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Quiz 8
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. Net exports of a country are the value of
a. goods and services imported minus the value of goods and services exported.
b. goods and services exported minus the value of goods and services imported.
c. goods exported minus the value of goods imported.
d. goods imported minus the value of goods exported.
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2. Suppose that a country exports $200 million of goods and services and imports $80 million of goods and
services, what is the value of net exports?
a. $280 million
b. $200 million
c. -$200 million
d. $120 million
e. -$120 million
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3. Over the last 50 years, Canadian imports as a percentage of GDP have approximately
a. stayed constant.
b. doubled.
c. tripled.
d. quadrupled.
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4. Which of the following would be Canadian foreign direct investment?
a. Your Canadian based mutual fund buys stock in Eastern European companies.
b. A Canadian citizen opens a guitar store in Hong Kong.
c. A Swiss bank buys a Canadian government bond.
d. A German tractor factory opens a plant in Victoria.
e. None of the above are correct.
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5. Catherine, a citizen of Spain, decides to purchase bonds issued by Chile instead of ones issued by Canada
even though the Chilean bonds have a higher risk of default. An economic reason for her decision might be
that
a. she dislikes Canadian foreign policy.
b. the Chilean bonds pay a higher rate of interest.
c. the Canadian. government is more stable than the Chilean government.
d. None of the above provide an economic reason for buying the riskier bond.
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6. If a U.S. textbook publishing company sells texts to Canadian students, U.S. net exports
a. increase, and U.S. net capital outflow increases.
b. increase, and U.S. net capital outflow decreases.
c. decrease, and U.S. net capital outflow increases.
d. decrease, and U.S. net capital outflow decreases.
____
7. A closed economy's GDP is given by
a. Y = C + I + G.
b. Y = C + I + G + T.
c. Y = C + I + G + S.
d. Y = C + I + G + NX.
e. Y = C + I + S + T
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8. In an open economy,
a. Saving = Foreign saving + Net capital outflow.
b. Saving = Domestic investment - Net capital outflow.
c. Saving = Domestic saving + Net capital outflow.
d. None of the above is correct.
____
9. Domestic saving must equal investment in
a. both closed and open economies.
b. closed, but not open economies.
c. open, but not closed economies.
d. neither closed nor open economies.
____ 10. If a country has business opportunities that are relatively attractive to other countries, we would expect it to
have
a. both positive net exports and positive net capital outflow.
b. both negative net exports and negative net capital outflow.
c. positive net exports and negative net capital outflow.
d. negative net exports and positive net capital outflow.
____ 11. In 2005, Canadian net capital outflow as a percent of GDP was about
a. 4 percent.
b. 10 percent.
c. -1 percent.
d. 2 percent.
e. 5 percent
____ 12. The nominal exchange rate is the
a. nominal interest rate in one country divided by the nominal interest rate in the other
country.
b. rate at which a person can trade the currency of one country for the currency of another.
c. price of a good in one country divided by the price of the same good in another.
d. the number of goods a person can trade for a similar good in another country.
____ 13. If the exchange rate is 5 units of Peruvian currency per dollar and a hotel room in Lima costs 350 units of
Peruvian currency, how many dollars do you need to get a room?
a. $1,750, and this will increase Peru's net exports.
b. $70 and this will increase Peru's net exports.
c. $1,750 and this will have no effect on Peru's net exports.
d. $70 and this will have no effect on Peru's net exports.
____ 14. Exchange rates are 150 yen per dollar, 0.8 euro per dollar, and 20 pesos per dollar. A bottle of beer in New
York costs 6 dollars, 1,200 yen in Tokyo, 7 euro in Munich, and 100 pesos in Cancun. Where is the most
expensive and the cheapest beer in that order?
a. Cancun, New York
b. New York, Tokyo
c. Tokyo, Munich
d. Munich, Cancun
____ 15. In Ireland, a pint of beer costs 4 Irish punts. In Australia, a pint of beer costs 6 Australian dollars. If the
exchange rate is .6 punts per Australian dollar, what is the real exchange rate?
a. 0.8 pints of Irish beer per pint of Australian beer
b. 0.9 pints of Irish beer per pint of Australian beer
c. 1.11 pints of Irish beer per pint of Australian beer
d. 1.25 pints of Irish beer per pint of Australian beer
e. None of the above is correct.
____ 16. A depreciation of the Canadian real exchange rate induces Canadian 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.
____ 17. According to the theory of purchasing-power parity, the nominal exchange rate between two countries must
reflect the different
a. price levels in those countries.
b. resource endowments in those countries.
c. income levels in those countries.
d. standards of living between those countries.
____ 18. 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
Bolivia
Japan
Morocco
Norway
Thailand
Currency
Boloviano
Yen
Dinar
Kroner
Baht
Currency per
Canadian Dollar
8.00
125.00
10.00
6.5
40.00
Canadian
Price Index
100
100
100
100
100
Country Price
Index
800
25,000
1,000
750
3500
____ 19. Refer to Table 31-1. Assume that there are no transportation costs or trade restrictions. Arbitrageurs can
make a profit with which countries?
a. Bolivia and Morocco
b. Japan Sweeden, and Thailand
c. Japan and Sweeden
d. Thailand
____ 20. Which of the following events would be consistent with purchasing-power parity?
a. The price level in Canada rises more rapidly than that in Ireland and the real exchange rate
defined as Irish goods per unit of Canadian goods stays the same.
b. The money supply in Canada rises more rapidly than in Egypt and the nominal exchange
rate defined as Egyptian pounds per dollar falls.
c. Earl, a worldwide traveler, looks at exchange rates and worldwide breakfast prices one
morning and finds that whatever country he decides to go to he can convert $5 into enough
local currency to buy the same breakfast.
d. All of the above are correct.
Short Answer
21. What is the logic behind the theory of purchasing-power parity?
22. Suppose that money supply growth continues to be higher in Turkey than it is in Canada What does
purchasing-power parity imply will happen to the real and to the nominal exchange rate?
Quiz 8
Answer Section
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SHORT ANSWER
21. ANS:
The logic behind purchasing-power parity is the law of one price, which asserts that a good must sell for the
same price in all locations. If the price for a good is higher in one market than in another, someone can make
a profit by purchasing the good where it is relatively cheap, and selling the good where it is relatively
expensive. This process of arbitrage leads to an equalization of prices for the good in all locations.
PTS: 1
DIF: Average
REF: 284-285
22. ANS:
Higher money growth leads to higher prices, so prices will rise more in Turkey than in Canada Under
purchasing-power parity, this has no affect on the real exchange rate. However, in order for a dollar to buy as
many goods in Turkey as it buys in Canada when prices are rising faster in Turkey, the nominal exchange rate
must be rising so that a dollar buys more Turkish lira.
PTS: 1
DIF: Average
REF: 285