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Open-Economy Macroeconomics: Basic Concepts 7733
33. To increase domestic investment, a country must increase its saving.
a. True
b. False
34. The increase in the trade deficit in the 1980’s reflected a decrease in national saving that is
associated with an increase in the government budget deficit.
a. True
b. False
35. The large trade deficits in the U.S. during the 1990’s were primarily associated with a rise in
domestic investment spending rather than a rise in the budget deficit.
a. True
b. False
7734 Open-Economy Macroeconomics: Basic Concepts
36. From 2008 to 2012 both U.S. saving and U.S. investment fell.
a. True
b. False
37. If the exchange rate is 12.5 pesos per U.S. dollar, it is also 1/12.5 U.S. dollars per peso.
a. True
b. False
38. If the exchange rate is 80 yen per dollar, then a hotel room in Tokyo that costs 25,000 yen costs
$200.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7735
39. If the price of a good in the U.S. is $10, the exchange rate is 2 units of foreign currency per dollar,
and the foreign price of the same good is 30 units of foreign currency, then the real exchange rate
is 2/3.
a. True
b. False
40. Other things the same, an increase in the nominal exchange rate raises the real exchange rate.
a. True
b. False
41. Other things the same, an increase in domestic prices raises the real exchange rate.
a. True
b. False
7736 Open-Economy Macroeconomics: Basic Concepts
42. Other things the same, an increase in foreign prices raises the real exchange rate.
a. True
b. False
43. Other things the same, an increase in the real exchange rate raises U.S. net exports.
a. True
b. False
44. Other things the same, an increase in the U.S. real exchange rate makes U.S. goods more
expensive relative to foreign goods.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7737
45. The theory of purchasing-power parity states that a unit of a country’s currency should be able to
buy the same quantity of goods in foreign countries as it does in the domestic economy.
a. True
b. False
46. Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.
a. True
b. False
47. Jason plans to buy shrimp in Florida and sell them in Manhattan, Kansas where the price is higher.
Jason plans to engage in arbitrage.
a. True
b. False
7738 Open-Economy Macroeconomics: Basic Concepts
48. If the U.S. real exchange rate is greater than 1, then there is the possibility of arbitraging by
buying foreign goods to sell in the U.S.
a. True
b. False
49. Many economists believe that the theory of purchasing-power parity describes the forces that
determine exchange rates in the long run.
a. True
b. False
50. According to purchasing-power parity theory, the nominal exchange rate between the U.S. and
another country should equal the U.S. price level divided by the price level in the foreign country.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7739
51. According to purchasing power parity, the nominal exchange rate between the U.S. and another
country should equal the price level of foreign goods divided by the price level of U.S. goods.
a. True
b. False
52. If the purchasing power of the dollar is always the same at home and abroad, then the nominal
exchange rate defined as units of foreign currency per dollar decreases if the U.S. price level rises
more than the price level in foreign countries.
a. True
b. False
53. Other things the same, an increase in the foreign price level leads to an increase in the real
exchange rate.
a. True
b. False
7740 Open-Economy Macroeconomics: Basic Concepts
54. If prices in Mexico rise at a higher rate than prices in the U.S., then according to purchasing-
power parity the U.S. nominal exchange rate with Mexico should rise.
a. True
b. False
55. If prices in the U.S. rise faster than prices in the United Kingdom, then according to the doctrine
of purchasing- power parity the U.S. nominal exchange rate should rise
a. True
b. False
56. If over the next year the inflation rate in the euro area is higher than the inflation rate in Japan,
then the euro should depreciate relative to the Japanese yen.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7741
57. In the 1970s and 1980s the U.S. dollar depreciated against the German mark and appreciated
against the Italian lira because U.S. inflation was lower than in Germany but higher than in Italy.
a. True
b. False
58. When the central bank of some country prints large quantities of money, that county’s currency
loses value both in terms of the goods and services it buys and in terms of the amount of foreign
currencies it can buy.
a. True
b. False
59. List the factors that might influence a country's exports, imports, and trade balance.
7742 Open-Economy Macroeconomics: Basic Concepts
60. Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why
and in what directions this changes U.S. net exports and U.S. net capital outflow.
61. Why are net exports and net capital outflow always equal?
Open-Economy Macroeconomics: Basic Concepts 7743
62. Colonial America had little industry and so had mostly raw materials to export. At the same time,
there were many opportunities to purchase capital goods and earn a high rate of return because
there was little existing capital so that the marginal product of capital was relatively high. What
does this suggest about net exports and net capital outflow in colonial America?
63. Derive the relation between savings, domestic investment, and net capital outflow using the
national income accounting identity.
7744 Open-Economy Macroeconomics: Basic Concepts
64. Suppose that a country has $120 billion of national saving, and $80 billion of domestic investment.
Is this possible? Where did the other $40 billion of national savings go?
65. How do the nominal exchange rate and the real exchange rate differ?
66. How do we find the real exchange rate from the nominal exchange rate?
Open-Economy Macroeconomics: Basic Concepts 7745
67. Suppose a bottle of wine costs 20 euros in France and 25 dollars in the United States. If the
exchange rate is .80 euros per dollar, what is the real exchange rate?
68. What is the logic behind the theory of purchasing-power parity?
7746 Open-Economy Macroeconomics: Basic Concepts
69. Suppose that a U.S. dollar buys more gold in Australia than it buys in Russia. What does
purchasing-power parity imply should happen?
70. What does purchasing-power parity imply about the real exchange rate? Explain what this means.
Open-Economy Macroeconomics: Basic Concepts 7747
71. According to purchasing-power parity, what is the relationship between changes in price levels
between two countries and changes in nominal exchange rates?
72. Can purchasing-power parity be used to explain the fact that the U.S. dollar depreciated by more
than 50 percent against the German mark between 1970 and 1998, but appreciated by more than
100 percent against the Italian lira during the same period? Defend your answer.
7748 Open-Economy Macroeconomics: Basic Concepts
73. Suppose that money supply growth continues to be higher in Turkey than it is in the United States.
What does purchasing-power parity imply will happen to the real and to the nominal exchange
rate?
74. Assuming all other things equal, what would happen to the U.S. dollar real exchange rate under
each of the following circumstances?
a. The U.S. nominal exchange rate depreciates.
b. U.S. domestic prices increase.
c. Prices in the rest of the world rise.
Open-Economy Macroeconomics: Basic Concepts 7749
75. Under what circumstances does purchasing-power parity explain how exchange rates are
determined, and why is it not completely accurate?
76. Suppose a lobster supper in Maine costs fewer dollars than a Lobster supper in Paris, France.
Explain why this is inconsistent with purchasing-power parity and explain why the inconsistency
may exist.
