True/False
Indicate whether the
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 is priced at €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
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 oil rig 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 of the USA 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 France saves €1,000 billion and French net capital outflow is -
€200 billion, French domestic investment is
a. | -€200 billion. | b. | €200 billion. | c. | €800
billion. | d. | €1,000 billion. | e. | €1,200
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 pounds per
dollar, how many dollars can you get for a pound?
a. | 0.5 of a dollar | b. | 1 dollar | c. | 1.5
dollars | 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. | 0.5 kilograms of Japanese rice per kilogram of UK rice | b. | 0.8 kilograms of
Japanese rice per kilogram of UK rice | c. | 1.25 kilograms of Japanese rice per kilogram of
UK rice | d. | 2.5 kilograms of Japanese rice per kilogram of UK rice | e. | none of these
answers |
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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. | 1/3 euro per pound | c. | 0.75 euro per pound | b. | 1.5 euros per pound | d. | 3 euros 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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