Comparing the U.S. economy today to that of 1950, one finds that today, as a percentage of GDP,
exports and imports are both higher.
exports and imports are both lower.
exports are higher, and imports are lower.
exports are lower, and imports are higher.
answer
exports and imports are both higher
In the 1950s, imports and exports of goods and services were typically between 4 and 5 percent of GDP. In recent years, they have been about three times that level. These increases can be attributed to improvements in transportation, advances in telecommunications, changes in the types of goods being transported, and increasing openness of government trade policies
question
In an open economy, national saving equals domestic investment
plus the net outflow of capital abroad.
minus the net exports of goods and services.
plus the government's budget deficit.
minus foreign portfolio investment.
answer
plus the net outflow of capital abroad.
National saving is the nation's income that is left after paying for current consumption and government purchases, that is: S = Y-C-G . This can be rewritten as S=I+NX , which can be further rewritten as S=I+NCO , since the value of net exports must be equal to the value of net capital outflow. Thus, national saving equals domestic investment plus the net outflow of capital abroad.
question
If the value of a nation's imports exceeds the value of its exports, which of the following is NOT true?
Net exports are negative.
GDP is less than the sum of consumption, investment, and government purchases.
Domestic investment is greater than national saving.
The nation is experiencing a net outflow of capital.
answer
The nation is experiencing a net outflow of capital.
Net exports equal exports minus imports;
When the value of a nation's imports exceeds the value of its exports, net exports are negative.
Recalling that total income is equal to the sum of consumption, investment, government purchases, and net exports ( Y=C+I+G+NX ), GDP must be less than the sum of consumption, investment, and government purchases alone (imagine Y=100 and NX=-10 ); in order for Y=C+I+G+NX to be true, C+I+G=110 (spending is greater than GDP). Having determined that Y
question
If a nation's currency doubles in value on foreign exchange markets, the currency is said to ________, reflecting a change in the ________ exchange rate.
appreciate, nominal
appreciate, real
depreciate, nominal
depreciate, real
answer
appreciate, nominal
An increase in the value of a currency on foreign exchange markets is known as appreciation.
The rate at which one currency is exchanged for another is the nominal exchange rate.
question
If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate?
1/4 euro per dollar
1/3 euro per dollar
3 euros per dollar
4 euros per dollar
answer
1/3 euro per dollar
If purchasing-power parity holds, a dollar should buy the same quantity of goods in New York (where prices are measured in dollars) as it would buy in Paris if converted to euros. If P is the price level (or in this case, the price of a representative good, coffee), the purchasing power of $1 is 1/P , or 1/6. Abroad, when $1 is exchanged for e units of foreign currency, the purchasing power will be e/P* (where P* is again the price of the representative foreign good). The exchange rate e must therefore equalize the two expressions:
1/P = e/P*
Rearranging the expression reveals that the nominal exchange rate equals the ratio of the foreign price level (measured in units of the foreign currency) to the domestic price level (measured in units of the domestic currency):
e = P*/P
= 2 euros / 6 dollars
= 1/3 euro per dollar
question
The theory of purchasing-power parity says that higher inflation in a nation causes the nation's currency to ________, leaving the ________ exchange rate unchanged.
appreciate, nominal
appreciate, real
depreciate, nominal
depreciate, real
answer
depreciate, real
The theory of purchasing power parity says that the nominal exchange rate equals the ratio of the foreign price level (measured in units of the foreign currency) to the domestic price level (measured in units of the domestic currency): e=P*/P . As the domestic price level increases (due to higher inflation), e decreases. This depreciation of the currency, however, does not affect the real exchange rate
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