Q: Which of the following best describes the accounting identity in an open economy?

$\text{Net exports} = \text{Net capital outflow}$

Q: Given the following data: $E = 4$ pesos per CAD, $P = 200$ CAD per bushel of Canadian wheat, $P^* = 1600$ pesos per bushel of Argentinian wheat. What is the real exchange rate?

$e = \frac{4 \times 200}{1600} = 0.5$ bushels of Argentinian wheat per bushel of Canadian wheat

Q: Suppose the nominal exchange rate between CAD and USD is $E = 0.75$ USD per CAD, the price level in Canada is $P = 140$, and the price level in the US is $P^* = 120$. What is the real exchange rate?

$e = \frac{0.75 \times 140}{120} = 0.875$

Question 1

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

Accepted Answer

$-100 billion; Canada has a trade deficit

Question 2

Which of the following best describes the accounting identity in an open economy?

Accepted Answer

$	ext{Net exports} = 	ext{Net capital outflow}$

Question 3

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

Accepted Answer

The Canadian dollar has appreciated

Question 4

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

Accepted Answer

$e = \frac{4 	imes 200}{1600} = 0.5$ bushels of Argentinian wheat per bushel of Canadian wheat

Question 5

If the domestic price level ($P$) rises while the nominal exchange rate ($E$) and the foreign price level ($P^*$) remain constant, what happens to the real exchange rate ($e$)?

Accepted Answer

The real exchange rate increases

Question 6

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 7

Which of the following is NOT a reason why the PPP theory may fail to accurately predict exchange rates in the real world?

Accepted Answer

Tradeable goods are always perfect substitutes

Question 8

If a country’s national saving is greater than its domestic investment, what does this imply about its net capital outflow (NCO)?

Accepted Answer

NCO is positive; the country invests abroad

Question 9

In a small open economy with perfect capital mobility, what does interest rate parity imply?

Accepted Answer

$r = r^*$

Question 10

Which of the following would likely cause the domestic currency to depreciate according to the PPP theory?

Accepted Answer

An increase in the domestic price level

Question 11

Suppose the nominal exchange rate between CAD and USD is $E = 0.75$ USD per CAD, the price level in Canada is $P = 140$, and the price level in the US is $P^* = 120$. What is the real exchange rate?

Accepted Answer

$e = \frac{0.75 	imes 140}{120} = 0.875$

Question 12

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

Accepted Answer

Default risk and tax rates differ across countries

Question 13

If the US runs a trade deficit with China, what does this imply about the US net capital outflow?

Accepted Answer

US net capital outflow is negative

Question 14

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 15

If the Canadian dollar depreciates, which of the following is true?

Accepted Answer

One CAD exchanges for less foreign currency

Question 16

Which equation correctly represents the saving-investment identity in an open economy?

Accepted Answer

$S_{national} = I + NX$

Question 17

If the price of a basket of goods in Canada ($P$) increases while the price of the same basket in the US ($P^*$) remains constant, what happens to the nominal exchange rate according to PPP?

Accepted Answer

The nominal exchange rate decreases

Question 18

Which of the following scenarios would violate the law of one price and create an opportunity for arbitrage?

Accepted Answer

A good sells for a lower price in one country than in another

Question 19

In a small open economy with perfect capital mobility, what happens if the domestic real interest rate is lower than the world real interest rate?

Accepted Answer

Domestic lending to the rest of the world increases, pushing up the domestic interest rate

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

Study Guide - Practice Questions

Study Guide - Flashcards