Boğaziçi University Department of Economics Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS Problem Set 5 Answer Key

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1 Boğziçi University Deprtment of Eonomis Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS Prolem Set 5 Answer Key 1. One yer ountry hs negtive net exports. The next yer it still hs negtive net exports n imports hve risen more thn exports.. its tre surplus fell.. its tre surplus rose.. its tre efiit fell.. its tre efiit rose 2. A ountry purhses $3 illion of foreign-proue goos n servies n sells $2 illion ollrs of omestilly proue goos n servies to foreign ountries. It hs. exports of $3 illion n tre surplus of $1 illion.. exports of $3 illion n tre efiit of $1 illion.. exports of $2 illion n tre surplus of $1 illion.. exports of $2 illion n tre efiit of $1 illion. 3. If ountry hs $2.4 illion of net exports n purhses $4.8 illion of goos n servies from foreign ountries, then it hs. $7.2 illion of exports n $4.8 illion of imports.. $7.2 illion of imports n $4.8 illion of exports.. $4.8 illion of exports n $2.4 illion of imports.. $4.8 illion of imports n $2.4 illion of exports. 4. If ountry h tre surplus of $50 illion n then its exports rose y $30 illion n its imports rose y $20 illion, its net exports woul now e. $0 illion.. $20 illion.. $40 illion.. $60 illion. 5. If omesti resients of Frne purhse 1.2 trillion euros of foreign ssets n foreigners purhse 1.5 trillion euros of Frenh ssets, then Frne s net pitl outflow is. -.3 trillion euros, so it must hve tre efiit trillion euros, so it must hve tre surplus...3 trillion euros, so it must hve tre efiit...3 trillion euros, so it must hve tre surplus.

2 6. Suppose tht foreign itizens eie to purhse more U.S. phrmeutils n U.S. itizens eie to uy more stok in foreign orportions. Other things the sme, these tions. rise oth U.S. net exports n U.S. net pitl outflows.. rise U.S. net exports n lower U.S. net pitl outflows.. lower oth U.S. net exports n U.S. net pitl outflows.. lower U.S. net exports n rise U.S. net pitl outflows. 7. Whih of the following is n exmple of U.S. foreign iret investment?. A U.S. se mutul fun uys stok in Estern Europen ompnies.. A U.S. itizen uils n opertes offee shop in the Netherlns.. A Swiss nk uys U.S. government on.. A Germn trtor ftory opens plnt in Wterloo, Iow. 8. Mtt n Melin re Amerin resients. Mtt uys stok issue y Germn orportion. Melin opens shoe ftory in Pnm. Whose purhse, y itself, inreses the U.S. s net pitl outflow?. Mtt s. Melin s. oth Mtt s n Melin s. neither Mtt s nor Melin s 9. Alfonso, itizen of Itly, eies to purhse ons issue y Ireln inste of ones issue y the Unite Sttes even though the Irish ons hve higher risk of efult. An eonomi reson for his eision might e tht. he islikes U.S. foreign poliy.. the Irish ons py higher rte of interest.. the U.S. government is more stle thn the Irish government.. None of the ove provie n eonomi reson for uying the riskier on. 10. Other things the sme, whih of the following woul oth mke foreigners more willing to engge in U.S. portfolio investment?. U.S. interest rtes rise, the efult risk of U.S. ssets rise. U.S. interest rtes rise, the efult risk of U.S. ssets fll. U.S. interest rtes fll, the efult risk of U.S. ssets rise. U.S. interest rtes fll, the efult risk of U.S. ssets fll 11. If the Amerin ompny Stryker uils n opertes new ftory in Frne,. it engges in foreign iret investment. By itself this tion lowers U.S. net pitl outflow.. it engges in foreign iret investment. By itself this tion rises U.S. net pitl outflow.. it engges in foreign portfolio investment. By itself this tion lowers U.S. net pitl outflow.. it engges in foreign portfolio investment. By itself this tion rises U.S. net pitl outflow.

