Deck 29: Open-Economy Macroeconomics: Basic Concepts

Question 1

If the UK's money supply grows faster than Switzerland's, the value of the pound should rise relative to the value of the Swiss franc.

Answer 1

False

Question 2

Which of the following would directly increase UK net capital outflow?

A) Rolls Royce sells an aircraft engine to Boeing of the USA.
B) The Japanese financial company Nomura buys shares in Vodafone.
C) BP builds a new oil rig in Venezuela.
D) Honda builds a new plant in the UK.

Answer 2

C

Question 3

A country's trade balance is positive when

A) exports exceed imports.
B) exports plus investment exceed imports plus domestic saving.
C) imports exceed exports.
D) imports plus domestic saving exceed exports plus investment.

Answer 3

A

Question 4

Arbitrage is the process of taking advantage of differences in prices of the same good by buying where the good is cheap and selling where it is expensive.

Question 5

Each of the following is a reason why international trade has expanded in recent decades except which one?

A) Technological improvements have meant that countries have become more similar in terms of the goods they can produce.
B) Many new high technology goods have been introduced for which the cost of transport relative to the value of the product is low.
C) There have been improvements in technology that have improved telecommunications between countries.
D) Policy makers have promoted policies to increase international trade, such as the General Agreement on Tariffs and Trade, and subsequently established the World Trade Organization.
E) Larger cargo ships and aeroplanes have reduced the cost of transporting goods.

Question 6

Which of the following is equivalent to the trade deficit?

A) imports ÷ exports
B) net capital inflow
C) exports + imports
D) net exports - imports

Question 7

Which of the following statements is true about a country with a trade deficit?

A) Net exports are negative.
B) Net capital outflow must be positive.
C) Exports exceed imports.
D) Net exports are positive.
E) none of these answers

Question 8

Which of the following would be recorded as an UK merchandise export?

A) A UK tourist spends 10,000 euros on vacation in the south of France.
B) A machine shop in Nottingham purchases a grinder made in Italy.
C) A UK resident receives a £50 dividend on shares she owns in a business in Germany.
D) A French car hire firm purchases a fleet of new Honda cars built at Honda's factory in the UK.

Question 9

For a given amount of UK national saving, an increase in UK net capital outflow decreases UK domestic investment.

Question 10

If the yen/euro exchange rate rises, the euro has appreciated.

Question 11

A country that exports more than it imports is said to have a trade deficit.

Question 12

If a company based in the UK prefers a strong pound (a pound with a high foreign exchange value), then the company probably exports more than it imports

Question 13

If UK imports total £100 billion and UK exports total £150 billion, which of the following would be true?

A) UK net exports equal £150 billion
B) The UK has a trade surplus of £50 billion.
C) The UK has a trade deficit of £100 billion.
D) The UK has a trade deficit of £50 billion.

Question 14

If a case of mineral water is priced at €8 in the eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/euro exchange rate should be 5,760 yen/euro.

Question 15

If the nominal exchange rate is 2 UK pounds per 1 US dollar, and if the price of a Big Mac is $2 in the USA and £6 in the UK, then the real exchange rate is 2/3 British Big Mac per American Big Mac.

Question 16

If Spain has a positive capital inflow, what does this signify?

A) Nothing.
B) That the government is running a budget deficit.
C) That more funds were invested in Spain by foreigners than Spain invested abroad.
D) That Spain is running a trade surplus.

Question 17

An economy that interacts with other economies is known as

A) an export economy.
B) a friendly economy.
C) an open economy.
D) a balanced trade economy.
E) an import economy.

Question 18

For any country, net exports are always equal to net capital outflow because every international transaction involves an exchange of an equal value of some combination of goods and assets.

Question 19

Which of the following is an example of foreign direct investment?

A) General Motors of the USA buys steel from South Korea.
B) General Motors of the USA buys shares in Saab of Sweden.
C) McDonald's builds a restaurant in Moscow.
D) UK publisher Bloomsbury sells the rights to make a film of a Harry Potter book to an American film studio.

Question 20

If purchasing power parity holds, the real exchange rate is always equal to 1.

Question 21

The most accurate measure of the international value of the UK pound is

A) an exchange rate index that accounts for many exchange rates.
B) the yen/pound exchange rate.
C) the pound/dollar exchange rate.
D) the euro/pound exchange rate.
E) the Swiss franc/pound exchange rate.

