Open-Economy Macroeconomics: Basic Concepts 7713
71. If the Kenyan nominal exchange rate declines, and prices are unchanged in Kenya and abroad,
then the Kenyan real exchange rate
a. does not change.
b. rises.
c. declines
d. None of the above is necessarily correct.
72. If the Canadian nominal exchange rate does not change, but prices rise faster abroad than in
Canada, then the Canadian real exchange rate
a. does not change.
b. rises.
c. declines.
d. None of the above is necessarily correct.
7714 Open-Economy Macroeconomics: Basic Concepts
73. If the Mexican nominal exchange rate does not change, but prices rise faster in Mexico than in all
other countries, then the Mexican real exchange rate
a. does not change.
b. rises.
c. declines.
d. There is not enough information to answer the question
74. According to purchasing-power parity, if prices in the United States increase by a larger
percentage than prices in the United Kingdom, then the
a. real exchange rate rises.
b. nominal exchange rate rises.
c. real exchange rate falls.
d. nominal exchange rate falls.
Open-Economy Macroeconomics: Basic Concepts 7715
75. According to purchasing-power parity, if prices in the United States increase by a smaller
percentage than prices in the United Kingdom, then the
a. real exchange rate rises.
b. nominal exchange rate rises.
c. real exchange rate falls.
d. nominal exchange rate falls.
76. According to purchasing-power parity, if over the course of a year the price level in the U.S. rises
more than in Canada, then which of the following rises?
a. the U.S. real exchange rate, but not the U.S. nominal exchange rate
b. the U.S. nominal exchange rate, but not the U.S. real exchange rate
c. the U.S. nominal exchange rate and the U.S. real exchange rate
d. neither the real exchange rate nor the nominal exchange rate
7716 Open-Economy Macroeconomics: Basic Concepts
77. According to purchasing-power parity, if over the course of a year the price level in the U.S. rises
more than in Japan, then which of the following falls?
a. the U.S. real exchange rate, but not the U.S. nominal exchange rate
b. the U.S. nominal exchange rate, but not the U.S. real exchange rate
c. the U.S. nominal exchange rate and the U.S. real exchange rate
d. neither the real exchange rate nor the nominal exchange rate
78. If the U.S. price level is increasing by 3 percent annually and the Japanese price level is
increasing by 1 percent annually, then according to purchasing-power parity, by about what
percent would the nominal exchange rate be changing?
a. decreasing by 4 percent
b. decreasing by 2 percent
c. increasing by 4 percent
d. increasing by 2 percent
Open-Economy Macroeconomics: Basic Concepts 7717
79. If over the next six months inflation is higher in the U.S. than in foreign countries, then according
to purchasing– power parity
a. only the nominal exchange rate depreciates.
b. both the real and nominal exchange rate appreciate.
c. both the real and nominal exchange rate depreciate.
d. only the real exchange rate appreciates.
80. If over the next few years inflation is higher in Mexico than in the U.S., then according to
purchasing–power parity which of the following should rise?
a. the U.S. real exchange rate but not the U.S. nominal exchange rate
b. the U.S. nominal exchange rate but not the U.S. real exchange rate
c. the U.S. real exchange rate but not the U.S. nominal exchange rate
d. neither the U.S. real nor the U.S. nominal exchange rate
7718 Open-Economy Macroeconomics: Basic Concepts
81. During 2011, the price level in the U.S. rose at a faster rate than the price level in Japan. Other
things the same, according to purchasing-power parity, this difference in inflation rates should
have caused
a. the nominal exchange rate of the dollar to appreciate relative to the yen.
b. the real exchange rate of the dollar to appreciate relative to the yen.
c. the nominal exchange rate of the dollar to depreciate relative to the yen.
d. the real exchange rate of the dollar to depreciate relative to the yen.
82. According to the doctrine of purchasing-power parity, which of the following should depreciate if
over the next year the inflation rate is higher in the U.S. than in the Euro area?
a. both the U.S. real exchange rate and the U.S. nominal exchange rate
b. the U.S. real exchange rate, but not the U.S. nominal exchange rate
c. the U.S. nominal exchange rate, but not the U.S. real exchange rate
d. neither the U.S. nominal exchange rate nor the U.S. real exchange rate
Open-Economy Macroeconomics: Basic Concepts 7719
83. From 1970 to 1998 the U.S. dollar
a. gained value compared to the German mark because inflation was higher in Germany.
b. gained value compared to the German mark because inflation was lower in Germany.
c. lost value compared to the German mark because inflation was higher in Germany.
d. lost value compared to the German mark because inflation was lower in Germany.
84. From 1970 to 1998 the U.S. dollar
a. gained value compared to the German mark because inflation was higher in the U.S.
b. gained value compared to the German mark because inflation was lower in the U.S.
c. lost value compared to the German mark because inflation was higher in the U.S.
d. lost value compared to the German mark because inflation was lower in the U.S.
85. From 1970 to 1998 the U.S. dollar
a. gained value compared to the Italian lira because inflation was higher in Italy.
b. gained value compared to the Italian lira because inflation was lower in Italy.
c. lost value compared to the Italian lira because inflation was higher in Italy.
d. lost value compared to the Italian lira because inflation was lower in Italy.
7720 Open-Economy Macroeconomics: Basic Concepts
86. From 1970 to 1998 the U.S. dollar
a. gained value compared to the Italian lira because inflation was higher in the U.S.
b. gained value compared to the Italian lira because inflation was lower in the U.S.
c. lost value compared to the Italian lira because inflation was higher in the U.S.
d. lost value compared to the Italian lira because inflation was lower in the U.S.
