Question

Please add explain

1. The country of Nowhere is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, which statement would happen?

a. Nowhere's net exports would fall

b. Nowhere's real interest rate would rise

c. Nowhere's real exchange rate would fall

d. Nowhere's net exports would not change.

2. If a country has $50 million of net exports and $70 million of saving, what must be net capital outflow and domestic investment?

a. Net capital outflow is $50 million, and domestic investment is $70 million

b. Net capital outflow is $120 million, and domestic investment is $70 million

c. Net capital outflow is $50 million, and domestic investment is $20 million

d. Net capital outflow is $120 million, and domestic investment is $50 million

3. Suppose that the exchange rate is 50 Bangladesh taka per Canadian dollar, and that a bushel of rice costs 200 taka in Bangladesh and $3 in Canada. Which statement is consistent with these facts?

a. The real exchange rate is greater than one, and arbitrageurs could profit by buying rice in Bangladesh and selling it in Canada

b. The real exchange rate is greater than one, and arbitrageurs could profit by buying rice in Canada and selling it in Bangladesh

c,  The real exchange rate is less than one, and arbitrageurs could profit by buying rice in Canada and selling it in Bangladesh

d.  The real exchange rate is less than one, and arbitrageurs could profit by buying rice in Bangladesh and selling it in Canada

4. Suppose inflation is higher in Canada over the next few months than in foreign countries, and exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods Canadian goods buy. According to purchasing - power parity, what should we expect to see?

a. Both the real and nominal exchange rates appreciate.

b. Only the nominal exchange rate depreciates.

c. Both the real and nominal exchange rates depreciate.

d. Only the real exchange rate appreciates.

5. If the quantity of loanable funds supplied is greater than the quantity demanded, what does the excess measure?

a. purchase of domestic investments

b. net capital inflow

c. net capital outflow

d. foreigners purchase of Canadian goods

Answer 1

1. a. The correct answer is that Nowhere's net exports will fall. This is because the unstability of other countries will negatively affect their exchange rate and the currency of Nowhere will appreciate against those currencies becauee of its stable position. Due to this, the currency of Nowhere will become expensive as opposed to the currencies of other counties. This will negatively affect the exports in Nowhere due to which exports will decline.

2. The correct answer is c. Net capital outflow is $50 million and domestic investment is $20 million.

This is because by the accounting identity, net capital outflow is always equal to the net exports of the country. This is because the amount of net exports shows the amount of capital spent abroad (i.e., outflow) for goods that are imported in A.

Also, the formula to calculate domestic investment is national savings - net capital outflow.

3. Real exchange rate is given as: Nominal exchange rate×(Domestic Price/Foreign Price)

Real exchange rate = 50 taka/1 Dollar × ($3/ bushel of rice ÷ 200 taka / bushel of rice) = 0.75 Bangladeshi bushel of rice/ US bushel of rice.

Thus, the real exchange rate is less than one.

Thus, the correct answer is c. Arbitrageurs can buy rice in Canada and sell in Bangladesh to make profit. This is because 0.75 bushel of rice is worth 1 bushel of rice in Canada. Thus, the same currency can buy more rice in Canada as compared to Bangladesh.

4. The correct answer is c. Both real and nominal exchange rates depriciate. This is because inflation tends to reduce the value of domestic currency in relation to the foreign currency. Also, the Canadian goods become less competitive in the international market reducing the demand for Canadian dollar.

Also, real exchange rate will depriciate because the Foreign currency can buy less of goods in Canada than before. This effect can be understood by the purchasing power parity theory.

5. The correct answer is net capital outflow. This is because as mentioned in the previous question, net capital outflow is the difference between national saving and domestic investment. In the loanable funds market, domestic investment signifies demand for loanable funds and national saving signifies supply of loanable funds. Excess of supply over demand will signify net capital outflow.