Deck 11: Open-Economy Macroeconomics: Basic Concepts

Question 1

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

Answer 1

True

Question 2

If SA imports total R100 billion and SA exports total R150 billion, which of the following would be true?

A)SA net exports equal R150 billion.
B)The SA has a trade surplus of R50 billion.
C)The SA has a trade deficit of R100 billion.
D)The SA has a trade deficit of R50 billion.

Answer 2

The SA has a trade surplus of R50 billion.

Question 3

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.

Answer 3

McDonald's builds a restaurant in Moscow.

Question 4

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

Question 5

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 6

If SA's money supply grows faster than Zimbabwe's, the value of the rand should rise relative to the value of the Zimbabwean dollar.

Question 7

If a bottle of mineral water is priced at R8 in South Africa and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/rand exchange rate should be 5,760 yen/rand.

Question 8

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 9

If the nominal exchange rate is 20 SA rands per 1 US dollar, and if the price of a Big Mac is $2 in the USA and R60 in SA, then the real exchange rate is 2/3 SA Big Mac per American Big Mac.

Question 10

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

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

Question 11

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

Question 12

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

Question 13

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 14

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 15

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 16

Which of the following would be recorded as a SA merchandise export?

A)A SA tourist spends 10,000 euros on vacation in the south of France.
B)A machine shop in Durban purchases a grinder made in Italy.
C)A SA resident receives a R500 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 SA.

Question 17

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 18

If SA 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 SA by foreigners than SA invested abroad.
D)That SA is running a trade surplus.

Question 19

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

Question 20

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.

Question 21

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

A)None of these answers.
B)the rand has appreciated.
C)the rand has depreciated.
D)the rand could have appreciated or depreciated depending what happened to relative prices in Brazil and SA.

Question 22

The exchange rate is the

A)value of money.
B)quantity of rands, 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 23

If SA has R25 billion in imports, R15 billion in exports, and sells R20 billion of assets to foreigners, how many foreign assets do domestic residents purchase?

A)R5 billion.
B)R10 billion.
C)R30 billion.
D)None of the above are correct.

Question 24

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

A)R8
B)R15
C)R1.5
D)R12

Question 25

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

A)A purchase of 100 shares in Vodacom.
B)A loan of r₁ million to a Brazilian mining company.
C)A purchase of shares in Swiss firm Nestlé.
D)The establishment of a new accountancy practice in Gaborone, Botswana.

Question 26

Suppose the nominal exchange rate between the Japanese yen and the SA rand is 100 yen per rand.Further, suppose that a kilogram of rice costs R2 in SA and 250 yen in Japan.What is the real exchange rate between Japan and SA?

A)0.5 kilograms of Japanese rice per kilogram of SA rice.
B)0.8 kilograms of Japanese rice per kilogram of SA rice.
C)1.25 kilograms of Japanese rice per kilogram of SA rice.
D)2.5 kilograms of Japanese rice per kilogram of SA rice.
E)None of these answers.

Question 27

If SA exports more than it imports,

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

Question 28

If other things remain 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 29

When more rands are needed to buy a unit of Japanese yen, the rand

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

Question 30

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 31

When the euro depreciates against the rand,

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

Question 32

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 33

If SA saves R1 000 billion and SA net capital outflow is - R200 billion, SA's domestic investment is

A)-R200 billion.
B)R200 billion.
C)R800 billion.
D)R1 000 billion.
E)R1 200 billion.

Question 34

Suppose a cup of coffee is €1.50 in Germany and R0.50 in SA.If purchasing power parity holds, what is the nominal exchange rate between euros and rands?

A)€0.33 per rand.
B)€1.50 per rand.
C)€0.75 per rand.
D)€3 per rand.

Question 35

Currencies depreciate and appreciate all the time.Who gains and who loses when the SA rand depreciates?

A)Europeans holding SA rands gain, European tourists to SA lose.
B)European exporters to SA gain, Europeans holding SA rands lose.
C)SA exporters gain, SA importers lose.
D)SA importers gain, SA exporters lose.

Question 36

If the nominal exchange rate between SA rands and US dollars is R0.50 per $1.00, how many dollars can you get for a rand?

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

Question 37

If savings in SA is R300 billion and investment in SA is R550 billion, then

A)there must be net capital inflow of R550 billion.
B)there must be net capital inflow of R250 billion.
C)the SA government must be running a R250 billion surplus.
D)the SA financial market must be experiencing a net capital outflow.

Question 38

The most accurate measure of the international value of the SA rand is

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

Question 39

SA's net capital outflow measures

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

Question 40

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

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

Question 41

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

Question 42

Which of the following is a statement of the purchasing power parity (PPP) 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 43

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

Question 44

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

Question 45

Why are net exports and net capital outflow always equal?

Question 46

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 47

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

Question 48

Suppose that money supply growth continues to be higher in SA 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 49

Suppose the inflation rate over the last 20 years has been 10 per cent in SA, 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 rand and the yen.
B)None of these answers.
C)the yen should have fallen in value compared to the rand and risen compared to the dollar.
D)the value of the rand should have risen compared to the value of the yen and the dollar.
E)the yen should have risen in value compared to the rand and fallen compared to the dollar.

Question 50

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

Question 51

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

Question 52

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 53

Suppose the same basket of goods costs $100 in the USA and R80 in SA.According to PPP, if the prices do not change, what will be the exchange rate?

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

Question 54

If the SA price level is increasing by 3 per cent annually and the US price level is increasing by 5 per cent annually, by what percentage would the rand price of US dollars 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 55

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

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 56

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

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

Question 57

a) How do we find the real exchange rate from the nominal exchange rate?
b) Suppose a bottle of wine costs R20 in SA and 25 dollars in the USA.If the exchange rate is 0.80 rands per dollar, what is the real exchange rate?

Question 58

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 59

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