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Exam 12: Open-Economy Macroeconomics: Basic Concepts

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Question 111

Multiple Choice

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If the Canadian real interest rate exceeds the world real interest rate,what would Canadian savers most likely do?

A) Canadian savers would prefer to buy foreign assets.
B) Canadian savers would prefer to wait until the real interest rate falls to equal the world interest rate.
C) Canadian savers would sell their Canadian assets and buy foreign assets instead.
D) Canadian savers would sell their foreign assets and buy Canadian assets instead.

E) A) and B)
F) C) and D)

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Question 112

Multiple Choice

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If it took as many dollars to buy goods in Canada as it did to buy enough currency to buy the same goods in Kenya,the real exchange rate would be computed as how many Kenyan goods per Canadian goods?

A) one
B) the number of dollars needed to buy Canadian goods divided by the number of shillings needed to buy Kenyan goods
C) the number of shillings needed to buy Kenyan goods divided by the number of dollars needed to buy Canadian goods
D) a number equal to the nominal exchange rate

E) B) and C)
F) A) and C)

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Question 113

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List the factors that might influence a country's exports,imports,and trade balance.

A country has $120 million of net exports and $150 million of saving.What is net capital outflow?

If P = domestic prices,P* = foreign prices,and e is the nominal exchange rate,what is implied by purchasing-power parity?

Which of the following shows that any trade transaction must have a financial counterpart?

A British pharmacy buys drugs from a Canadian company and pays for them with British pounds.What are the effects of this transaction?

What is the formula for a closed economy's GDP?

Why are net exports and net capital outflow always equal?

Consider the following table,adapted from the Big Mac Index computed by The Economist magazine.The table shows prices of a Big Mac in local currencies and the current nominal exchange rate between the local currency and the Canadian dollar. a.Compute the Big Mac prices in Canadian dollars for each country. b.Compute the PPP exchange rate. c.Compute the overvaluation or undervaluation of each country's currency with respect to the Canadian dollar.A currency is considered to be overvalued if the nominal exchange rate is less than the PPP exchange rate.Overvaluation is the percentage difference between the nominal and the PPP exchange rate,computed using the following formula: [(PPP exchange rate - Nominal exchange rate) / Nominal exchange rate]*100.

According to purchasing-power parity theory,if the same fast-food hamburger costs $2.00 in Canada and 10 Tunisian dinars,what should the exchange rate be?

If a country sells more goods and services abroad than it purchases abroad,it has positive net exports and a trade surplus.

Suppose that money-supply growth continues to be higher in Turkey than it is in Canada.What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

Refer to Table 12-1.Assume that there are no transportation costs or trade restrictions.With which country can Canadian importers make a profit?

Can purchasing-power parity be used to explain the fact that the Canadian dollar depreciated by more than 50 percent against the German mark from 1970 to 2001,but appreciated by more than 100 percent against the Italian lira during the same period? Defend your answer.

If the exchange rate changes from 40 Thai baht per dollar to 25 Thai baht per dollar,what has happened to the dollar?

Why is interest rate parity NOT a perfect theory of real interest rate determination in a small open economy?

A rational investor will always purchase the bond that pays the highest real interest rate.

According to purchasing-power parity theory,the real exchange rate should equal the nominal exchange rate.

If the purchasing power of the dollar is always the same at home and abroad,then the nominal exchange rate defined as foreign goods per unit of Canadian goods decreases if the Canadian price level rises more than the price level in foreign countries.