Question

When Tom, a U.S. citizen, purchases a coat made in China, the purchase is both a U.S. and Chinese import.

Select one:

True

False

Question text

The process of arbitrage supports purchasing-power parity theory because the market forces of supply and demand eliminate or reduce price differences.

Select one:

True

False

Suppose that U.S. residents decide to purchase more foreign cars and foreign residents decide to buy more stock in U.S. corporations. Other things the same, these actions raise both U.S. net exports and U.S. net capital outflows.

Select one:

True

False

Net capital outflow measures the imbalance between a country's domestic purchase of foreign assets and the sale of domestic assets to foreign residents.

Select one:

True

False

If the nominal exchange rate is four Canadian dollars per three U.S. dollars, it is also 0.75 U.S. dollar per Canadian dollar.

Select one:

True

False

Answer 1

1. False. For US, the purchase of coat will be import but for china, it is export.

2. True. The PPP theory suggests that same basket of goods in different countries should have the same price, adjusted for exchange rate, in common currency. If there is price difference across countries, the process of arbitrage comes to play and purchasing in cheaper and selling in dearer country will ultimately eliminate the price difference.

3. False. The purchase of foreign cars by US residents will increase import and thus net export will decrease. Also foreigners purchasing stocks of US corporations will lead to capital inflow and not outflow.

4. True. Net capital outflow is the difference between US residents purchase of foreign assets and foreigner's purchase of US assets.

5. True. (3/4) US dollars/canadian dollar = 0.75 US dollars/canadian dollar.