3 12. Suppose tht U.S. itizens purhse more rs me in Kore, n Korens purhse more ons issue y U.S. orportions. Other things the sme, these tions. rise oth U.S. net exports n U.S. net pitl outflows.. rise U.S. net exports n lower U.S. net pitl outflows.. lower oth U.S. net exports n U.S. net pitl outflows.. lower U.S. net exports n rise U.S. net pitl outflows. 13. Suppose tht U.S. itizens purhse more rs me in Kore, n Korens purhse more ons issue y U.S. orportions. Other things the sme, these tions. rise oth U.S. net exports n U.S. net pitl outflows.. rise U.S. net exports n lower U.S. net pitl outflows.. lower oth U.S. net exports n U.S. net pitl outflows.. lower U.S. net exports n rise U.S. net pitl outflows. 14. Whih of the following equtions is lwys orret in n open eonomy?. I = Y - C. I = S. I = S - NCO. I = S + NX 15. If sving is greter thn omesti investment, then. there is tre efiit n Y > C + I + G.. there is tre efiit n Y < C + I + G.. there is tre surplus n Y > C + I + G.. there is tre surplus n Y < C + I + G. 16. If ountry hs tre efiit then. S > I n Y > C + I + G.. S > I n Y < C + I + G.. S < I n Y > C + I + G.. S < I n Y < C + I + G. 17. A Jpnese flour mill uys whet from the Unite Sttes n pys for it with yen. Other things the sme, Jpnese. net exports inrese, n U.S. net pitl outflow inreses.. net exports inrese, n U.S. net pitl outflow ereses.. net exports erese, n U.S. net pitl outflow inreses.. net exports erese, n U.S. net pitl outflow ereses.

4 18. A U.S. retiler uys shoes from n Itlin ompny. The Itlin firm then uses ll of the revenues to uy lether from the U.S. These trnstions. inrese oth U.S. net exports n U.S. net pitl outflow.. erese oth U.S. net exports n U.S. net pitl outflow.. inrese U.S. net exports n o not ffet U.S. net pitl outflow.. None of the ove is orret. 19. A Turkish ompny exhnges lirs for ollrs n then uses the ollrs to purhse meil equipment from U.S. ompny. These trnstions. inrese U.S. net exports, n inrese Turkish net pitl outflow.. inrese U.S. net exports, n erese Turkish net pitl outflow.. erese U.S. net exports, n inrese Turkish net pitl outflow.. erese U.S. net exports, n erese Turkish net pitl outflow. 20. Lst yer ountry h exports of $100 illion, imports of $70 illion, n purhse $60 illion worth of foreign ssets. Wht ws the vlue of omesti ssets purhse y foreigners?. $70 illion. $40 illion. $30 illion. $10 illion 21. In n open eonomy, gross omesti prout equls $1,970 illion, government expeniture equls $300 illion, investment equls $500 illion, n net pitl outflow equls $280 illion. Wht is onsumption expeniture?. $280 illion. $780 illion. $890 illion. $1,170 illion 22. The ollr is si to ppreite ginst the euro if. the exhnge rte flls. Other things the sme, it will ost fewer euros to uy U.S. goos.. the exhnge rte flls. Other things the sme, it will ost more euros to uy U.S. goos.. the exhnge rte rises. Other things the sme, it will ost fewer euros to uy U.S. goos.. the exhnge rte rises. Other things the sme, it will ost more euros to uy U.S. goos. 23. If the prie of goo in the U.S. is $10 n the unit of foreign urreny is the inr, in whih se is the rel exhnge rte 5/4?. the foreign prie is 4 inrs n the exhnge rte is 1/2 inrs per ollr. the foreign prie is 5 inrs n the exhnge rte is 2.5 inrs per ollr. the foreign prie is 4 inrs n the exhnge rte is 2 inrs per ollr

5 . the foreign prie is 5 inrs n the exhnge rte is 2/5 inrs per ollr 24. If the rel exhnge rte etween the U.S. n Jpn is 1, the nominl exhnge rte is 100 yen per U.S. ollr n the prie of hiken in the U.S. is $2.50 per poun, wht is the prie of hiken in Jpn?. 400 yen per poun. 250 yen per poun. 100 yen per poun. 40 yen per poun 25. If the rel exhnge rte for ol is 1.5, the prie of ol in the U.S. is $50 per ton, n the prie of ol in Britin is 20 British pouns per ton, wht is the nominl exhnge rte?. 15/4. 5/3. 3/5. 4/ If the rel exhnge rte etween the U.S. n Argentin is 1, then. purhsing-power prity hols, n 1 U.S. ollr uys 1 Argentinen olivr.. purhsing-power prity hols, n the mount of ollrs neee to uy goos in the U.S. is the sme s the mount neee to uy enough Argentinen olivrs to uy the sme goos in Argentin.. purhsing-power prity oes not hol, ut 1 U.S. ollr uys 1 Argentinen olivr.. purhsing-power prity oes not hol, ut the mount of ollrs neee to uy goos in the U.S. is the sme s the mount neee to uy enough Argentinen olivrs to uy the sme goos in Argentin. 27. If purhsing-power prity hols, then the vlue of the. nominl exhnge rte is equl to one. A ollr uys s mny goos in the U.S. s it oes overses.. nominl exhnge rte is equl to one. A ollr uys the quntity of foreign urreny equl to the U.S. prie level ivie y the foreign ountry s prie level.. rel exhnge rte is equl to one. A ollr uys s mny goos in the U.S. s it oes overses.. rel exhnge rte is equl to one. A ollr uys the quntity of foreign urreny equl to the U.S. prie level ivie y the foreign ountry s prie level. 28. The nominl exhnge rte is out 2 Arun florin per ollr. If sket of goos in the Unite Sttes osts $40, how mny florins must sket of goos in Aru ost for purhsing-power prity to hol?. 20 florin. 40 florin. 60 florin. 80 florin 29. The prie of sket of goos is $2000 in the U.S. If purhsing-power prity hols, n the ollr uys two units of some ountry s urreny, then how mny units of foreign urreny oes the sme sket of goos ost in tht ountry?

