Q: Given the following information: U.S. price level $$P = 120$$, Eurozone price level $$P^* = 100$$, and the nominal exchange rate $$e = 0.90$$ euros per dollar, what is the real exchange rate?

$$\frac{e \times P}{P^*} = \frac{0.90 \times 120}{100} = 1.08$$

Q: If the nominal exchange rate between the U.S. dollar and the Japanese yen is 110 yen per dollar, a Big Mac costs $4 in the U.S. and 440 yen in Japan, what is the real exchange rate (Japanese Big Macs per U.S. Big Mac)?

$$\frac{e \times P}{P^*} = \frac{110 \times 4}{440} = 1$$

Question 1

Suppose the U.S. has exports of $$500 billion and imports of 600 $$billion in a given year. What is the value of U.S. net exports (NX), and does the U.S. have a trade surplus or deficit?

Accepted Answer

$$NX = -100$$ billion; trade deficit

Question 2

If U.S. consumers decide to buy more products 'Made in the U.S.A.' instead of imports, what is the likely effect on U.S. net exports (NX)?

Accepted Answer

NX will increase because imports fall

Question 3

Which of the following best describes net capital outflow (NCO)?

Accepted Answer

Domestic residents' purchases of foreign assets minus foreigners' purchases of domestic assets

Question 4

A U.S. company buys a factory in Brazil. This transaction is an example of:

Accepted Answer

Foreign direct investment

Question 5

If a country has $$S \u003e I$$, what does this imply about its net capital outflow (NCO) and trade balance (NX)?

Accepted Answer

$$NCO \u003e 0$$ and $$NX \u003e 0$$

Question 6

Given the following information: U.S. price level $$P = 120$$, Eurozone price level $$P^* = 100$$, and the nominal exchange rate $$e = 0.90$$ euros per dollar, what is the real exchange rate?

Accepted Answer

$$\frac{e 	imes P}{P^*} = \frac{0.90 	imes 120}{100} = 1.08$$

Question 7

If the nominal exchange rate between the U.S. dollar and the Japanese yen is 110 yen per dollar, a Big Mac costs $4 in the U.S. and 440 yen in Japan, what is the real exchange rate (Japanese Big Macs per U.S. Big Mac)?

Accepted Answer

$$\frac{e 	imes P}{P^*} = \frac{110 	imes 4}{440} = 1$$

Question 8

According to purchasing-power parity (PPP), if a basket of goods costs $500 in the U.S. and 10,000 pesos in Mexico, what should the nominal exchange rate be (pesos per dollar)?

Accepted Answer

$$e = \frac{P^*}{P} = \frac{10,000}{500} = 20$$

Question 9

If inflation is higher in the U.S. than in Japan, what does PPP predict will happen to the nominal exchange rate ($$e) $$between the dollar and the yen?

Accepted Answer

$$e$$ will fall, so the dollar depreciates against the yen

Question 10

Which of the following is NOT a reason why purchasing-power parity (PPP) may not hold perfectly in the real world?

Accepted Answer

All countries have identical inflation rates

Question 11

Suppose the U.S. has $$Y = 20,000$$, $$C = 12,000$$, $$G = 3,000$$, and $$NX = 1,000. $$What is the value of investment ($$I$$)?

Accepted Answer

$$I = Y - C - G = 20,000 - 12,000 - 3,000 = 5,000$$

Question 12

If the U.S. dollar appreciates relative to the euro, which of the following is a likely consequence?

Accepted Answer

U.S. exports to Europe become more expensive for Europeans

Question 13

Which of the following statements about a country with a trade deficit is NOT true?

Accepted Answer

Investment \u003c saving

Question 14

If the nominal exchange rate is 18 pesos per dollar, a U.S. latte costs $4, and a Mexican latte costs 90 pesos, what is the real exchange rate (Mexican lattes per U.S. latte)?

Accepted Answer

$$\frac{e 	imes P}{P^*} = \frac{18 	imes 4}{90} = 0.8$$

Question 15

Which of the following best describes the law of one price?

Accepted Answer

Identical goods should sell for the same price in all markets, absent transportation costs and trade barriers

Question 16

If a U.S. citizen buys a bond issued by a German company, how is this transaction classified?

Accepted Answer

Foreign portfolio investment

Question 17

If the price level in the U.S. rises faster than in Canada, what does PPP predict will happen to the U.S. dollar relative to the Canadian dollar?

Accepted Answer

The U.S. dollar will depreciate

Question 18

Which of the following is an example of capital inflow for the U.S.?

Accepted Answer

A Japanese investor buys U.S. Treasury bonds

Question 19

If the nominal exchange rate is $$e = 1.5$$ Canadian dollars per U.S. dollar, the price of a basket of goods in the U.S. is $$P = 200$$, and in Canada $$P^* = 270$$, what is the real exchange rate?

Accepted Answer

$$\frac{e 	imes P}{P^*} = \frac{1.5 	imes 200}{270} = 1.11$$

Open Economy Concepts: International Macroeconomics Essentials

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