Macroeconomics [ch. 18]

An economy that interacts with other economies is known as an open economy. In an open economy, there is a significant level of trade and exchange of goods, services, and capital with other countries. This interaction allows for the flow of imports and exports, foreign investments, and international economic cooperation. Unlike a closed economy, which has limited or no interaction with other economies, an open economy benefits from increased opportunities for growth, innovation, and specialization through international trade and investment.

A country with a trade deficit means that its imports exceed its exports. This implies that the value of goods and services leaving the country (exports) is less than the value of goods and services entering the country (imports). Therefore, net exports, which is the difference between exports and imports, will be negative.

If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar, it means that the value of the Brazilian real has decreased relative to the US dollar. Therefore, the US dollar has appreciated in value compared to the Brazilian real.

McDonald's building a restaurant in Moscow is an example of foreign direct investment because it involves a company from one country (McDonald's) establishing and operating a business (restaurant) in another country (Moscow). This type of investment involves a significant level of ownership and control by the foreign company in the host country, and it typically includes the transfer of capital, technology, and expertise. In this case, McDonald's is directly investing in the Russian market by establishing a physical presence and contributing to the local economy.

The most accurate measure of the international value of the dollar is an exchange rate index that accounts for many exchange rates. This is because relying on a single exchange rate, such as the yen/dollar or pound/dollar exchange rate, may not provide a comprehensive view of the dollar's value in the international market. By considering multiple exchange rates, an exchange rate index can provide a more holistic and accurate measure of the dollar's international value.

If Japan exports more than it imports, it means that it has a trade surplus. A trade surplus indicates that Japan is selling more goods and services to other countries than it is buying from them. As a result, Japan's net capital outflow must be positive, meaning that it is investing more in foreign countries than foreign countries are investing in Japan. This positive net capital outflow is a result of the excess funds generated from the trade surplus being invested abroad.

Dental services would likely be the least accurate product to calculate purchasing-power parity because the cost of dental services can vary significantly between countries due to factors such as different levels of healthcare infrastructure, labor costs, and regulations. Unlike physical products like gold, automobiles, or diamonds, dental services are highly dependent on local factors and may not have consistent pricing across different countries. Therefore, using dental services as a measure for purchasing-power parity may not provide an accurate comparison of the cost of living between countries.

The given question asks for the number of dollars that can be obtained for a British pound, given a nominal exchange rate of .5 pound per dollar. Since the exchange rate is given as .5 pound per dollar, it means that for every 1 pound, you can get 2 dollars. Therefore, the correct answer is 2 dollars.

According to purchasing-power parity, the nominal exchange rate should equalize the prices of goods and services in different countries. In this case, the price of a cup of coffee is 1.5 euros in Germany and $.50 in the United States. To equalize these prices, the nominal exchange rate between euros and dollars should be such that 1.5 euros is equal to $.50. To find this rate, we divide 1.5 euros by $.50, which gives us 3 euros per dollar. Therefore, the correct answer is 3 euros per dollar.

If the money supply in Mexico grows more quickly than the money supply in the United States, it would lead to an increase in the supply of pesos in the foreign exchange market. This increase in supply would cause the value of the peso to decrease relative to the dollar, resulting in depreciation. Therefore, the correct answer is that the peso should depreciate relative to the dollar.

Arbitrage refers to the practice of exploiting price differences for the same good in different locations. In this scenario, individuals take advantage of lower prices in one area by purchasing the good and then selling it in another area where it is more expensive. This allows them to make a profit by capitalizing on the price disparity. Therefore, the correct answer is arbitrage.

Microsoft building a new distribution facility in Sweden would directly increase U.S. net capital outflow because it involves a U.S. company investing in a foreign country. When Microsoft builds a facility in Sweden, it requires a significant amount of capital investment, which will flow out of the U.S. and into Sweden. This increases the net capital outflow of the U.S. as the investment is made in a foreign country.

An Italian importer of U.S. steel would be pleased by a depreciation of the dollar because it would make the U.S. steel cheaper for them to import. A depreciation of the dollar means that the value of the dollar decreases compared to other currencies, making imports from the United States more affordable. This would benefit the Italian importer as they would be able to purchase U.S. steel at a lower cost, potentially increasing their profit margins or allowing them to offer more competitive prices to their customers.

Over the last 20 years, if the inflation rate in Great Britain has been higher than that in Japan and the United States, then the value of the pound should have risen compared to the yen and the dollar. On the other hand, if the inflation rate in Japan has been lower than that in Great Britain and the United States, then the yen should have fallen in value compared to the pound and risen compared to the dollar. Therefore, the statement that "the yen should have risen in value compared to the pound and fallen compared to the dollar" is true.

The correct answer is "NAFTA imposes requirements for increase trade between countries in North America." This statement suggests that NAFTA, which is a trade agreement between the United States, Canada, and Mexico, does not impose requirements for increased trade between these countries. The other options provided in the question, such as larger cargo ships and airplanes, high-technology goods, and improvements in technology, all contribute to the increase in international trade by the U.S.

If the United States saves $1,000 billion and U.S. net capital outflow is -$200 billion, it means that the U.S. is investing more abroad than it is receiving in foreign investments. This negative net capital outflow indicates that there is a capital deficit, which implies that U.S. domestic investment is not sufficient to meet the savings. Therefore, U.S. domestic investment must be higher than the savings of $1,000 billion. The only option that reflects this is $1,200 billion, making it the correct answer.

The real exchange rate between Japan and the United States can be calculated by dividing the nominal exchange rate by the ratio of the price levels in Japan and the United States. In this case, the nominal exchange rate is 100 yen per dollar. The price of a pound of hamburger is $2 in the United States and 250 yen in Japan. By dividing the price level in Japan (250 yen) by the price level in the United States ($2), we get 125 yen per dollar. Therefore, the real exchange rate is .8 pound of Japanese hamburger per pound of American hamburger.

A decrease in net capital outflow means that there is less investment abroad, which in turn means that more capital is available domestically. This increase in domestic capital should lead to an increase in domestic investment rather than a decrease. Therefore, the statement that a decrease in net capital outflow must decrease domestic investment is not true.

When a U.S. resident buys a Jaguar from Great Britain, it is considered an import, which reduces net exports. The British exporter then uses the receipts to buy stock in General Electric, which is considered a capital outflow from the United States. Therefore, net capital outflow also falls.

All of the above options will increase the real exchange rate. A decrease in the ruble price of Russian vodka means that Russian vodka becomes cheaper relative to U.S. vodka, increasing the number of bottles of Russian vodka per bottle of U.S. vodka. An increase in the dollar price of U.S. vodka means that U.S. vodka becomes more expensive relative to Russian vodka, again increasing the number of bottles of Russian vodka per bottle of U.S. vodka. Lastly, an increase in the number of rubles for which the dollar can be exchanged means that the value of the ruble has increased, making Russian vodka relatively cheaper and increasing the real exchange rate.