics: Basic Concepts

Which of the following does purchasing-power parity conclude should equal 1?

If Israel's domestic investment exceeds its national saving, then Israel has

All saving in the U.S. economy shows up as

Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are U.S.

Suppose a country's net capital outflow does not change, but its investment rises by $250 billion.

A country has a trade deficit. Which of the following must also be true?

The theory of purchasing-power parity primarily explains

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate?

If a dollar buys more corn in the U.S. than in Mexico, then

According to purchasing-power parity, if prices in the United States increase by a smaller percentage than prices in the United Kingdom, then the

A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is

A U.S. firm buys sardines from Morocco and pays for them with U.S. dollars. Other things the same, U.S. net exports

Purchasing-power parity theory does not hold at all times because

Domestic saving must equal domestic investment in

The real exchange rate is the nominal exchange rate, defined as foreign currency per dollar, times

Prices in both the U.S. and China rise, but prices in China increase by a larger percentage. According to purchasing- power parity, the U.S. dollar

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.

When U.S. national saving rises, domestic investment also necessarily rises.

Other things the same, if the U.S. real exchange rate appreciates, U.S. net exports

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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