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Chapter 31

Open-Economy Macroeconomics: Basic Concepts

Educators

EA
TS
+ 1 more educators

Problem 1

How would the following transactions affect U.S. exports, imports, and net exports?
a. An American art professor spends the summer touring museums in Europe.
b. Students in Paris flock to see the latest movie from Hollywood.
c. Your uncle buys a new Volvo.
d. The student bookstore at Oxford University in England sells a copy of this textbook.
e. A Canadian citizen shops at a store in northern Vermont to avoid Canadian sales taxes.

EA
Erwin A.
Numerade Educator

Problem 2

Would each of the following transactions be included in net exports or net capital outflow? Be sure to say whether it would represent an increase or a decrease in that variable.
a. An American buys a Sony TV.
b. An American buys a share of Sony stock.
c. The Sony pension fund buys a bond from the U.S. Treasury.
d. A worker at a Sony plant in Japan buys some Georgia peaches from an American farmer.

TS
Tucker S.
Numerade Educator

Problem 3

Describe the difference between foreign direct investment and foreign portfolio investment. Who is
more likely to engage in foreign direct investment$-$a corporation or an individual investor? Who is more likely to engage in foreign portfolio investment?

Sandile N.
Numerade Educator

Problem 4

How would the following transactions affect U.S. net capital outflow? Also, state whether each involves direct investment or portfolio investment.
a. An American cellular phone company establishes an office in the Czech Republic.
b. Harrods of London sells stock to the General Electric pension fund.
c. Honda expands its factory in Marysville, Ohio.
d. A Fidelity mutual fund sells its Volkswagen stock to a French investor.

Fuzail S.
Numerade Educator

Problem 5

Would each of the following groups be happy or unhappy if the U.S. dollar appreciated? Explain.
a. Dutch pension funds holding U.S. government bonds
b. U.S. manufacturing industries
c. Australian tourists planning a trip to the United States
d. an American firm trying to purchase property overseas

EA
Erwin A.
Numerade Educator

Problem 6

What is happening to the U.S. real exchange rate in each of the following situations? Explain.
a. The U.S. nominal exchange rate is unchanged, but prices rise faster in the United States than abroad.
b. The U.S. nominal exchange rate is unchanged, but prices rise faster abroad than in the United States.
c. The U.S. nominal exchange rate declines, and prices are unchanged in the United States and abroad.
d. The U.S. nominal exchange rate declines, and prices rise faster abroad than in the United States.

Fuzail S.
Numerade Educator

Problem 7

A can of soda costs \$1.25 in the United States and 25 pesos in Mexico. What is the peso$-$dollar exchange rate (measured in pesos per dollar) if purchasing power parity holds? If a monetary expansion caused all prices in Mexico to double, so that soda rose to 50 pesos, what would happen to the peso$-$dollar exchange rate?

Sandile N.
Numerade Educator

Problem 8

A case study in the chapter analyzed purchasing power parity for several countries using the price of
Big Macs. Here are data for a few more countries:
a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Recall
that the U.S. price of a Big Mac was \$4.93.)
b. According to purchasing-power parity, what is the predicted exchange rate between the Hungarian
forint and the Canadian dollar? What is the actual exchange rate?
c. How well does the theory of purchasing-power parity explain exchange rates?

Yi Chun L.
Washington University in St Louis

Problem 9

9. Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam.
a. In 2015, a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange
rate between Ectenian dollars and Wiknamian pesos?
b. Over the next 20 years, inflation is expected to be 3.5 percent per year in Ectenia and 7 percent per
year in Wiknam. If this inflation comes to pass, what will the price of Spam and the exchange
rate be in 2035? ($Hint:$ Recall the rule of 70 from Chapter 27.)
c. Which of these two nations will likely have a higher nominal interest rate? Why?
d. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the
interest-rate differential. Do you see any potential problems with this idea? Explain.

Jesse N.
Numerade Educator