41. In broad real terms, the dollar
a. depreciated against other currencies in the second half of the 1990s and in the early 2000s.
b. depreciated against other currencies in the second half of the 1990s and appreciated against those currencies
in the early 2000s.
c. appreciated against other currencies in the second half of the 1990s and in the early 2000s.
d. appreciated against other currencies in the second half of the 1990s and depreciated against those currencies
in the early 2000s.
42. During the 2008–2009 financial crisis, the dollar
in real terms.
a. appreciated slightly; appreciated
b. depreciated slightly; depreciated
c. appreciated sharply; depreciated
d. depreciated sharply; appreciated
in real terms. After the crisis ended, the dollar
43. A measure of the flow of goods and services out of a country into other countries or other items that cause
payments to flow into the country is
a. the national savings account balance.
b. the balance on current account.
c. the capital account balance.
d. the capital and financial account balance.
44. The sum of net exports of goods and services plus net income from abroad plus net unilateral current transfers
equals
a. the trade balance.
b. the balance on current account.
c. the capital account balance.
d. the capital and financial account balance.
45. The amount foreign citizens, firms, and governments invest in a country minus the amount that the country’s citizens,
firms, and governments invest abroad is
a. the trade balance.
b. the balance on current account.
c. the capital-account balance.
d. the balance on capital and financial account.
46. The balance on the current account plus the balance on the capital and financial account equals
a. 0.
b. 1 .
c. -1.
d. 100.
47. A country‘s net foreign investment is equal to the amount
a. the domestic country invests in other countries, minus what other countries invest in the domestic country.
b. other countries invest in the domestic country, minus what the domestic country invests in other countries.
c. of the current-account balance plus the capital-account balance.
d. of portfolio investment made by the domestic country in other countries, minus the amount of portfolio
investment other countries make in the domestic country.
48. U.S. citizens invested $10 billion in foreign securities during a certain year and $21 billion in acquiring capital goods in
foreign countries while foreigners invested only $27.5 billion in U.S. during that year. The net foreign investment of
U.S. during that year was .
a. –$3.5 billion.
b. –$58.5 billion.
c. $1.2 billion.
d. $3.5 billion.
49. Foreign investment is composed of investment plus investment.
a. inventory; financial
b. portfolio; direct
c. portfolio; indirect
d. inventory; physical capital
50. Investment in foreign countries that occurs by purchasing financial securities is referred to as
a. directed capital.
b. direct investment.
c. capital investiture.
d. portfolio investment.
51. Investment in foreign countries that occurs by installing capital goods and using them to produce output is referred to
as
a. directed capital.
b. direct investment.
c. capital investiture.
d. portfolio investment.
52. If the volume of domestic investment is $32 billion, net exports is $10 billion, and budget deficit is $5 billion, what is
the volume of domestic savings?
a. $47 billion
b. $38 billion
c. $29 billion
d. $16 billion
53. Suppose, the U.S. has domestic savings of $10 billion, domestic investment of $160 billion, and a government budget
deficit of $250 billion. Based on these figures, the amount of net foreign investment is $ billion.
a. 400
b. 80
c. −80
d. −400
54. Suppose, the U.S. has domestic savings of $10 billion, a government budget deficit of $250 billion, net exports of
−$400 billion, and net income from abroad and net unilateral transfers of $0. Based on these figures, the amount of
net foreign investment is $ billion.
a. 260
b. −140
c. −260
d. −400
55. Suppose, the U.S. has domestic savings of $100 billion, domestic investment of $60 billion, and a government budget
surplus of $30 billion. Based on these figures, the amount of net foreign investment is $ billion.
a. 10
b. 70
c. 130
d. 190
56. In recessions, the dollar usually
a. appreciates.
b. depreciates.
c. remains unaffected.
d. follows no consistent pattern.
57. In economic expansions, the dollar usually
a. appreciates.
b. depreciates.
c. remains unaffected.
d. follows no consistent pattern.