87. During a hyperinflation the real domestic value of a country’s currency
a. falls and its nominal exchange rate depreciates.
b. falls and its nominal exchange rate appreciates.
c. rises and its nominal exchange rate depreciates.
d. rises and its nominal exchange rate appreciates.
Open-Economy Macroeconomics: Basic Concepts 7721
88. Which of the following events would be consistent with purchasing-power parity?
a. The price level in the United States rises more rapidly than that in Ireland and the real
exchange rate defined as Irish goods per unit of U.S. goods stays the same.
b. The money supply in the United States rises more rapidly than in Egypt and the nominal
exchange rate defined as Egyptian pounds per dollar falls.
c. Earl, a worldwide traveler, looks at exchange rates and worldwide breakfast prices one morning
and finds that whatever country he decides to go to he can convert $15 into enough local
currency to buy the same breakfast.
d. All of the above are correct.
89. On behalf of your firm, you make frequent trips to Tokyo. You notice that you always have to pay
more dollars to get your hair cut than you pay in the U.S. This observation is
a. consistent with purchasing–power parity if prices in Japan are rising more rapidly than prices in
the United States.
b. consistent with purchasing-power parity if prices in Japan are rising less rapidly than prices in
the United States.
c. inconsistent with purchasing-power parity, but might be explained by limited opportunities for
arbitrage in haircuts across international borders.
d. None of the above is correct.
7722 Open-Economy Macroeconomics: Basic Concepts
90. Purchasing-power parity theory does not hold at all times because
a. many goods are not easily transported.
b. the same goods produced in different countries may be imperfect substitutes for each other.
c. Both a and b are correct.
d. prices are different across countries.
True/False and Short Answer
1. A country with negative net exports has a trade surplus.
a. True
b. False
2. If a country’s imports exceed its exports it has a trade surplus.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7723
3. If a country sells more goods and services abroad than it purchases abroad, it has positive net
exports and a trade surplus.
a. True
b. False
4. Movies are a major export of the U.S.
a. True
b. False
5. Over the past six decades, the U.S. economy has experienced a dramatic increase in the relative
importance of international trade and finance.
a. True
b. False
7724 Open-Economy Macroeconomics: Basic Concepts
6. Reduced barriers to trade help explain an increase in U.S. exports and imports relative to GDP
since 1950.
a. True
b. False
7. Reductions in transportation costs help explain the increase in U.S. trade flows.
a. True
b. False
8. U.S. exports make up less than 20 percent of GDP.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7725
9. Net capital outflow is the purchase of domestic assets by foreign residents minus the purchase of
foreign assets by domestic residents.
a. True
b. False
10. When net capital outflow is negative, it means that on net the value of domestic assets purchased
by foreigners exceeds the value of foreign assets purchased by domestic residents.
a. True
b. False
11. If purchases of foreign assets by U.S. residents exceed purchases of U.S. assets by foreign
residents, then U.S. net capital outflow is positive.
a. True
b. False
7726 Open-Economy Macroeconomics: Basic Concepts
12. A rational investor will always purchase the bond that pays the highest real interest rate.
a. True
b. False
13. When a company from Germany builds an automobile factory in the United States, the German
firm has engaged in foreign direct investment.
a. True
b. False
14. Both foreign direct investment and foreign portfolio investment by U.S. residents increase U.S.
net capital outflow.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7727
15. By itself, when a Japanese bank purchases a bond issued by a U.S. corporation, U.S. net capital
outflow rises.
a. True
b. False
16. By itself, if a U.S. firm builds a new factory overseas, U.S. net capital outflow rises.
a. True
b. False
17. For an economy as a whole, net exports must equal minus one times net capital outflow.
a. True
b. False
7728 Open-Economy Macroeconomics: Basic Concepts
18. A country must have a positive net outflow of capital if it has a trade deficit.
a. True
b. False
19. If a country’s net exports fall, then its net capital outflow falls by the same amount.
a. True
b. False
20. If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net
exports and U.S. net capital outflow decrease.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7729
21. If a German firm buys goods from a U.S. firm with dollars it obtains by exchanging euros for
dollars, both U.S. net exports and U.S. net capital outflow increase.
a. True
b. False
22. A Turkish firm exchanges lira (Turkish currency) for dollars. It then uses these dollars to
purchase computers from the U.S. These actions decrease U.S. net capital outflow and increase
U.S. net exports.
a. True
b. False
23. If Walmart buys $50 million worth of consumer goods from China and sells them in the U.S., and
China uses the $50 million to purchase U.S. bonds, U.S. net exports and U.S. net capital outflow
both fall.
a. True
b. False
7730 Open-Economy Macroeconomics: Basic Concepts
24. If a nation is selling more goods and services to foreigners than it is buying from them, then on net
it must be selling assets abroad.
a. True
b. False
25. If a nation is selling more goods and services to foreigners than it is buying from them, then on net
it must be buying assets abroad.
a. True
b. False
26. In an open economy national saving equals domestic investment plus net capital outflow.
a. True
b. False
Open-Economy Macroeconomics: Basic Concepts 7731
27. It is possible for a country to have domestic investment that exceeds national saving.
a. True
b. False
28. When U.S. national saving rises, domestic investment also necessarily rises.
a. True
b. False
29. If a country’s trade surplus falls, its net capital outflow rises.
a. True
b. False
7732 Open-Economy Macroeconomics: Basic Concepts
30. A nation with a trade surplus will necessarily have saving that is greater than domestic
investment.
a. True
b. False
31. Other things the same, if U.S. net capital outflow rises, so does U.S. saving.
a. True
b. False
32. In an open economy, national saving can be less than investment.
a. True
b. False