Krugman/Wells

1. 18 >> Open-Economy Macroeconomics Krugman/Wells CHECK YOUR UNDERSTANDING

2. Check Your Understanding 18-1Question 1

3. 1a) Which of the balance of payments accounts does the following event affect? Boeing sells a newly built airplane to China. • current account • financial account

4. 1b) Which of the balance of payments accounts does the following event affect? Chinese investors buy stock in Boeing. • current account • financial account

5. 1c) Which of the balance of payments accounts does the following event affect? A Chinese company buys a used airplane from American Airlines and ships it to China. • current account • financial account

6. 1d) Which of the balance of payments accounts does the following event affect? A Chinese investor, who owns property in the U.S., buys a corporate jet, which he will keep in the U.S. so he can travel around America. • current account • financial account

7. Check Your Understanding 18-1Question 2 Suppose China decides that it needs a huge program of infrastructure spending, which it will finance by borrowing. How would this program affect the U.S. balance of payments?

8. 2) This will cause a(n) ______ in the U.S. balance of payments on financial account and a _____ in the U.S. balance of payments on the current account. • increase; increase • increase; decrease • decrease; increase • decrease; decrease

9. Check Your Understanding 18-2Question 1*

10. 1a*) If the exchange rate is one euro = $1.40, what is the exchange rate for one dollar in euros? • One dollar = 1.40 euros • One dollar = 1 euro • One dollar = .71 euros • One dollar = 0.40 euros

11. 1b*) If the exchange rate is initially one euro = $1.40, but changes to one euro = $1.50, the euro has: • appreciated. • depreciated.

12. 1c*) If the exchange rate is initially one euro = $1.40, but changes to one euro = $1.50, the dollar has • appreciated. • depreciated.

13. Check Your Understanding 18-2Question 1

14. 1a) Assume that Mexico discovers huge reserves of oil and starts exporting oil to the U.S. What effect would this have on the nominal peso-U.S. dollar exchange rate? • The peso would appreciate. • The peso would depreciate.

15. 1b) Assume that Mexico discovers huge reserves of oil and starts exporting oil to the U.S. What effect would this on the other exports from Mexico to the U.S.? • other exports would increase • other exports would decrease • there would be no effect

16. 1c) Assume that Mexico discovers huge reserves of oil and starts exporting oil to the U.S. What effect would this on imports from the U.S. to Mexico? • Imports would increase. • Imports would decrease. • There would be no effect.

17. Check Your Understanding 18-2Question 2 A basket of goods and services that costs $100 in the United States costs 800 pesos in Mexico, and the current nominal exchange rate is 10 pesos per U.S. dollar. Over the next five years, the cost of that market basket rises to $120 in the United States and to 1,200 pesos in Mexico, although the nominal exchange rate remains at 10 pesos per U.S. dollar. The price index in both countries today is 100.

18. 2a) Given this information, the real exchange rate now is _____ and in five years will be _____. • 10; 8 • 10; 12 • 20; 8 • 20; 12

19. 2b) Given this information, the purchasing power parity now is _____ and in five years will be _____. • 8 pesos per dollar; 8 pesos per dollar • 10 pesos per dollar; 10 pesos per dollar • 8 pesos per dollar; 10 pesos per dollar • 8 pesos per dollar; 12 pesos per dollar

20. Check Your Understanding 18-3Question 1 Explain how the following policy changes would eliminate disequilibrium in China’s foreign exchange market with a fixed exchange rate where the equilibrium value of the yuan is above the target value.

21. 1a) An appreciation of the yuan would eliminate disequilibrium in China’s foreign exchange market with a fixed exchange rate where the equilibrium value of the yuan is above the target value by: • increasing the quantity of yuan demanded and decreasing the quantity of yuan supplied. • decreasing the quantity of yuan demanded and increasing the quantity of yuan supplied.

22. 1b) Placing restrictions on foreigners who want to invest in China would eliminate disequilibrium in China’s foreign exchange market with a fixed exchange rate where the equilibrium value of the yuan is above the target value by: • increasing the demand for the yuan. • decreasing the demand for the yuan. • increasing the supply of the yuan. • decreasing the supply of the yuan.

23. 1c) Removing restrictions on Chinese who want to invest abroad would eliminate disequilibrium in China’s foreign exchange market with a fixed exchange rate where the equilibrium value of the yuan is above the target value by: • increasing the demand for the yuan. • decreasing the demand for the yuan. • increasing the supply of the yuan. • decreasing the supply of the yuan.

24. 1d) Imposing taxes on Chinese exports would eliminate disequilibrium in China’s foreign exchange market with a fixed exchange rate where the equilibrium value of the yuan is above the target value by: • increasing the demand for the yuan. • decreasing the demand for the yuan. • increasing the supply of the yuan. • decreasing the supply of the yuan.

25. Check Your Understanding 18-4 Question 1

26. 1) According to the graph, there was a devaluation of the mark in: • 1974. • 1976. • 1985. • 2002.

27. Check Your Understanding 18-4 Question 2

28. 2) High interest rates in Canada in the late 1980s made it hard for Canadian manufacturers to compete with U.S. manufacturers because the Canadian dollar _____ and Canadian goods became _______ for foreigners. • appreciated; more expensive • appreciated; cheaper • depreciated; more expensive • depreciated; cheaper