True/False
Indicate whether the
sentence or statement is true or false.
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1.
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Net exports are defined as imports minus
exports.
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2.
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UK net capital outflow falls when Whole Foods Inc
of the USA buys retail premises in Kensington, London.
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3.
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For any country, net exports are always equal to
net capital outflow because every international transaction involves an exchange of an equal value of
some combination of goods and assets.
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4.
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For a given amount of UK national saving, an
increase in UK net capital outflow decreases UK domestic investment.
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5.
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Valuable technologically advanced goods are less
likely to be traded internationally because shipping costs absorb too much of the potential
profit.
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6.
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A country that exports more than it imports is said
to have a trade deficit.
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7.
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If the yen/dollar exchange rate rises, the dollar
has appreciated.
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8.
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If a case of mineral water costs €8 in the
Eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange
rates, the yen/euro exchange rate should be 5,760 yen/euro.
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9.
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If purchasing power parity holds, the real exchange
rate is always equal to 1.
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10.
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If the UK's money supply grows faster than
Switzerland’s, the value of the pound should rise relative to the value of the Swiss
franc.
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11.
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If the nominal exchange rate is 2 UK pounds per US
dollar, and if the price of a Big Mac is $2 in the USA and 6 pounds in the UK, then the real exchange
rate is 2/3 British Big Mac per American Big Mac.
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12.
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In order to increase domestic investment, a country
must either increase its saving or decrease its net foreign investment
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13.
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Arbitrage is the process of taking advantage of
differences in prices of the same good by buying where the good is cheap and selling where it is
expensive.
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14.
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Arbitrage tends to cause prices for the same good
to diverge from one another.
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15.
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If a company based in the UK prefers a strong pound
(a pound with a high foreign exchange value), then the company probably exports more than it
imports
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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An economy that interacts with other economies is
known as
a. | an export economy. | b. | a friendly economy. | c. | an open
economy. | d. | a balanced trade economy. | e. | an import economy. |
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17.
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Each of the following is a reason why international
trade has expanded in recent decades except which one?
a. | Technological improvements have meant that countries
have become more similar in terms of the goods they can produce. | b. | Many new high technology goods have been introduced for which the cost of
transport relative to the value of the product is low. | c. | There have been improvements in technology that have improved
telecommunications between countries. | d. | Policy makers have
promoted policies to increase international trade, such as the General Agreement on Tariffs and
Trade, and subsequently established the World Trade Organization. | e. | Larger cargo ships and aeroplanes have reduced the cost of transporting
goods. |
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18.
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Which of the following statements is true about a
country with a trade deficit?
a. | Net exports are negative. | b. | Net capital outflow must be positive. | c. | Exports exceed imports. | d. | Net exports are
positive. | e. | none of these
answers |
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19.
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Which of the following would directly increase UK
net capital outflow?
a. | Rolls Royce sells an aircraft engine to Boeing of the
USA. | b. | The Japanese financial company Nomura buys shares in
Vodafone. | c. | BP builds a new oilrig in
Venezuela. | d. | Honda builds a new
plant in Swindon, England. |
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20.
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Which of the following is an example of foreign
direct investment?
a. | General Motors buys steel from South
Korea. | b. | General Motors of the USA buys shares in Saab of
Sweden. | c. | McDonald's builds a restaurant in
Moscow. | d. | UK publisher Bloomsbury sells the rights to make a film
of a Harry Potter book to an American film studio. |
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21.
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If Japan exports more than it
imports,
a. | Japan's net exports are
negative. | b. | Japan is running a trade
deficit. | c. | Japan's net capital outflow must be
positive. | d. | Japan's net capital outflow must be
negative. |
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22.
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If the USA saves $1,000 billion and US net capital
outflow is - $200 billion, US domestic investment is
a. | $800 billion. | b. | $1,200 billion. | c. | -$200
billion. | d. | $1,000 billion. | e. | $200 billion. |
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23.
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If the exchange rate changes from 3 Brazilian reals
per dollar to 4 reals per euro,
a. | none of these answers | b. | the euro has appreciated. | c. | the euro has depreciated. | d. | the euro could have appreciated or depreciated depending what happened to
relative prices in Brazil and the Eurozone countries. |
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24.
