Ch 18 Open Economy Macroeconomics

Question 1

An economy that does not interact with other economies

Answer 1

closed economy

Question 2

An economy that interacts freely with other economies around the world

Answer 2

open economy

Question 3

domestically produced goods and services that are sold abroad

Answer 3

exports

Question 4

foreign-produced goods and services that are sold domestically

Answer 4

imports

Question 5

the difference between the value of a country’s exports and the value of its imports

Answer 5

net exports

Question 6

Net exports are also called ____ _____

Answer 6

trade balance

Question 7

If a country exports more than it imports, the country is said to run a ___ _____

Answer 7

trade surplus

Question 8

If a country sells fewer goods and services abroad than it buys from other countries, the country is said to run a _____ _______

Answer 8

trade deficit

Question 9

If net exports are zero, the country is said to have _____ ______

Answer 9

balanced trade

Question 10

What is net capital outflow?

Answer 10

the difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners

Question 11

When net capital outflow is negative, a country is experiencing a

Answer 11

capital inflow

Question 12

Net Capital Outflow = Net Exports

Answer 12

it’s an identity

Question 13

In an open economy,

Y-C-G=I+NX
S=I+NX
S=I+NCO

In other words, when a US citizen saves a dollar of her income, that dollar can be used to finance the accumulation of domestic capital or it can be used to finance the purchase of foreign capital.

Answer 13

none

Question 14

An open economy has two uses for its saving:

Answer 14

(1) domestic investment and (2) net capital outflow

Question 15

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

Answer 15

nominal exchange rate

Question 16

If the exchange rate changes so that a dollar buys more foreign currency, that change is called an _______ of the dollar

Answer 16

appreciation

Question 17

If the exchange rate changes so that a dollar buys less foreign currency, that change is called a _________ of the dollar

Answer 17

depreciation

Question 18

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

Answer 18

real exchange rate

Question 19

Formula for real exchange rate

Answer 19

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

Question 20

This theory states that a unit of any given currency should be able to buy the same quantity of goods in all countries.

Answer 20

purchasing-power parity

Question 21

The ________ is an economic concept that states that the price of an identical asset or commodity will have the same price globally

Answer 21

Law of one price

Question 22

The process of taking advantage of price differences for the same item in different markets

Answer 22

arbitrage

Question 23

What does the theory of purchasing-power parity say about exchange rates?

Answer 23

It tells us that the nominal exchange rate between the currencies of two countries depends on the price levels in those countries.

For instance,
if a pound of coffee costs 500 yen in Japan and $5 in the Untied States, then the nominal exchange rate must be 100 yen per dollar.

Question 24

Nominal Exchange Rate

Answer 24

Price level in foreign country / price level in domestic country

Question 25

Two reasons the theory of purchasing-power parity does not always hold in practice

Answer 25

1) goods are not easily traded. 2) even tradable goods are not always perfect substitutes when they are produced in different countries. For example, some consumers prefer German cars and others prefer American cars.