MACROECONOMICS II. Answer True or False a- If a nation is selling less goods and
ID: 1194419 • Letter: M
Question
MACROECONOMICS
II. Answer True or False
a- If a nation is selling less goods and services to foreigners than it is buying from them, then on net it must be buying more assets abroad, then the value of domestic assets purchased by foreigners.
b. By itself, the purchase of a U.S. bond by a foreign resident decreases U.S. net capital outflow and decreases foreign capital outflow.
c. If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net exports and U.S. net capital outflow decrease.
d. The net value of the goods and services sold by a country (net exports) must equal the net value of the assets acquired (net capital outflow).
e. The theory of purchasing-power parity states that a unit of a country’s currency should be able to buy the same quantity of goods in foreign countries as it does domestically.
f. According to purchasing-power parity theory, the nominal exchange rate between the U.S. and another country should equal the price level for that country divided by the price level for the U.S.
g. When the U.S. real interest rate rises, purchases of foreign assets by domestic residents fall and purchases of U.S. assets by foreigners rise. Thus, net capital outflow is inversely related to the real interest rate.
Explanation / Answer
(a) TRUE
Selling less abroad than buying from abroad means, Exports are less than Imports, so there is Current Account deficit. To compensate for it, there must be a Capital Account surplus which means investment in foreign assets must be higher than foreign investment in domestic assets.
(b) TRUE
Net capital outflow = Capital outflow - Capital inflow
Purchase of US bond by foreigners will increase foreign capital inflow, reducing net capital outflow & foreign capital outflow.
(c) FALSE
US company buying Chinese toys will decrease net exports (by increasing imports). But it will increase capital outflow, so Net capital outflow will increase & not decrease.
(d) TRUE
This holds true because current account balance must be compensated by capital account balance.
(e) FALSE
PPP states that the price of identical goods will be the same in every country.
(f) TRUE
This is correct as per Absolute Purchasing Power parity theory.
(g) TRUE
As interest rate in US rises, capital inflow increases & net capital outflow decreases.
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