Q: If the nominal exchange rate between the U.S. dollar and the Mexican peso is $$e = 19$$ pesos per dollar, the price of a Starbucks latte in the U.S. is $$P = 3$$ dollars, and the price in Mexico is $$P^* = 90$$ pesos, what is the real exchange rate measured as Mexican lattes per U.S. latte?

$$\frac{e \times P}{P^*} = \frac{19 \times 3}{90} = 0.63$$ Mexican lattes per U.S. latte

Question 1

Suppose the U.S. dollar appreciates against the Japanese yen. Which of the following is most likely to occur as a result?

Accepted Answer

U.S. exports to Japan will decrease because American goods become more expensive for Japanese consumers.

Question 2

If the nominal exchange rate between the U.S. dollar and the Mexican peso is $$e = 19$$ pesos per dollar, the price of a Starbucks latte in the U.S. is $$P = 3$$ dollars, and the price in Mexico is $$P^* = 90$$ pesos, what is the real exchange rate measured as Mexican lattes per U.S. latte?

Accepted Answer

$$\frac{e 	imes P}{P^*} = \frac{19 	imes 3}{90} = 0.63$$ Mexican lattes per U.S. latte

Question 3

Which of the following best describes a country experiencing a trade deficit?

Accepted Answer

Imports are greater than exports.

Question 4

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

Net exports will increase because imports will fall.

Question 5

Which equation correctly represents the relationship between saving, investment, and net capital outflow in an open economy?

Accepted Answer

$$S = I + NCO$$

Question 6

A U.S. citizen purchases stocks from a German company. How does this transaction affect U.S. net capital outflow (NCO)?

Accepted Answer

NCO increases because domestic residents are purchasing foreign assets.

Question 7

According to purchasing-power parity (PPP), if a Big Mac costs $5 in the U.S. and 500 yen in Japan, what should the nominal exchange rate (yen per dollar) be?

Accepted Answer

$$e = \frac{P^*}{P} = \frac{500}{5} = 100$$ yen per dollar

Question 8

If inflation is higher in the U.S. than in Japan, what is the expected effect on the nominal exchange rate between the dollar and the yen according to PPP?

Accepted Answer

The dollar will depreciate against the yen.

Question 9

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

Accepted Answer

All goods are perfectly tradable and identical in every country.

Question 10

Suppose Canada experiences a recession, leading to falling incomes and rising unemployment. What 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 11

If the price of goods produced in Mexico rises faster than the price of goods produced in the U.S., what is the likely effect on U.S. net exports?

Accepted Answer

U.S. net exports will increase because U.S. goods become relatively cheaper.

Question 12

Which of the following transactions would cause U.S. net capital outflow (NCO) to decrease?

Accepted Answer

A Japanese investor buys U.S. Treasury bonds.

Question 13

If a country has $$S \u003c I$$, what does this imply about its net capital outflow (NCO)?

Accepted Answer

NCO is negative, indicating capital inflow.

Question 14

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

Accepted Answer

Identical goods should sell for the same price in all markets if there are no transportation costs and barriers.

Question 15

A Big Mac costs $$5.15 in the U.S. and 450 yen in Japan. If the nominal exchange rate is e = 146$ yen per dollar, what is the price of a U.S. Big Mac in yen?

Accepted Answer

$$146 	imes 5.15 = 751.9$$ yen

Question 16

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

Accepted Answer

A U.S. company opens a fast-food outlet in Moscow.

Question 17

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

Accepted Answer

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

Question 18

Which of the following statements about the accounting identity $$NCO = NX is $$correct?

Accepted Answer

Every transaction that affects net exports also affects net capital outflow by the same amount.

Question 19

If the nominal exchange rate between the U.S. dollar and the euro is $$e = 0.86$$ euros per dollar, what does this mean?

Accepted Answer

One U.S. dollar can be exchanged for 0.86 euros.

Open Economy Concepts: International Macroeconomics Study Notes

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