Question

True or false:

1) If a nation is selling more goods and services to foreigners than it is buying from them, then on net it must be selling assets abroad.

2) It is possible for a country to have domestic investment that exceeds national saving.

3) If a country’s trade surplus falls, its net capital outflow rises.

4) If the exchange rate is 80 yen per dollar, then a hotel room in Tokyo that costs 25,000 yen costs $200.

5) Other things the same, an increase in the nominal exchange rate raises the real exchange rate.

Answer 1

1) It is false because if nation selling more goods and services to foreigners than it is buying which means that there is more quantity of foreign currency in the domestic market which domestic people use for buying asset in foreign instead of selling asset to foreigners.

2) It is true in a situation when more capital inflow from some foreign country that is more foreign people invest in domestic country.

3) It is false because fall in trade surplus means either rise in imports or fall in export which cause less of foreign currency in domestic currency. This will result less people to invest abroad which means fall in net capital outflow.

4) It is false because:

$1 = 80 yen

$1 x 25000/80 = 80 x 25000/80 yen

$312= 25000 yen

Then a hotel room in Tokyo that costs 25,000 yen costs $312.5

5) It is true. Formula for real exchange rate:

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

Here if Domestic price and foreign price remain same then rise in nominal exchange rate cause rise in real exchange rate.