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Suppose that the dollar buys more bananas in Honduras than in Guatemala.How could traders make a profit?


A) by buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Honduras
B) by buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Guatemala
C) by buying bananas in Guatemala and selling them in Honduras, which would tend to raise the price of bananas in Guatemala
D) by buying bananas in Guatemala and selling them in Honduras, which would tend to raise the price of bananas in Honduras

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

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In Canada,a cup of hot chocolate costs $6.In Australia,the same hot chocolate costs 6 Australian dollars.If the exchange rate is $3 Australian dollars per Canadian dollar,what is the real exchange rate?


A) 1/2 cup of Australian hot chocolate per cup of Canadian hot chocolate
B) 1 cup of Australian hot chocolate per cup of Canadian hot chocolate
C) 2 cups of Australian hot chocolate per cup of Canadian hot chocolate
D) 3 cups of Australian hot chocolate per cup of Canadian hot chocolate

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

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According to purchasing-power parity,what is the relationship between changes in price levels between two countries and changes in nominal exchange rates?

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Purchasing-power parity asserts that the...

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According to the theory of purchasing-power parity,what must the nominal exchange rate between two countries reflect?


A) the different price levels in those countries
B) the different resource endowments in those countries
C) the different income levels in those countries
D) the different standards of living between those countries

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

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What does purchasing-power parity explain?


A) It explains prices in the short run.
B) It explains prices in the long run.
C) It explains exchange rates in the short run.
D) It explains exchange rates in the long run.

E) B) and D)
F) None of the above

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A Russian flour mill buys wheat from Canada and pays for it with rubles.Which of the following correctly identifies the effects of this transaction?


A) Russian net exports increase, and Canadian net capital outflow increases.
B) Russian net exports increase, and Canadian net capital outflow decreases.
C) Russian net exports decrease, and Canadian net capital outflow increases.
D) Russian net exports decrease, and Canadian net capital outflow decreases.

E) A) and D)
F) None of the above

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Bolivia buys railroad engines from a Canadian firm and pays for them with Bolivianos (Bolivian currency) .What happens to Canadian net exports and net foreign investment due to this transaction?


A) It increases both Canadian net exports and Canadian net foreign investment.
B) It decreases both Canadian net exports and Canadian net foreign investment.
C) It increases Canadian net exports and decreases Canadian net foreign investment.
D) It decreases Canadian net exports and increases Canadian net foreign investment.

E) All of the above
F) B) and C)

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Suppose inflation is higher in Canada over the next few months than in foreign countries,and exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods Canadian goods buy.According to purchasing-power parity,which of the following should we expect to see?


A) Only the nominal exchange rate depreciates.
B) Both the real and nominal exchange rates appreciate.
C) Both the real and nominal exchange rates depreciate.
D) Only the real exchange rate appreciates.

E) A) and B)
F) None of the above

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Which of the following is an example of Canadian foreign portfolio investment?


A) Albert, a German citizen, buys shares of stock in a Canadian computer company.
B) Larry, a citizen of Ireland, opens a fish-and-chips restaurant in Canada.
C) Ruth, a Canadian citizen, buys bonds issued by a German corporation.
D) Dustin, a Canadian citizen, opens a tavern in New Zealand.

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

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When Canada imports more than it exports,it must also buy domestic assets from foreigners.

A) True
B) False

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Suppose the price level in Canada was P = 124 last year;it is up by 3 points this year.In the U.S.,the price level was 112 last year;it is up by 2 points this year.The exchange rate was US$0.96 per C$1 last year.(For part a,approximate all results to two decimals.) a)Compare the rate of change in the exchange rate with the difference between the foreign and domestic inflation rates.Are they equal? b)In theory,the rate of change in the nominal exchange rate should be about the same as the inflation difference.Redo the calculations from part a,retaining this time at least four decimals in your intermediate results.Does your answer to the question in part a change? c)What have you learned from this exercise?

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a) The inflation rate in Canada = (127 -...

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A country has $50 million of domestic investment and net capital outflow of -$70 million.What is saving?


A) -$70 million
B) -$20 million
C) $50 million
D) $120 million

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

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Which of the following was an important change in the Canadian economy after 1999?


A) National saving fell below investment, and net capital outflow was a large positive number.
B) Net capital outflow turned positive.
C) Investment equalled saving every year.
D) Investment fell below saving, so net capital outflow was a large negative number.

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

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How do we find the real exchange rate from the nominal exchange rate?

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Real exchange rate =...

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


A) NCO = NX
B) NCO + I = NX
C) NX + NCO = Y
D) Y = NCO - I

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

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When making investment decisions,which of the following are investors most likely to do?


A) They compare the real interest rates offered on different bonds.
B) They compare the nominal, but not the real, interest rates offered on different bonds.
C) They purchase the highest-priced bond available.
D) They purchase the highest-interest bonds available.

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

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Suppose that in 1999 you could purchase about 400 Greek drachmas (the former Greek currency,replaced by the euro in 2002) for a dollar.In 2000,you could purchase about 350 drachmas for a dollar.Which of the following best explain the changes that could have taken place between 1999 and 2000?


A) The dollar appreciated, increasing the trade balance.
B) The dollar depreciated, decreasing the trade balance.
C) The dollar appreciated, decreasing the trade balance.
D) The dollar depreciated, increasing the trade balance.

E) B) and D)
F) None of the above

Correct Answer

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The nominal exchange rate is about 2 Aruban florins per dollar.If a basket of goods in Canada costs $40,how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?


A) 20 florins
B) 40 florins
C) 80 florins
D) 100 florins

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

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Catherine,a citizen of Spain,decides to purchase bonds issued by Chile instead of Canadian bonds,even though the Chilean bonds have a higher risk of default.Which of the following might be an economic reason for her decision?


A) Chile has a lower inflation rate.
B) The Chilean bonds pay a higher rate of interest.
C) The Canadian government is more stable than the Chilean government.
D) Chilean bonds have shorter maturity periods than Canadian bonds.

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

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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 India,the real exchange rate would be computed as how many Indian goods per Canadian goods?


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

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

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