Name__________________________________
Spring 2016
Chapter 18 Quiz
1. (10 pts). A country purchases $3 billion of foreign-produced goods and services and sells $2 billion
dollars of domestically produced goods and services to foreign countries. It has
a. exports of $3 billion and a trade surplus of $1 billion.
b. exports of $3 billion and a trade deficit of $1 billion.
c. exports of $2 billion and a trade surplus of $1 billion.
d. exports of $2 billion and a trade deficit of $1 billion.
ANSWER:
d
2. (10 pts). Indicate whether each enters in the US trade balance (and whether it is an addition or
subtraction entry) and/or or the US Current Account (and whether it a positive or negative entry).
a. Gap orders summer clothing from Vietnam. TB/CA+
b. Price Waterhouse- Cooper Beijing’s Office Remits Fourth Quarter Proifst to its headquarters back in
the US.
CA+
c. UIUC students visit Cancun Mexico during Spring Break. TB/CAd. Korean Students Enroll in UIUC. TB/CA+
e. Pr. Parente receives an honorarium for a talk he gave at the Universidad de Sevilla, Spain. CA+
3. (10 pts) Which of these is a foreign portfolio investment and which is a foreign direct investment?
a. Disney builds a new amusement park near Barcelona, Spain. FDI
b. A U.S. citizen buys bonds issued by the British government. FPI
c. A U.S. based restaurant chain opens new restaurants in India. FDI
d. A U.S. citizen buys stock in companies located in Japan. FPI
e. BMW builds a manufacturing plant in South Carolina. FDI
4. (15 pts) Why are net exports and net capital outflow always equal?
ANSWER:
Net exports and net capital outflow are always equal because every
international transaction is an exchange. When a seller country transfers
a good or service to a buyer country, the buyer country gives up some
asset to pay for this good or service. The value of that asset equals the
value of goods and services sold. Hence, the net value of goods and
services sold by a country (NX) must equal the net value of assets
acquired (NCO).
5. (10 pts) Last year a country purchased $1.5 trillion worth of goods and services from foreign countries,
sold $2 trillion worth of goods and services to foreign countries and had national saving of $1.25 trillion.
What was the value of its domestic investment? Show your work.
ANSWER:
6
Net capital outflow = Net exports = $2 trillion - $1.5 trillion = $.5 trillion.
Saving = investment + net capital outflow
$1.25 trillion = investment + $.5 trillion $.75 trillion = investment
(10 pts) While vacationing in Italy, you see an interesting meal on a menu. The price is 24 euros.
a. If the exchange rate is .80 euros per dollar, how many dollars would you have to give up to buy the
meal?
b. If the dollar appreciated against the euro, but the price of the meal remained 24 euro, would the
meal cost more or fewer dollars? Explain.
ANSWER:
A. 24 euros = $x times .80 euro per dollar, x = 24/.80 = 30
B. It would cost fewer dollars. If the dollar appreciated against the euro,
each dollar would buy more euros.
7. (10 pts) A dozen eggs cost $2 in the U.S. and 12 pesos in Argentina. If the real exchange rate is 5/6,
what is the nominal exchange rate? Show your work.
ANSWER:
The real exchange rate = 5/6 = the nominal exchange rate x $2/12
pesos. So, the nominal exchange rate = 5x12 pesos/6x$2 = 60 pesos/$12
= 5 pesos per dollar.
8. (12 pts) A basket of goods and services that costs $100 in the United States costs 800 pesos in Mexico.
At this moment on the foreign exchange market, the current nominal exchange rate is 10 pesos per U.S.
dollar.
a. If one sells $100 on the foreign exchange market, how much Mexican pesos can he get?
$100x 10P/$=1000P
b. What would be the nominal exchange rate and the real exchange rate if Purchasing Power Parity
held? IF PPP holds, then real=1. Then 1=e x P/P* so e=P*/P=800P/$100=8P/$
c. What is the peso equivalent price of the basket of goods in the US? e xP=10P/$ x $100 =1000P
d. If an American can import this basket of goods and services from Mexico, how much money in
dollars would he make on each basket? Buy basket in Mexico for 800P/(10P/$)=$80. Sell in US
for $100 so profit =$20
9. (13 pts) Suppose that Purchasing Power Parity Holds and the Quantity Theory of Money Holds.
Between 2000 and 2015, the money supply in Brazil grew at 10%, Real GDP grew at 3% and Velocity at
0%. For the US, the money supply grew at 5%, real GDP grew at 4% and Velocity at 0%. By how much
did the nominal exchange rate (Brazilian reales per dollar) appreciate or depreciate?
Answer. Quantity Theory of Money %M  %V  %P  %Y
*
PPP implies. %e  %P  %P
For Brazil, inflation =10%+0%-3%=7% and for the US inflation =5%+0%-4%=1%. Hence the percentage
change in the nominal exchange rate is 7%-3%=4%, so US dollar appreciated.