6 None of the ove re orret. 30. If purhsing-power prity hols ut then U.S. pries rise, whih of the following move the exhnge rte k towrs purhsing-power prity?. foreign pries rise or the U.S. nominl exhnge rte rises. foreign pries rise or the U.S. nominl exhnge rte flls. foreign pries fll or the U.S. nominl exhnge rte rises. foreign pries fll or the U.S. nominl exhnge rte flls 31. A pir of jens ost $25 in the U.S. n 1600 inr in Algeri. If the nominl exhnge rte is 75 inr per U.S. ollr, then the rel exhnge rte is. more thn one, so profit oul e me y uying jens in Algeri n selling them in the U.S.. more thn one, so profit oul e me y uying jens in the U.S. n selling them in Algeri.. less thn one, so profit oul e me y uying jens in Algeri n selling them in the U.S.. less thn one, so profit oul e me y uying jens in the U.S. n selling them in Algeri. 32. A Big M in Jpn osts 400 yen while it osts $4.50 in the U.S.. The nominl exhnge rte is 100 yen per ollr. Whih of the following woul oth mke the rel exhnge rte move towrs purhsing-power prity?. the prie of Big Ms in the U.S. flls, the nominl exhnge rte flls. the prie of Big Ms in the U.S. flls, the nominl exhnge rte rises. the prie of Big Ms in the U.S. rises, the nominl exhnge rte flls. the prie of Big Ms in the U.S. rises, the nominl exhnge rte rises 33. Pries in oth the U.S. n Ini rise, ut pries in Ini inrese y smller perentge. Aoring to purhsing- power prity the U.S. ollr. gins vlue oth in terms of the omesti goos n servies it n uy n in terms of the Inin urreny it n uy.. gins vlue in terms of the omesti goos n servies it n uy, ut loses vlue in terms of the Inin urreny it n uy.. loses vlue in terms of the omesti goos n servies it n uy, ut gins vlue in terms of the Inin urreny it n uy.. loses vlue oth in terms of the omesti goos n servies it n uy n in terms of the Inin urreny it n uy. 34. Aoring to purhsing-power prity, if it took 55 Inin rupees to uy ollr toy, ut it took 58 to uy it yer go, then the ollr hs. ppreite, initing infltion ws higher in the U.S. thn in Ini.. ppreite, initing infltion ws lower in the U.S. thn in Ini.. epreite, initing infltion ws higher in the U.S. thn in Ini.. epreite, initing infltion ws lower in the U.S. thn in Ini.

