F: Chapter 31

Question 1

closed economy

Answer 1

one that does not interact with other economies in the world (no exports no imports)

Question 2

open economy

Answer 2

one that interacts freely with other economies around the world (buys and sells goods and services in world product markets)

Question 3

Exports

Answer 3

goods and services that are produced domestically and sold abroad

Question 4

Imports

Answer 4

goods and services that are produced abroad and sold domestically

Question 5

Net Exports

Answer 5

NX=exports-imports (also called trade balance)

Question 6

Trade deficit

Answer 6

Net exports are negative (Imports>Exports)

Question 7

Trade surplus

Answer 7

Next exports are positive (Exports> Imports)

Question 8

Balanced Trade

Answer 8

Net exports are zero (Exports = Imports)

Question 9

Factors that affect Net Exports (6)

Answer 9

1. Tastes of consumers for domestic and foreign goods
2. prices of goods at home and abroad
3. exchange rates
4. income of consumers at home and abroad
5. costs of transporting goods from country to country
6. government policies

Question 10

Net capital outflow (NCO)

Answer 10

purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

Question 11

Variables that influence Net Capital Outflow

Answer 11

1. The real interest rates being paid on foreign assets
2. The real interest rates being paid on domestic assets
3. The perceived economic and political risks of holding assets abroad
4. The government policies that affect foreign ownership of domestic assets

Question 12

NCO = NX

Answer 12

net capital outflow = net exports

Question 13

GDP formula

Answer 13

Y = C + I + G + NX

national saving (s) = Y-C-G
S=I +NX
S = I + NCO

Question 14

nominal exchange rate

Answer 14

rate at which a person can trade the currency of one country for the currency of another

Question 15

appreciation

Answer 15

refers to an increase in the value of a currency

when the nominal exchange rate changes so that each euro buys more foreign currency, the euro is said to appreciate

Question 16

depreciation

Answer 16

refers to a decrease in the value of a currency

when the nominal exchange rate changes so that each euro less more foreign currency, the euro is said to depreciate

Question 17

real exchange rate

Answer 17

rate at which a person can trade the goods and services of one country for the goods and services of another

Question 18

real exchange rate formula

Answer 18

real exchange rate = (nominal exchange rate x domestic price) / foreign price

Question 19

Purchasing power parity theory

Answer 19

explaining the variation of currency exchange rates

• unit of any given currency should be able to buy the same quantity of goods in all countries

Question 20

the law of one price

Answer 20

a good must sell for the same price in all locations (Purchasing power parity theory)

Question 21

Arbitrage

Answer 21

taking advantage of differences in prices in different markets

Question 22

central bank prints large quantities of money

Answer 22

the money loses value both in terms of goods and services it can buy and in terms of the amount of other currencies it can buy