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### 29 Cards in this Set

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 Suppose the dollar depreciates relative to the British pound. What is the result on U.S. prices? Prices in the U.S. are rising. In an open economy, saving is equal to: Domestic investment plus net capital outflow. S = I + NCO ____ is greater than ____ if the U.S. experiences a trade surplus. exports, imports According to the purchasing power parity theory, what will happen to the pound if inflation in Great Britain exceeds inflation in the U.S.? The pound will depreciate. Suppose that a German-produced car becomes very popular in the United States. What effect would this have on the U.S.? There would be an increase in the trade deficit in the United States. If a U.S. dollar exchanges for 2.0 German marks, then the dollar price of a mark is: 50 cents - A French winery increases its wine sales to the United States. What is the effect of this increase? An increase in French exports and U.S. imports. The nightly news reports that the dollar has strengthened relative to the Japanese yen. What does this mean? It means that the dollar can now purchase more yen. Suppose there is an increase in the nominal exchange rate. We would expect an increase in: The real exchange rate. If one Japanese Yen = \$0.50, how many Yen can be purchased with \$1.00? 2 Yen per \$1 - If the nominal exchange rate of the dollar goes from 1.00 English pounds to 0.75 pounds, then what has happened to the dollar? The dollar has depreciated relative to the pound and English currency is now strengthened. Suppose that a video craze in the US makes a particular Japanese-produced video game very popular. How would this affect the U.S.? It would increase the trade deficit of the US. How do we express the nominal exchange rate? As units of foreign currency per U.S. dollar What causes ANY currency to depreciate? inflation If a dollar buys __________, there is an appreciation of the dollar. more foreign currency The movement of _____ help(s) to ensure that currency has the same purchasing power in all countries. exchange rates A depreciation (fall) in the U.S. real exchange encourages consumers both at home and abroad to buy more ____ & fewer ____. U.S. goods, foreign goods The real exchange rate compares the prices of _____ and _____ in the domestic economy. domestic goods, foreign goods The ____ between the currencies of two countries must reflect the different price levels in those countries. nominal exchange rate If the purchasing power of the dollar is always the same at home and abroad, then the ____ cannot change. exchange rate What causes money to lose value both in terms of the goods and services it can buy and in terms of the amount of other currencies it can buy? When the central bank prints large quantities of money. If the ____ ____ of the dollar is always the same at home and abroad, then the exchange rate cannot change. purchasing power Suppose a country has business opportunities that are relatively attractive to other countries. What effect would this have on the country's net exports and net capital outflow? This would cause the country to have both NEGATIVE net exports and net capital outflow. How would this transaction affect net exports and net capital outflow? "A Russian flour mill buys wheat from the United States and pays for it with rubles." Russian net exports DECREASE. U.S. net capital outflow INCREASES b/c the U.S. has acquired a Russian asset. What 6 factors affect net exports? 1) PRICES of goods. 2) EXCHANGE RATES at which people can use domestic currency to buy foreign currencies. 3) TASTES of consumers. 4) POLICIES of the govt. toward international trade. 5) INCOMES of consumers. 6) COSTS of transporting goods. Suppose the US real exchange rate appreciates. What will happen to US exports and imports? An appreciation of the US real exchange rate makes domestic goods more expensive and foreign goods less expensive. The result is that EXPORTS WILL FALL and IMPORTS WILL RISE. Suppose that Japan has had 5% inflation in the last year, and Germany has had 3% inflation in the last year. According to the PPP model of exchange rates, what will result? Inflation causes the value of any currency to depreciate, so both the Mark and the Yen will have depreciated in the past year. The PPP model of exchange rates predicts that the country with HIGHER inflation will have the currency that depreciates, relative to the other currency. Therefore, the YEN WILL DEPRECIATE AGAINST THE MARK. In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate ____ and net exports ____. fall, rise Suppose that Mary, a UK citizen, spends \$1000 while shopping on her vacation in Florida. What does Mary's shopping spree do to US net exports and NCO? Mary's purchase of \$1000 of US exports causes US net exports to rise. In exchange for the goods Mary purchased, she gave domestic agents \$1000 in cash - this represents a purchase of UK assets by US residents - therefore, NCO also rises by \$1000.