Q: Suppose the nominal exchange rate between the U.S. dollar and the Japanese yen is 146 yen per dollar. If a Big Mac costs $5.15 in the U.S. and 450 yen in Japan, what is the real exchange rate measured as Japanese Big Macs per U.S. Big Mac?

$$\frac{146 \times 5.15}{450} \approx 1.67$$

Q: If the price of a tall Starbucks Latte is $3 in the U.S. and 90 pesos in Mexico, and the nominal exchange rate is 19 pesos per dollar, what is the real exchange rate measured as Mexican lattes per U.S. latte?

$$\frac{19 \times 3}{90} \approx 0.63$$

Question 1

Suppose the U.S. exports $$500 billion worth of goods and imports 650 $$billion worth of goods in a given year. What is the value of U.S. net exports (NX) for that year?

Accepted Answer

$$NX = 500 - 650 = -150$$ billion

Question 2

If Canada experiences a recession, which of the following is the most likely effect on U.S. net exports (NX)?

Accepted Answer

U.S. net exports will decrease because Canadians will buy fewer U.S. goods.

Question 3

Which of the following best describes a trade surplus?

Accepted Answer

Exports are greater than imports.

Question 4

Net capital outflow (NCO) is defined as:

Accepted Answer

Domestic residents’ purchases of foreign assets minus foreigners’ purchases of domestic assets.

Question 5

If U.S. net capital outflow (NCO) is negative, what does this indicate?

Accepted Answer

Foreign purchases of domestic assets exceed domestic purchases of foreign assets.

Question 6

Which accounting identity links net exports (NX) and net capital outflow (NCO)?

Accepted Answer

$$NX = NCO$$

Question 7

Given the national income identity $$Y = C + I + G + NX$$, rearrange the equation to express national saving ($$S) in $$terms of investment ($$I) $$and net capital outflow ($$NCO).$$

Accepted Answer

$$S = Y - C - G = I + NCO$$

Question 8

Suppose the nominal exchange rate between the U.S. dollar and the Japanese yen is 146 yen per dollar. If a Big Mac costs $5.15 in the U.S. and 450 yen in Japan, what is the real exchange rate measured as Japanese Big Macs per U.S. Big Mac?

Accepted Answer

$$\frac{146 	imes 5.15}{450} \approx 1.67$$

Question 9

If the price of a tall Starbucks Latte is $3 in the U.S. and 90 pesos in Mexico, and the nominal exchange rate is 19 pesos per dollar, what is the real exchange rate measured as Mexican lattes per U.S. latte?

Accepted Answer

$$\frac{19 	imes 3}{90} \approx 0.63$$

Question 10

Which of the following would cause U.S. net exports (NX) to increase?

Accepted Answer

Foreign incomes rise, leading to increased demand for U.S. exports.

Question 11

If the nominal exchange rate between the U.S. dollar and the Russian ruble is determined by purchasing-power parity (PPP), and a Ford Escape SUV sells for $24,000 in the U.S. and 720,000 rubles in Russia, what is the nominal exchange rate (rubles per dollar)?

Accepted Answer

$$e = \frac{720,000}{24,000} = 30$$

Question 12

According to the law of one price, what should happen if coffee sells for $$10/pound in Seattle and 12/$$pound in Boston, assuming zero transportation costs?

Accepted Answer

Arbitrage will occur, driving prices to equalize between the two cities.

Question 13

Purchasing-power parity (PPP) implies that the nominal exchange rate between two countries should:

Accepted Answer

Equal the ratio of their price levels.

Question 14

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

The dollar will depreciate against the yen.

Question 15

Which of the following is a limitation of purchasing-power parity (PPP) theory?

Accepted Answer

Many goods cannot easily be traded, and tastes differ across countries.

Question 16

If the U.S. real exchange rate appreciates, what is the most likely effect on U.S. exports?

Accepted Answer

U.S. exports will decrease because U.S. goods become more expensive.

Question 17

A country has $$S \u003e I. $$According to the open economy identity, what does this imply?

Accepted Answer

The country has positive net capital outflow (NCO \u003e 0).

Question 18

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

Accepted Answer

Investment \u003c saving

Question 19

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

Accepted Answer

U.S. net exports will increase.

Open Economy Concepts: International Macroeconomics Study Guide

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