Question 22

If the exchange rate changes from 3 Brazilian reals per euro to 4 reals per euro,

A) none of these answers
B) the euro has appreciated.
C) the euro has depreciated.
D) the euro could have appreciated or depreciated depending what happened to relative prices in Brazil and the Eurozone countries.

Question 23

If the exchange rate was 1.50 US dollars per euro, that would mean that Europeans would have to spend __________ to buy a $12 watch in New York City.

A) €8
B) €15
C) €1.5
D) €12

Question 24

If a European county has €25 billion in imports, €15 billion in exports, and sells €20 billion of assets to foreigners, how many foreign assets do domestic residents purchase?

A) €5 billion
B) €10 billion
C) €30 billion
D) None of the above are correct.

Question 25

Italy's net capital outflow measures

A) the flow of goods and services between Italy and other countries.
B) the flow of assets between Italy and other countries.
C) the Italian government's budget surpluses and deficits relative to those experienced in other countries.
D) the amount of physical capital built by Italian firms in foreign countries.

Question 26

If one country has a lower inflation rate than other countries, its

A) currency tends to appreciate.
B) currency tends to depreciate.
C) real interest rate will be higher than in other countries.
D) nominal interest rate will be higher than in other countries.

Question 27

If Japan exports more than it imports,

A) Japan's net exports are negative.
B) Japan is running a trade deficit.
C) Japan's net capital outflow must be positive.
D) Japan's net capital outflow must be negative.

Question 28

Which of the following people or firms would be pleased by a depreciation of the pound against the US dollar?

A) All the people and firms mentioned in these answers.
B) A French exporter of wine to the UK.
C) An American tourist visiting London.
D) A UK importer of French wine.
E) A UK company that wishes to expand abroad by building a factory in Poland.

Question 29

If France saves €1,000 billion and French net capital outflow is - €200 billion, France's domestic investment is

A) -€200 billion.
B) €200 billion.
C) €800 billion.
D) €1,000 billion.
E) €1,200 billion.

Question 30

Which of the following, if undertaken by a UK economic agent, would be classified as foreign direct investment?

A) A purchase of 100 shares in Vodafone.
B) A loan of £1 million to a Brazilian mining company.
C) A purchase of shares in Swiss firm Nestlé.
D) The establishment of a new accountancy practice in Bucharest, Romania.

Question 31

Which of the following products would likely be the least accurate if used to calculate purchasing power parity?

A) Diamonds
B) Gold
C) Cars
D) Wheat
E) Dental services

Question 32

Currencies depreciate and appreciate all the time. Who gains and who loses when the Russian rouble depreciates?

A) Europeans holding Russian roubles gain, European tourists to Russia lose.
B) European exporters to Russia gain, Europeans holding Russian roubles lose.
C) Russian exporters gain, Russian importers lose.
D) Russian importers gain, Russian exporters lose.

Question 33

Suppose a cup of coffee is €1.50 in Germany and £0.50 in the UK. If purchasing power parity holds, what is the nominal exchange rate between euros and pounds?

A) €0.33 per pound
B) €1.50 per pound
C) €0.75 per pound
D) €3 per pound

Question 34

Other things the same, if a country saves less, then

A) net capital outflow rises, so net exports rise.
B) net capital outflow rises, so net exports fall.
C) net capital outflow falls, so net exports rise.
D) net capital outflow falls, so net exports fall.

Question 35

If the nominal exchange rate between UK pounds and US dollars is £0.50 per $1.00, how many dollars can you get for a pound?

A) $0.50
B) $1.00
C) $1.50
D) $2.00
E) none of these answers

Question 36

Suppose the nominal exchange rate between the Japanese yen and the UK pound is 100 yen per pound. Further, suppose that a kilogram of rice costs £2 in the UK and 250 yen in Japan. What is the real exchange rate between Japan and the UK?

A) 0.5 kilograms of Japanese rice per kilogram of UK rice
B) 0.8 kilograms of Japanese rice per kilogram of UK rice
C) 1.25 kilograms of Japanese rice per kilogram of UK rice
D) 2.5 kilograms of Japanese rice per kilogram of UK rice
E) none of these answers

Question 37

When the euro depreciates against the pound,

A) the number of pounds per euro will increase.
B) tourism from eurozone countries to London will increase.
C) UK exports to Euroland will increase.
D) the price of imported Italian olive oil in the UK will fall.

Question 38

When more euros are needed to buy a unit of Japanese yen, the euro

A) has deflated.
B) has inflated.
C) has appreciated.
D) has depreciated.

