Question

1)The real exchange rate: A. measures how many Japanese yen one really gets for a U.S. dollar. B. is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level. C. is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level. D. is the price of a domestic car divided by the price of a foreign car.

2).Net exports equal GDP minus domestic spending on: A. all goods and services. B. all goods and services plus foreign spending on domestic goods and services. C. domestic goods and services. D. domestic goods and services minus foreign spending on domestic goods and services.

3). In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net exports: A. fall and the real exchange rate falls. B. fall but the real exchange rate remains unchanged. C. remain unchanged but the real exchange rate falls. D. and the real exchange rate remain unchanged.

4.) Which of the following would decrease the real exchange rate in a small open economy in the long run? A. a personal income tax cut B. a reduction in government spending C. a tariff on imports D. an increase in investment

5). In a small open economy, if consumers shift their preference toward Japanese cars, then net exports: A. fall and the real exchange rate falls. B. fall but the real exchange rate remains unchanged. C. remain unchanged but the real exchange rate falls. D. and the real exchange rate remains unchanged.

Answer 1

1. B. is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.

Real exchange rate is the measure of price of the goods and services in the domestic country that can be exchanged in a foreign country.

Real exchange rate = Nominal exchange rate * (Domestic price / Foreign price)

2. A. all goods and services.

Net exports are the value of a country's total exports minus the value of its total imports.

GDP = C + I + G + X – M

Domestic spending on all goods and services = C + I + G

Net exports = GDP - Domestic spending on all goods and services

Net exports = (C + I + G + X – M) – (C + I + G)

Net exports = C + I + G + X – M – C – I – G

Net exports = X – M

3. D. and the real exchange rate remain unchanged.

Introduction of automatic-teller machines does not have any impact on net exports and real exchange rate.

4. B. a reduction in government spending

Positive relationship exists between government spending and real exchange rate. After an increase in government spending, the real exchange rate appreciates and reduction in government spending, decreases the real exchange rate.

5. C. remain unchanged but the real exchange rate falls.

Consumer preferences are one determinant of net export. A change in consumer preference towards foreign goods will affect the level of imports. As imports become more attractive, there is fall in real exchange rate.