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Suppose the real exchange rate between Russia and
the UK is defined in terms of bottles of Russian vodka per bottle of UK vodka. Which of the following
will increase the real exchange rate (that is, increase the number of bottles of Russian vodka per
bottle of UK vodka)?
a. | an increase in the price in pounds of UK
vodka | b. | None of the changes described in these answers will
increase the real exchange rate. | c. | an increase in the
number of roubles for which the pound can be exchanged | d. | All of the changes described in these answers will increase the real exchange
rate. | e. | a decrease in the price in roubles of Russian
vodka |
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25.
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The most accurate measure of the international
value of the UK pound is
a. | an exchange rate index that accounts for many exchange
rates. | b. | the yen/pound exchange rate. | c. | the pound/dollar exchange rate. | d. | the euro/pound exchange rate. | e. | the Swiss franc/pound exchange rate. |
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26.
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If the nominal exchange rate between UK pounds and
US dollars is 0.5 pound per dollar, how many dollars can you get for a pound?
a. | 1.5 dollars | b. | 0.5 of a dollar | c. | 1
dollar | d. | 2 dollars | e. | none of these answers |
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27.
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Suppose the nominal exchange rate between the
Japanese yen and the UK pound is 100 yen per pound. Further, suppose that a kilogram of rice costs
£2 in the UK and 250 yen in Japan. What is the real exchange rate between Japan and the
UK?
a. | 2.5 kilograms of Japanese rice per kilogram of UK
rice | b. | 0.5 kilograms of Japanese rice per kilogram of UK
rice | c. | none of these answers | d. | 1.25 kilograms of Japanese rice per kilogram of UK
rice | e. | 0.8 kilograms of Japanese rice per kilogram of UK
rice |
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28.
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Which of the following people or firms would be
pleased by a depreciation of the pound?
a. | All the people and firms mentioned in these
answers. | b. | A French exporter of wine to the
UK. | c. | An American tourist visiting
London. | d. | A UK importer of French wine. | e. | A UK company that wishes to expand abroad by building a factory in
Poland. |
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29.
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Suppose a cup of coffee is 1.5 euros in Germany and
£0.50 in the UK. If purchasing power parity holds, what is the nominal exchange rate between
euros and pounds?
a. | 3 euros per pound | b. | 1.5 euros per pound | c. | 0.75 euro per
pound | d. | 1/3 euro per
pound |
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30.
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Which of the following products would likely be the
least accurate if used to calculate purchasing power parity?
a. | Diamonds | b. | Gold | c. | Cars | d. | Wheat | e. | Dental services |
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31.
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Suppose the money supply in Mexico grows more
quickly than the money supply in the USA. We would expect that
a. | The Mexican peso should appreciate relative to the US
dollar. | b. | the Mexican peso should depreciate relative to the US
dollar. | c. | none of these answers | d. | the Mexican peso should maintain a constant exchange rate with the US dollar
because of purchasing power parity. |
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32.
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When people take advantage of differences in prices
for the same good by buying it where it is cheap and selling it where it is expensive, it is known
as
a. | net exports. | b. | purchasing power parity. | c. | net capital
outflow. | d. | currency appreciation. | e. | arbitrage. |
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33.
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Suppose a resident of the USA buys a Jaguar car
from the UK, and the UK exporter uses the receipts to buy shares in Boeing. Which of the following
statements is true from the perspective of the UK?
a. | Net exports fall, and net capital outflow
rises. | b. | Net exports rise, and net capital outflow
rises. | c. | none of these answers | d. | Net exports rise, and net capital outflow falls. | e. | Net exports fall, and net capital outflow
falls. |
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34.
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Which of the following statements is not true about
the relationship between national saving, investment, and net capital outflow?
a. | An increase in saving associated with an equal increase
in net capital outflow leaves domestic investment unchanged. | b. | For a given amount of saving, an increase in net capital outflow must decrease
domestic investment. | c. | For a given amount
of saving, a decrease in net capital outflow must decrease domestic
investment. | d. | Saving is the sum
of investment and net capital outflow. |
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35.
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Suppose the inflation rate over the last 20 years
has been 10 per cent in the UK, 7 per cent in Japan, and 3 per cent in the USA. If purchasing power
parity holds, which of the following statements is true? Over this period,
a. | the value of the dollar should have fallen compared to
the value of the pound and the yen. | b. | none of these
answers | c. | the yen should have fallen in value compared to the
pound and risen compared to the dollar. | d. | the value of the
pound should have risen compared to the value of the yen and the dollar. | e. | the yen should have risen in value compared to the pound and fallen compared
to the dollar. |
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