Ch 31

Question 1

More exports than imports

Answer 1

Trade surplus

Question 2

Net Capital Outflow

Answer 2

Domestic residents purchases of foreign goods minus foreigners purchases of domestic assets

Question 3

Equation for saving

Answer 3

Saving=investment + net capital outflow

S= I+NCO

Question 4

Saving greater than investment

Answer 4

Positive net capital outflow

Question 5

Saving less than investment

Answer 5

Net capital outflow is negative

Question 6

Trade deficits

Answer 6

Not necessarily a problem, but can be a symptom of a problem

Question 7

Nominal exchange rate

Answer 7

The rate at which one country’s currency trades for another

Question 8

Real exchange rate

Answer 8

Rate at which goods and services of one country trade for goods and services of another
Equation: nominal exchange rate(domestic price)/foreign price

Question 9

Exchange rate effect

Answer 9

If US real exchange rate appreciates US goods become more expensive relative to foreign goods

Question 10

Law of one price

Answer 10

The notion that a good should sell for the same price in all markets

Question 11

Arbitrage

Answer 11

Making a quick profit by buying where good is cheap, selling where expensive

Question 12

Purchasing power parity

Answer 12

Theory of exchange rate whereby a unit of any currency should be able to buy the same quantity of goods in all countries
Implies nominal exchange rates adjust to equalize prices

Question 13

PPP equation

Answer 13

Exchange rate = domestic/foreign

Question 14

Reasons price doesn’t always equalize

Answer 14

Many goods not easily traded, foreign and domestic goods are not perfect substitutes

Question 15

More imports than exports

Answer 15

Trade deficit