3. If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?

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1 Practice Questions 2 Chapter 31 (Second Part) 1. A paperback book in the U.S. costs $6. In Chile it costs 4 pesos. If the nominal exchange rate is 1/2 peso per dollar, what is the real exchange rate? a. 2/3 b. 3/4 c. 4/3 d. 2/3 2. A depreciation of the U.S. real exchange rate induces U.S. consumers to buy a. fewer domestic goods and fewer foreign goods. b. more domestic goods and fewer foreign goods. c. fewer domestic goods and more foreign goods. d. more domestic goods and more foreign goods. 3. If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity? a. P = e/ P* b. 1 = e/ P* c. e = P*/ P d. None of the above is correct. Use the (hypothetical) information in the following table to answer the following questions. Table 31-1 Country Currency Currency per U.S. Dollar U.S. Price Index Country Price Index Bolivia boloviano Japan yen ,000 Morocco dinar ,000 Norwegian kroner ,500 Thailand baht , Refer to Table For which country(ies) in the table does purchasing-power parity hold? a. Bolivia and Japan b. Bolivia and Morocco c. Japan and Morocco

2 d. Norway and Thailand 5. Refer to Table Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity? a. boloviano and dinar b. yen and kroner c. baht and kroner d. baht 6. Refer to Table Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity? a. boloviano and dinar b. yen, kroner, and baht c. yen and kroner d. baht 7. Refer to Table In real terms, U.S. goods are more expensive than goods in which country(ies)? a. Bolovia and Morocco b. Japan, Norway, and Thailand c. Japan and Norway d. Thailand 8. Refer to Table In real terms, U.S. goods are less expensive than goods in which country(ies)? a. Bolivia and Morocco b. Japan, Norway, and Thailand c. Japan and Norway d. Thailand True/Fal se 9. A country with negative net exports has a trade surplus. 10. When a company from Germany builds an automobile factory in the United States, the German firm has engaged in foreign direct investment. Sho rt Answer

3 11. Derive the relation between savings, domestic investment, and net capital outflow using the national income accounting identity. (Hint: Start with the national accounting identity.) Chapter 32: Figure 3 2-3

4 12. Refer to Figure Suppose the U.S. firms desire to purchase more capital in the U.S. The effects of this could be illustrated by a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left. b. shifting the demand curve in panel a to the right and the supply curve in panel c to the left. c. shifting the supply curve in panel a to the right and the demand curve in panel c to the left. d. shifting the supply curve in panel a to the right and the supply curve in panel c to the right. 13. Refer to Figure Suppose that the government goes from a budget surplus to a budget deficit. The effects of the change could be illustrated by a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left. b. shifting the demand curve in panel a to the left and the supply curve in panel c to the left. c. shifting the supply curve in panel a to the right and the demand curve in panel c to the right. d. shifting the supply curve in panel a to the left and the supply curve in panel c to the left. 14. A trade policy is a government policy a. directed toward the goal of improving the tradeoff between equity and efficiency.

5 b. that directly influences the quantity of goods and services that a country imports or exports. c. intended to exploit the tradeoff between inflation and unemployment by altering the budget deficit. d. toward trade unions.

6 The diagram below represents the market for loanable funds and the market for foreign-currency exchange in Mexico. Use the diagram to answer the following questions. Figure Refer to Figure Supposing that the Mexican economy starts at r 0 and E1. Which of the following is consistent with the effects of capital flight? a. the shift from D0 to D1 in Panel A b. the shift from NCO0 to NCO1 in Panel B c. the shift from S0 to S1 in Panel C d. All of the above shifts are consistent with the effects of capital flight. 16. Refer to Figure Which of the following is consistent with capital flight from Mexico? a. The real exchange rate of the peso appreciates from E 0 to E 1. b. The real exchange rate of the peso depreciates from E 0 to E 1. c. The real exchange rate of the peso appreciates from E 1 to E 0. d. The real exchange rate of the peso depreciates from E 1 to E Refer to Figure Suppose the Mexican economy starts at r 0 and E1. Which of the following new equilibrium is consistent with capital flight? a. ro and E0

7 b. r1 and E0 c. r1 and E1 d. None of the above is correct. 18. Fill in the table below with the direction of the variables that change in response to the events in the first column. U.S. governm ent budget d eficit increases U.S. imposes import quotas U.S. real interest rate U.S. domestic investme nt U.S. net capital outflow U.S. real exchange rate of domestic currenc y U.S. trade balance capital flight from the United States