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Exam 31: Open-Economy Macroeconomics: Basic Concepts

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Question 31

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According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money

A) gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.
B) gains value in terms of the domestic goods and services it can buy, but loses value in terms of the foreign currency it can buy.
C) loses value in terms of the domestic goods and services it can buy, but gains value in terms of the foreign currency it can buy.
D) loses value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

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

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Question 32

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What does purchasing-power parity imply about the real exchange rate? Explain what this means.

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That it is equal to one. The n...

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Question 33

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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.

For an economy as a whole, net exports must equal minus one times net capital outflow.

If a country's imports exceed its exports it has a trade surplus.

To increase domestic investment, a country must increase its saving.

Over the last 5 years the amount of country A's currency it took to buy a unit of country B's currency more than doubled. A. Did country A's currency depreciate or appreciate? B. According to purchasing-power parity, what explains the change in the value of country B's currency?

While vacationing in Agra, India, the price of one night's stay at your hotel room rises from 6600 rupees to 7200 rupees. If the exchange rate was previously 55 rupees per dollar, what would the exchange rate need to be now in order for the number of dollars you pay for your room to remain the same? Does this imply the rupee depreciated or appreciated against the dollar?

According to purchasing-power parity, inflation in the United States causes the dollar to

Suppose a country's net capital outflow does not change, but its investment declines by $420 billion. Its saving must have

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

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 depreciation of the U.S. real exchange rate induces U.S. consumers to buy

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.

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.

Both foreign direct investment and foreign portfolio investment by U.S. residents increase U.S. net capital outflow.

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?

Other things the same, an increase in the U.S. real exchange rate makes U.S. goods more expensive relative to foreign goods.

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.

Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.