Question 39

If savings in Germany is €300 billion and investment in Germany is €550 billion, then

A) there must be net capital outflow of -€550 billion.
B) there must be net capital outflow of -€250 billion.
C) the German government must be running a €250 billion surplus.
D) the German financial market must be experiencing a net capital outflow.

Question 40

The exchange rate is the

A) value of money.
B) quantity of euros, dollars, yen, etc., that are traded on currency markets.
C) amount of foreign currency that is used to buy goods made in your country.
D) number of units of a foreign currency that can be bought with one unit of your own currency.

Question 41

Suppose the same basket of goods costs $100 in the USA and £80 in Britain. According to PPP, if the prices do not change, what will be the exchange rate?

A) $5 per pound
B) $4 per pound
C) $1.25 per pound
D) $0.80 per pound

Question 42

Suppose a resident of the USA buys a Jaguar car from the UK, and the UK exporter uses the receipts to buy shares in Boeing. Which of the following statements is true from the perspective of the UK?

A) Net exports fall, and net capital outflow rises.
B) Net exports rise, and net capital outflow rises.
C) none of these answers
D) Net exports rise, and net capital outflow falls.
E) Net exports fall, and net capital outflow falls.

Question 43

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?

A) An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged.
B) For a given amount of saving, an increase in net capital outflow must decrease domestic investment.
C) For a given amount of saving, a decrease in net capital outflow must decrease domestic investment.
D) Saving is the sum of investment and net capital outflow.

Question 44

Suppose that a US dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen?

Question 45

What does purchasing-power parity imply about the real exchange rate?

Question 46

A fall in the euro's nominal exchange rate in terms of US dollars

A) will always lead to a fall in the real exchange rate of the euro in terms of US dollars.
B) may be offset by a rise in the price level in the eurozone so that the real exchange rate of the euro in terms of US dollars is unchanged.
C) will always make US imports into the eurozone countries more expensive relative to goods produced in the eurozone.
D) may make the eurozone a less affordable holiday destination for US residents.

Question 47

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

Question 48

Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7 per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds, which of the following statements is true? Over this period,

A) the value of the dollar should have fallen compared to the value of the pound and the yen.
B) none of these answers
C) the yen should have fallen in value compared to the pound and risen compared to the dollar.
D) the value of the pound should have risen compared to the value of the yen and the dollar.
E) the yen should have risen in value compared to the pound and fallen compared to the dollar.

Question 49

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as

A) net exports.
B) purchasing power parity.
C) net capital outflow.
D) currency appreciation.
E) arbitrage.

Question 50

a) How do we find the real exchange rate from the nominal exchange rate?
b) Suppose a bottle of wine costs 20 euros in France and 25 dollars in the USA. If the exchange rate is .80 euros per dollar, what is the real exchange rate?

Question 51

What is the logic behind the theory of purchasing-power parity?

Question 52

Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

Question 53

Suppose that Brian, a resident of the UK, buys software from a company in Japan. Explain what this is and in what directions this changes UK net exports and UK net capital outflow.

Question 54

According to purchasing-power parity, what is the relationship between changes in price levels between two countries and changes in nominal exchange rates?

Question 55

Suppose the money supply in Mexico grows more quickly than the money supply in the USA. We would expect that

A) the Mexican peso should appreciate relative to the US dollar.
B) the Mexican peso should depreciate relative to the US dollar.
C) none of these answers
D) the Mexican peso should maintain a constant exchange rate with the US dollar because of purchasing power parity.

Question 56

Why are net exports and net capital outflow always equal?

Question 57

Which of the following is a reason why exchange rates may deviate from their purchasing power parity values for many years?

A) Some goods are not tradable.
B) In some cases, a foreign-produced good is not a perfect substitute for a domestically produced version of the same thing.
C) In some markets, import quotas limit the ability of firms to agree on exchange prices.
D) Both a and b are correct.

Question 58

If the UK price level is increasing by 3 per cent annually and the Swiss price level is increasing by 5 per cent annually, by what percentage would the pound sterling price of Swiss francs need to change according to purchasing power parity?

A) depreciate by 5 per cent per year
B) appreciate by 3 per cent per year
C) appreciate by 5 per cent per year
D) depreciate by 2 per cent per year

Question 59

Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the

A) long run until the interest rate is roughly the same in both countries.
B) long run until real GDP is roughly the same in both countries.
C) long run until the average price of goods is roughly the same in both countries.
D) short run until the average price of goods is roughly the same in both countries.

Question 60

How do the nominal exchange rate and the real exchange rate differ?