7 35. Aoring to purhsing-power prity, if pries in the Unite Sttes inrese y lrger perentge thn pries in the Unite Kingom, then the. rel exhnge rte rises.. nominl exhnge rte rises.. rel exhnge rte flls.. nominl exhnge rte flls. 36. Other things the sme, n inrese in the U.S. interest rte uses the quntity of lonle funs supplie to. rise euse net pitl outflow n omesti investment rise.. rise euse ntionl sving rises.. fll euse net pitl outflow n omesti investment rise.. fll euse ntionl sving flls. 37. A ountry hs ntionl sving of $50 illion, government expenitures of $30 illion, omesti investment of $10 illion, n net pitl outflow of $40 illion. Wht is its supply of lonle funs?. $20 illion. $30 illion. $50 illion. $60 illion 38. In the open-eonomy mroeonomi moel, the supply of lonle funs omes from. ntionl sving. Demn omes from only omesti investment.. ntionl sving. Demn omes from omesti investment n net pitl outflow.. Only net pitl outflow. Demn for lonle funs omes from ntionl sving.. omesti investment n net pitl outflow. Demn for lonle funs omes from ntionl sving. 39. Other things the sme, if the rel interest rte in ountry flls, omesti resients will esire to purhse. more pitl goos n more foreign ons.. more pitl goos ut fewer foreign ons.. more foreign ons ut fewer pitl goos.. fewer pitl goos n fewer foreign ons. 40. If t given rel interest rte esire ntionl sving is $140 illion, omesti investment is $90 illion, n net pitl outflow is $60 illion, then t tht rel interest rte in the lonle funs mrket there is. surplus. The rel interest rte will rise.. surplus. The rel interest rte will fll.. shortge. The rel interest rte will rise.. shortge. The rel interest rte will fll.

8 41. If the emn for lonle funs shifts right, then. the rel interest rte n the equilirium quntity of lonle funs oth fll.. the rel interest rte flls n the equilirium quntity of lonle funs rises.. the rel interest rte n the equilirium quntity of lonle funs oth rise.. the rel interest rte rises n the equilirium quntify of lonle funs flls. 42. Whih of the following woul ten to shift the supply of ollrs in the mrket for foreign-urreny exhnge in the open-eonomy mroeonomi moel to the right?. the exhnge rte rises. the exhnge rte flls. the expete rte of return on U.S. ssets rises. the expete rte of return on U.S. ssets flls 43. Whih of the following mke(s) emn for U.S. ollrs in the mrket for foreign-urreny exhnge higher thn otherwise?. U.S. irline wnting uy jets me in Frne n Sweish hospitl wnting to uy meil equipment me in the U.S.. U.S. irline wnting to uy jets me in Frne, ut not Sweish hospitl wnting to uy meil equipment me in the U.S.. Sweish hospitl wnting to uy meil equipment me in the U.S., ut not U.S. irline wnting to uy jets me in Frne. neither U.S. nk wnting to len money to Cnin ompny nor U.S. firm wnting to uy omputers me in South Kore 44. If the rel exhnge rte for the ollr is ove the equilirium level, the quntity of ollrs supplie in the mrket for foreign-urreny exhnge is. greter thn the quntity emne n the ollr will ppreite.. greter thn the quntity emne n the ollr will epreite.. less thn the quntity emne n the ollr will ppreite.. less thn the quntity emne n the ollr will epreite. 45. If for some reson Amerins esire to inrese their purhses of foreign ssets, then other things the sme. oth the rel exhnge rte n the quntity of ollrs exhnge in the mrket for foreign-urreny exhnge woul fll.. oth the rel exhnge rte n the quntity of ollrs exhnge in the mrket for foreign-urreny woul rise.. the rel exhnge rte woul rise n the quntity of ollrs exhnge in the mrket for foreignurreny woul fll.. the rel exhnge rte woul fll n the quntity of ollrs exhnge in the mrket for foreignurreny woul rise.

9 46. In the open-eonomy mroeonomi moel, net pitl outflow rises if. either the exhnge rte rises or the rel interest rte flls.. either the exhnge rte flls or the rel interest rte rises.. the rel interest rte rises. Net pitl outflow oes not epen on the exhnge rte.. the rel interest rte flls. Net pitl outflow oes not epen on the exhnge rte. 47. In the open eonomy mroeonomi moel, if ountry s interest rte rises, then its. net pitl outflow n net exports rise.. net pitl outflow rises n its net exports fll.. net pitl outflow flls n its net exports rise.. net pitl outflow n net exports fll. 48. The vrile tht links the mrket for lonle funs n the mrket for foreign-urreny exhnge is. net pitl outflow.. ntionl sving.. exports.. omesti investment. 49. Other things the sme, in the open-eonomy mroeonomi moel, whih of the following woul mke Chin's net pitl outflow inrese?. n inrese in U.S. interest rtes. n inrese in Chinese interest rtes. n ppreition of the Chinese yun. None of the ove is orret. 50. In the open-eonomy mroeonomi moel, if the supply of lonle funs inreses, then the interest rte. n the rel exhnge rte inrese.. n the rel exhnge rte erese.. inreses n the rel exhnge rte ereses.. ereses n the rel exhnge rte inreses. 51. In the open-eonomy mroeonomi moel, if the supply of lonle funs shifts left. the interest rte rises n the supply of ollrs in the mrket for foreign urreny exhnge shifts right.. the interest rte rises n the supply of ollrs in the mrket for foreign urreny exhnge shifts left.. the interest rte flls n the emn for ollrs in the mrket for foreign urreny exhnge shifts right.. the interest rte flls n the emn for ollrs in the mrket for foreign urreny exhnge shifts left.

