SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Net exports are the value of a nation’s exports minus the value of its imports, also
2. The nominal exchange rate is the rate at which a person can trade the currency of
3. Because Mexico has had high ination and Japan has had low ination, the
Chapter Quick Quiz
1. a
2. a
Questions for Review
1. The net exports of a country are the value of its exports minus the value of its
imports. Net capital outow refers to the purchase of foreign assets by domestic
2. Saving equals domestic investment plus net capital outow, because any dollar
3. If a dollar can buy 100 yen, the nominal exchange rate is 100 yen per dollar. The
real exchange rate equals the nominal exchange rate times the domestic price
4. The economic logic behind the theory of purchasing-power parity is that a good
502
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 31/Open-Economy Macroeconomics: Basic Concepts ❖ 503
5. If the Fed started printing large quantities of U.S. dollars, the U.S. price level
Problems and Applications
1. a. When an American art professor spends the summer touring museums in
b. When students in Paris ock to see the latest movie from Hollywood,
c. When your uncle buys a new Volvo, an American is buying a foreign good, so
d. When the student bookstore at Oxford University sells a copy of this textbook,
e. When a Canadian citizen shops in northern Vermont to avoid Canadian sales
2. a. When an American buys a Sony TV, there is a decrease in net exports.
b. When an American buys a share of Sony stock, there is an increase in net
c. When the Sony pension fund buys a U.S. Treasury bond, there is a decrease in
d. When a worker at Sony buys some Georgia peaches from an American farmer,
3. Foreign direct investment requires actively managing an investment, for example,
4. a. When an American cellular phone company establishes an oCce in the Czech
b. When Harrod’s of London sells stock to the General Electric pension fund, U.S.
c. When Honda expands its factory in Marysville, Ohio, U.S. net capital outow
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 31/Open-Economy Macroeconomics: Basic Concepts ❖ 504
d. When a Fidelity mutual fund sells its Volkswagen stock to a French investor,
5. a. Dutch pension funds holding U.S. government bonds would be happy if the
b. U.S. manufacturing industries would be unhappy if the U.S. dollar appreciated
c. Australian tourists planning a trip to the United States would be unhappy if
d. An American +rm trying to purchase property overseas would be happy if the
6. All the parts of this question can be answered by keeping in mind the de+nition of
a. If the U.S. nominal exchange rate is unchanged, but prices rise faster in the
b. If the U.S. nominal exchange rate is unchanged, but prices rise faster abroad
c. If the U.S. nominal exchange rate declines and prices are unchanged in the
d. If the U.S. nominal exchange rate declines and prices rise faster abroad than
7. If purchasing-power parity holds, then 25 pesos per soda divided by $1.25 per
8. If you take X units of foreign currency per Big Mac divided by 3.57 dollars per Big
a. Chile: 2,100 pesos/$4.93 = 426 pesos/$
b. Under purchasing-power parity, the exchange rate of the Hungarian forint to
the Canadian dollar is 900 forints per Big Mac divided by 5.84 Canadian
dollars per Big Mac equals 154 forints per Canadian dollar. The actual
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 31/Open-Economy Macroeconomics: Basic Concepts ❖ 505
c. The exchange rates predicted by the Big Mac index are somewhat close to the
9. a. The exchange rate is 1 Ecterian dollar is equal to 6 Wiknamian pesos.
b. In Ecteria, the price of Spam would double. The price level will quadruple in
c. Wiknam will have a higher nominal interest rate because of the Fisher eIect.
d. The get-rich scheme would only work if there were a diIerence in real interest
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.