International Economics Quiz

The difference between a country's saving and investment. It represents the flow of funds from domestic savers to foreign borrowers.

The difference between domestic saving and domestic investment is equal to net capital outflow.

A U.S. resident buying stock in a Brazilian company increases U.S. net capital outflow because it represents a purchase of a foreign asset.

A Japanese resident buying a U.S. government bond decreases U.S. net capital outflow because it represents a purchase of a domestic asset.

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

The flow of funds between countries for investment purposes. This includes borrowing and lending money across national borders.

In an open economy, saving (S) does not necessarily equal investment (I). This is because a nation's savings can be used to finance domestic investment or foreign investment.

Domestic firms can finance their investment projects using funds from both domestic savers and foreign savers. This is part of international capital flows.

A decrease in national saving leads to a decrease in net exports (NX).

When a country increases its government spending, this often reduces the amount of national saving available for investment. This can lead to a decrease in net exports.

If a large foreign economy (country) increases its government spending, it reduces the amount of saving available globally. This pushes world interest rates up.

Increases in the world interest rate make it more expensive for businesses to borrow money, which reduces investment (I). This reduction in investment leads to an increase in net exports (NX).

The effect of foreign fiscal policy on the domestic economy is dependent on the size of the foreign economy. If the foreign economy is small, the impact is negligible. If the foreign economy is large, there is a noticeable impact.

Increased government purchases abroad lead to a decrease in world saving and an increase in NX for the smaller open economy.

An increase in government spending abroad reduces global saving, which results in higher world interest rates.

Higher world interest rates decrease investment in the smaller open economy due to higher borrowing costs. As investment decreases, net exports increase.

The price of one currency expressed in terms of another currency. For example, 80 yen per dollar means you can exchange 1 US dollar for 80 Japanese yen.

The rate at which goods and services of one country can be traded for goods and services of another country. For example, if a Swiss cheese costs twice as much as American cheese, the real exchange rate is 1/2 pound of Swiss cheese per pound of American cheese.

The real exchange rate is sometimes called the terms of trade. It reflects the relative prices of goods and services between two countries.

The nominal exchange rate can be expressed in two ways. For example, if the exchange rate is 80 yen per dollar, you can also say it is 1/80 (0.0125) dollar per yen.

The exchange rate tells us how much of one currency we need to buy one unit of another currency. For example, if the exchange rate is 80 yen per dollar, it means you need 80 yen to buy 1 US dollar.

The real exchange rate is often used to measure the relative price levels of two countries. If the real exchange rate is high, it means that the goods of the country with the higher exchange rate are relatively expensive.

The real exchange rate is affected by factors such as changes in the nominal exchange rate, relative inflation rates, and relative productivity levels.

The real exchange rate can be used to assess the competitiveness of a country's goods in international markets. A higher real exchange rate means that domestic goods are relatively more expensive compared to foreign goods.

The real exchange rate is calculated by dividing the nominal exchange rate by the ratio of foreign to domestic prices.

The real exchange rate represents the relative price of a basket of goods and services in one country compared to another.

The real exchange rate is used to understand the competitiveness of a country's exports and the affordability of its imports.

The real exchange rate can be used to compare the purchasing power of currencies across different countries.

In a macro model with only one good, the real exchange rate is the relative price of one country's output in terms of the other country's output.

In an open economy, the equilibrium real exchange rate is determined when the supply of dollars from net capital outflow matches the demand for dollars from foreigners buying the country's net exports.

The marginal propensity to consume (MPC) is the fraction of each additional dollar of income that households spend on consumption.

The average production of labor (APL) measures how much output is produced per worker on average.

The average production of capital (APK) measures how much output is produced per unit of capital on average.

A Cobb-Douglas production function with constant returns to scale assumes that the ratio of output to inputs remains constant, regardless of the scale of production.

Changes in government spending (G) directly impact national saving (S). Increasing G decreases S, while decreasing G increases S.

Changes in taxes (T) have an indirect impact on national saving (S) through their effect on disposable income. Decreasing T increases disposable income, which leads to an increase in saving, and vice versa.

Changes in national income (Y) directly affect national saving (S) through their effect on disposable income. Increasing Y increases disposable income and hence saving, and vice versa.

The net exports of a country are equal to the net capital outflow. This means the difference between exports and imports equals the difference between a country's investment in foreign assets and foreign investment in the country.

The net capital outflow (NCO) represents the supply of dollars in the foreign exchange market. This supply is used to buy foreign assets.

Net exports (NX) represent the demand for dollars in the foreign exchange market. This demand is used to buy U.S. goods and services.

The real exchange rate (ε) adjusts to ensure net exports (NX) equal net capital outflow (NCO). This means the price of domestic goods relative to foreign goods adjusts to equate the demand for dollars (NX) with the supply of dollars (NCO).

Net capital outflow (NCO) is determined by domestic saving (S) and investment (I). Saving (S) depends on domestic factors like output. Investment (I) depends on the world interest rate (r*).

The supply curve for dollars in the foreign exchange market is vertical because neither saving (S) nor investment (I) depends on the real exchange rate (ε).

The demand curve for dollars in the foreign exchange market is downward sloping because net exports (NX) decrease as the real exchange rate (ε) increases. This means as U.S. goods become more expensive relative to foreign goods, foreigners buy fewer U.S. products.