10 52. An inrese in ountry s uget surplus shifts its. emn for lonle funs right n ereses investment spening.. supply of lonle funs right n inreses investment spening.. supply of lonle funs left n ereses investment spening.. None of the ove is orret. 53. An inrese in the uget efiit. reues net pitl outflow n omesti investment.. reues net pitl outflow n rises omesti investment.. rises net pitl outflow n omesti investment. rises net pitl outflow n reues omesti investment. 54. An inrese in ountry s uget efiit. inreses net pitl outflow, so the emn for its urreny in the mrket for foreign-urreny exhnge shifts right.. inreses net pitl outflow, so the supply of its urreny in the mrket for foreign-urreny exhnge shifts right.. ereses net pitl outflow, so the emn for its urreny in the mrket for foreign-urreny exhnge shifts left.. ereses net pitl outflow, so the supply of its urreny in the mrket for foreign-urreny exhnge shifts left. 55. If the Jpnese government rise its uget efiit, then the yen woul. epreite n Jpnese net exports woul rise.. epreite n Jpnese net exports woul fll.. ppreite n Jpnese net exports woul rise.. ppreite n Jpnese net exports woul fll. 56. If the Frenh government inreses its expenitures n reues txes, then Frne s interest rte. n its exhnge rte rise.. rises n its exhnge rte flls.. flls n its exhnge rte rises.. n its exhnge rte fll. 57. Whih of the following ontins list only of things tht inrese when the uget efiit of the U.S. inreses?. U.S. supply of lonle funs, U.S. interest rtes, U.S. omesti investment. U.S. imports, U.S. interest rtes, the rel exhnge rte of the ollr. U.S. interest rtes, the rel exhnge rte of the ollr, U.S. omesti investment. the rel exhnge rte of the ollr, U.S. net pitl outflow, U.S. net exports

11 58. The imposition of n import quot shifts. the supply of urreny right, so the exhnge rte flls.. the supply of urreny left, so the exhnge rte rises.. the emn for urreny right, so the exhnge rte rises.. the emn for urreny left, so the exhnge rte flls. 59. At the originl exhnge rte n import quot. retes surplus in the mrket for foreign-urreny exhnge, so the exhnge rte rises.. retes surplus in the mrket for foreign-urreny exhnge, so the exhnge rte flls.. retes shortge in the mrket for foreign-urreny exhnge, so the exhnge rte rises.. retes shortge in the mrket for foreign-urreny exhnge, so the exhnge rte flls. 60. When ountry imposes n import quot, its. net exports rise n its rel exhnge rte ppreites.. net exports rise n its rel exhnge rte epreites.. net exports fll n its rel exhnge rte epreites. None of the ove is orret. 61. Suppose tht the U.S. imposes n import quot on lumer. The quot mkes the rel exhnge rte of the U.S. ollr. ppreite ut oes not hnge the rel interest rte in the Unite Sttes.. ppreite n the rel interest rte in the Unite Sttes inrese.. epreite n the rel interest rte in the Unite Sttes erese.. epreite ut oes not hnge the rel interest rte in the Unite Sttes. 62. When Mexio suffere from pitl flight in 1994, Mexio's net exports. erese.. i not hnge.. inrese.. erese until the peso ppreite, then inrese. 63. When Mexio suffere from pitl flight in 1994, Mexio's rel interest rte. fell n the peso ppreite.. fell n the peso epreite.. rose n the peso ppreite.. rose n the peso epreite. 64. Suppose ountry experienes pitl flight. Of the emn for lonle funs n the supply of urreny in the mrket for foreign-urreny exhnge, whih shifts right?

12 . only the emn for lonle funs. only the supply of its urreny in the mrket for foreign-urreny exhnge. oth urves shift right. neither urve shifts right 65. If ountry experienes pitl flight, whih urves shift right?. the emn for lonle funs n the emn for its urreny in the mrket for foreign-urreny exhnge. the emn for lonle funs n the supply of its urreny in the mrket for foreign-urreny exhnge. the supply of lonle funs n the emn for its urreny in the mrket for foreign-urreny exhnge. the supply of lonle funs n the supply of its urreny in the mrket for foreign-urreny exhnge