58. In which region of the world did a financial crisis occur in 1997, characterized by a reduced confidence of foreign
investors who began to withdraw their investments from the region?
a. Asia
b. North America
c. Africa
d. Europe
59. To prop up a currency, a country must
a. reduce its interest rates.
b. limit the movement of capital.
c. use its reserves to purchase its own currency in the foreign-exchange market.
d. sell its gold stock.
60. International investors believe that when a country gets into financial trouble, the IMF will rescue the country, thus
reducing the investors’ risk. As a result, investors take greater risks than they would otherwise. This is an example of
a. a risk premium.
b. a lender of last resort.
c. adverse selection.
d. moral hazard.
61. Explain how a shock in one country can be transmitted to other countries. List three ways this can happen and give
an example of each.
62. Explain why the correlation of output growth between the U.S. and Europe declined in the late 1980s and 1990s,
even though the countries became more economically interdependent. What do you expect will happen to the
correlation in the future?
63. Suppose you are an investor who is considering buying a one-year British government bond that has a 4 percent
interest rate or a one-year French government bond with a 7 percent interest rate. The exchange rate today is 2.00
euros per pound and you expect the exchange rate to be 2.10 euros per pound one year from now.
a. Which bond would you purchase? Why? Show your calculations.
Suppose you expect the exchange rate to be 2.05 euros per pound in one year, instead of 2.10
b. euros per pound. Would you change your decision about which bond to buy? Explain and
show your calculations.
64. Answer the questions below.
Suppose the Federal Reserve raises the federal funds rate in the United States but people
a. believe that the inflation rate will rise by more than the Fed raised the federal funds rate.
What do you expect to happen to the exchange rate? Explain why.
b. As the exchange rate changes in the direction you determined in part a, what happens to the
prices of imports and exports in the United States and in other countries? Explain.
c. What happens to net exports in the United States and in other countries that trade with the
United States in the short run? In the long run? Explain.
65. Suppose the exchange rate adjusts so that interest-rate parity holds. Also assume that the interest rate on a one-year
Canadian bond is 3 percent and the interest rate on a one-year U.S. bond is 5 percent.
a. If the exchange rate today is 1.40 Canadian dollars per U.S. dollar, what do you expect the
exchange rate to be one year from now?
b. Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected
to be 1 percent over the next year. What is the expected inflation rate in the United States?
66. In 2005, exchange rates were 1.74 U.S. dollars per British pound, 112 Japanese yen per U.S. dollar, and 1.20 dollars
per euro. In 2000, the exchange rates were 1.62 U.S. dollars per British pound, 102 Japanese yen per U.S. dollar,
and 0.94 dollars per euro. For each currency, explain whether it appreciated or depreciated from 2000 to 2005
versus the other two currencies.
67. Assume that the only good traded between Mexico, the U.S., and Canada is chicken, which is produced by all three
countries. If the cost of producing a pound of chicken is 5 pesos in Mexico, 1 U.S. dollar in the U.S., and 2 Canadian
dollars in Canada, and if the law of one price holds, what are each of the exchange rates between the three
countries?
68. Assume that the price level in Japan is 120, the price level in the U.S. is 145, and the price level in Mexico is
110. Also assume that the current nominal exchange rates are 115 yen per dollar and 4 pesos per dollar. Calculate
the real exchange rates between each pair of countries.
69. Assume that relative purchasing-power parity holds. In 2004, the price level in Japan is 120 and the price level in the
U.S. is 145. In 2005, the price level in Japan is 121 and the price level in the U.S. is 149. The exchange rate in 2004
is 112 yen per dollar. Calculate the exchange rate in 2005.
70. Suppose the U.S. has domestic savings of $50 billion, domestic investment of $120 billion, and a government budget
deficit of $150 billion. Japan has domestic savings of 25 trillion yen, domestic investment of 10 trillion yen, and a
government budget deficit of 8 trillion yen. Calculate the amounts of net foreign investment by the U.S. and by
Japan.
71. How should a country respond when foreign investors withdraw investments from that country?
72. What are the two major drawbacks of the International Monetary Fund that prevents it from bailing out countries in
crises?