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Exercise 9

Chapter 9 discusses key concepts in open-economy macroeconomics, including net exports, net capital outflow, and their interrelations with saving and investment. It also covers exchange rates, purchasing-power parity, and the effects of currency valuation changes. The chapter includes review questions and problems to apply these concepts in real-world scenarios.

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24 views2 pages

Exercise 9

Chapter 9 discusses key concepts in open-economy macroeconomics, including net exports, net capital outflow, and their interrelations with saving and investment. It also covers exchange rates, purchasing-power parity, and the effects of currency valuation changes. The chapter includes review questions and problems to apply these concepts in real-world scenarios.

Uploaded by

executivedirector.gppa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 9 Open-Economy Macroeconomics: Basic Concepts

Questions for Review


1. Define net exports and net capital outflow. Explain how and why they are related.

2. Explain the relationship among saving, investment, and net capital outflow.

3. If a Japanese car costs 500,000 yen, a similar American car costs $10,000, and a dollar can buy 100
yen, what are the nominal and real exchange rates?

4. Describe the economic logic behind the theory of purchasing-power parity.

5. If the Fed started printing large quantities of U.S. dollars, what would happen to the number of
Japanese yen a dollar could buy? Why?

Quick Check Multiple Choice


1. Comparing the U.S. economy today to that of 1950, one finds that today, as a percentage of GDP,
a. exports and imports are both higher.
b. exports and imports are both lower.
c. exports are higher, and imports are lower.
d. exports are lower, and imports are higher.

2. In an open economy, national saving equals domestic investment


a. plus the net outflow of capital abroad.
b. minus the net exports of goods and services.
c. plus the government’s budget deficit.
d. minus foreign portfolio investment.

3. If the value of a nation’s imports exceeds the value of its exports, which of the following is NOT
true?
a. Net exports are negative.
b. GDP is less than the sum of consumption, investment, and government purchases.
c. Domestic investment is greater than national saving.
d. The nation is experiencing a net outflow of capital.

4. If a nation’s currency doubles in value on foreign exchange markets, the currency is said to
_________, reflecting a change in the _________ exchange rate.
a. appreciate, nominal
b. appreciate, real

1
c. depreciate, nominal
d. depreciate, real

5. If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds,
what is the exchange rate?
a. 1/4 euro per dollar
b. 1/3 euro per dollar
c. 3 euros per dollar
d. 4 euros per dollar

6. The theory of purchasing-power parity says that higher inflation in a nation causes the nation’s
currency to _________, leaving the _________ exchange rate unchanged.
a. appreciate, nominal
b. appreciate, real
c. depreciate, nominal
d. depreciate, real

Problems and Applications


1. How would the following transactions affect U.S. exports, imports, and net exports?
a. An American art professor spends the summer touring museums in Europe.
b. Students in Paris flock to see the latest movie from Hollywood.
c. A Canadian citizen shops at a store in northern America to avoid Canadian sales taxes.

2. Would each of the following transactions be included in net exports or net capital outflow? Be sure
to say whether it would represent an increase or a decrease in that variable for U.S.
a. An American buys a Sony TV.
b. An American buys a share of Sony stock.
c. The Sony pension fund buys a bond from the U.S. Treasury.
d. A worker at a Sony plant in Japan buys some Georgia peaches from an American farmer.

3. How would the following transactions affect U.S. Net capital outflow? Also, state whether each
involves direct investment or portfolio investment.
a. An American cellular phone company establishes a factory in the Czech Republic.
b. Harrods of London sells stock to the General Electric pension fund.
c. Honda expands its factory in Marysville, Ohio.
d. A U.S. mutual fund sells its stock to a French investor.

4. A can of soda costs $0.75 in the United States and 12 pesos in Mexico. What is the peso-dollar
exchange rate if purchasing-power parity holds? If a monetary expansion caused all prices in Mexico
to double, so that soda rose to 24 pesos, what would happen to the peso-dollar exchange rate?

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