Question 1

Many economists believe that the theory of purchasing-power parity describes the forces that determine exchange rates in the long run.

Accepted Answer

A) True 
 B)False

Question 2

-Refer to Table 12-1. What currency(ies) is(are) less valuable than predicted by the purchasing-power parity theory?

Accepted Answer

A)  the yen 
B)  the yen and kroner 
C)  the baht and kroner 
D)  the boliviano

Question 3

When a country's central bank increases the money supply, what happens to a unit of that country's money?

Accepted Answer

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

Question 4

Michel, a Canadian citizen living in Canada, buys $300 of cheese from France. Which statement best identifies the effects of this transaction?

Accepted Answer

A)  It increases Canadian imports by $300 and increases Canadian net exports by $300. 
B)  It increases Canadian imports by $300 and decreases Canadian net exports by $300. 
C)  It increases Canadian exports by $300 and increases Canadian net exports by $300. 
D)  It increases Canadian exports by $300 and decreases Canadian net exports by $300.

Question 5

What kind of country would most likely have a "small open economy"?

Accepted Answer

A)  a country that trades with other countries and consistently has a trade surplus 
B)  a country that trades with other countries and consistently has a trade deficit 
C)  a country that trades with other countries and has a significant effect on world prices 
D)  a country that trades with other countries, but has a negligible effect on world prices

Question 6

Suppose the exchange rate is 5 units of Peruvian currency per dollar, and a hotel room in Lima, Peru, costs 450 units of Peruvian currency. How many dollars do you need to get a room in Lima?

Accepted Answer

A)  $45 
B)  $90 
C)  $455 
D)  $2250

Question 7

Which of the following is an example of Canadian foreign portfolio investment?

Accepted Answer

A)  Albert, a German citizen, buys shares of stock in a Canadian computer company. 
B)  Liam, a citizen of Ireland, opens a fish-and-chips restaurant in Canada. 
C)  Rachel, a Canadian citizen, buys bonds issued by a Spanish corporation. 
D)  Dustin, a Canadian citizen, opens a tavern in New Zealand.

Question 8

If it took as many dollars to buy goods in Canada as it did to buy enough currency to buy the same goods in Honduras, the real exchange rate would be computed as how many Honduran goods per Canadian goods?

Accepted Answer

A)  one 
B)  the number of dollars needed to buy Canadian goods divided by the number of lempira needed to buy Honduran goods 
C)  the number of lempira needed to buy Honduran goods divided by the number of dollars needed to buy Canadian goods 
D)  a number equal to the nominal exchange rate

Question 9

Which statement best explains the relationship among price levels, nominal and real exchange rates, and money supply in Canada and Ireland when purchasing-power parity holds?

Accepted Answer

A)  When the price level in Canada falls more rapidly than that in Ireland, the real exchange rate, defined as Irish goods per unit of Canadian goods, stays the same. 
B)  When the money supply in Canada rises more rapidly than in Ireland, the nominal exchange rate, defined as euros (the currency used in Ireland) per dollar, increases. 
C)  When prices for the same goods are the same in Canadian dollars in Canada and Ireland, the nominal exchange rate does not change. 
D)  When prices in both countries stay the same and the nominal exchange rate increases, the real exchange rate decreases.

Question 10

Which of the following is an identity that always holds in an open economy?

Accepted Answer

A)  NCO + C = NX 
B)  NCO = NX 
C)  NX - NCO = C 
D)  NX + NCO = Y

Question 11

Perhaps the most dramatic change in the Canadian economy over the past five decades has been the increasing relative importance of international trade and finance.

Accepted Answer

A) True 
 B)False

Question 12

Since 1999, what caused most of the change of Canadian net capital outflow as a percent of GDP?

Accepted Answer

A)  decrease in private investment 
B)  increase in national saving 
C)  decrease in U.S. investment 
D)  decrease in national saving

Question 13

What caused the sharp decrease in Canada's exports and imports in 2008?

Accepted Answer

A)  a sharp increase in Canadian interest rates 
B)  a worldwide recession 
C)  the Canada-U.S. Auto Pact 
D)  the introduction of the 5G network

Question 14

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

Question 15

Suppose the price of a standard pair of sport shoes is €65 in France and $90 in Canada, and the current exchange rate is 0.70 euro for one dollar. What is the purchasing-power parity exchange rate of the dollar?

Accepted Answer

A)  0.72 euro/dollar 
B)  1.03 euro/dollar 
C)  1.33 euro/dollar 
D)  1.43 euro/dollar

Question 16

If the exchange rate is 75 yen = $1, what is the cost of a bottle of rice wine that costs 8250 yen?

Accepted Answer

A)  $75.00 
B)  $110.00 
C)  $618.75 
D)  $6187.50

Question 17

A German company sells vehicles to a dealership in Canada. Which statement best identifies the effects of these transactions?

Accepted Answer

A)  They have no effect on Canadian net exports, and they increase German net exports. 
B)  They decrease Canadian net exports and increase German net exports. 
C)  They increase Canadian and German net exports. 
D)  They increase Canadian net exports and decrease German net exports.

Question 18

Suppose that the exchange rate is 10 Moroccan dirhams per Canadian dollar. Also suppose that you can buy a crate of oranges for 300 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Ottawa for $35. Which statement is consistent with these facts?

Accepted Answer

A)  The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Canada and selling them in Morocco. 
B)  The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada. 
C)  The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Canada and selling them in Morocco. 
D)  The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.

Question 19

How do nominal exchange rates change over time?

Accepted Answer

A)  They vary little over time. 
B)  They vary substantially over time. 
C)  They appreciate over time for most countries. 
D)  They depreciate over time for most countries.

Exam 12: Open-Economy Macroeconomics: Basic Concepts