Question 1

Suppose Canada has exports of $$500 billion and imports of 600 $$billion in a given year. What is Canada's net exports, and what does this imply about its trade balance?

Accepted Answer

$-100 billion; Canada is running a trade deficit

Question 2

Which of the following best describes the accounting identity relating net exports (NX) and net capital outflow (NCO) in an open economy?

Accepted Answer

$$NX = NCO$$

Question 3

If the nominal exchange rate between the Canadian dollar (CAD) and the US dollar (USD) rises from 0.75 USD per CAD to 0.80 USD per CAD, what has happened to the CAD?

Accepted Answer

The CAD has appreciated

Question 4

Given the following information: Nominal exchange rate $$E = 4$$ pesos per CAD, domestic price $$P = 200$$ CAD per bushel of Canadian wheat, and foreign price $$P^* = 1600$$ pesos per bushel of Argentinian wheat. What is the real exchange rate?

Accepted Answer

$$e = \frac{E \cdot P}{P^*} = \frac{4 \cdot 200}{1600} = 0.5$$

Question 5

According to the theory of purchasing-power parity (PPP), what is the formula for the nominal exchange rate?

Accepted Answer

$$E = \frac{P^*}{P}$$

Question 6

If the Bank of Canada increases the money supply, what is the expected effect on the nominal exchange rate according to PPP theory?

Accepted Answer

The Canadian dollar will depreciate

Question 7

Which of the following is NOT a reason why the PPP theory may not hold perfectly in the real world?

Accepted Answer

Tradeable goods are always perfect substitutes

Question 8

In a small open economy with perfect capital mobility, what is the relationship between the domestic real interest rate $$r$$ and the world real interest rate $$r^*$$ according to interest rate parity?

Accepted Answer

$$r = r^*$$

Question 9

Suppose the real interest rate in Canada is lower than the real interest rate in the rest of the world. What is the likely consequence in a small open economy with perfect capital mobility?

Accepted Answer

Capital will flow into Canada, raising the Canadian real interest rate

Question 10

If national saving in an open economy is less than domestic investment, what must be true about net capital outflow (NCO)?

Accepted Answer

NCO is negative; the country is a net borrower

Question 11

Which of the following best describes the real exchange rate?

Accepted Answer

The rate at which goods and services of one country can be traded for those of another country

Question 12

Suppose the nominal exchange rate between the euro and the Canadian dollar is 1.5 euros per CAD, the price level in Canada is 120, and the price level in Europe is 180. What is the real exchange rate?

Accepted Answer

$$e = \frac{1.5 \cdot 120}{180} = 1$$

Question 13

Which of the following is a limitation of the interest rate parity condition in the real world?

Accepted Answer

Default risk and tax differences can cause interest rates to differ

Question 14

If the price level in the United States rises while the price level in Canada remains constant, what does PPP predict will happen to the USD/CAD nominal exchange rate?

Accepted Answer

The USD will depreciate relative to the CAD

Question 15

Which of the following equations represents the saving-investment identity in an open economy?

Accepted Answer

$$S_{national} = I + NX$$

Question 16

A Canadian investor purchases Japanese government bonds. How is this transaction recorded in the Canadian balance of payments?

Accepted Answer

As an increase in Canadian net capital outflow

Question 17

If the real exchange rate between Canada and the US is greater than 1, what does this imply?

Accepted Answer

Canadian goods are more expensive than US goods

Question 18

Which of the following scenarios would most likely lead to a depreciation of the Canadian dollar according to the PPP theory?

Accepted Answer

An increase in the Canadian price level

Question 19

Suppose the Canadian government imposes strict controls on foreign ownership of domestic assets. What is the likely effect on net capital outflow (NCO)?

Accepted Answer

NCO will decrease

Question 20

If the law of one price does not hold for a particular good, what is the most likely reason?

Accepted Answer

There are significant transportation costs or the good is not tradeable

Open-Economy Macroeconomics: Basic Concepts (Chapter 12 Study Notes)

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