I. Answer True or False

1. If a nation is selling less goods and services to foreigners than it is buying from them, then on net it must be buying more assets abroad, then the value of domestic assets purchased by foreigners.

2. By itself, the purchase of a U.S. bond by a foreign resident decreases U.S. net capital outflow and decreases foreign capital outflow.

3. If a U.S. firm buys Chinese toys using previously obtained Chinese currency, then both U.S. net exports and U.S. net capital outflow decrease.

4. The net value of the goods and services sold by a country (net exports) must equal the net value of the assets acquired (net capital outflow).

5. The theory of purchasing-power parity states that a unit of a country’s currency should be able to buy the same quantity of goods in foreign countries as it does domestically.

6. According to purchasing-power parity theory, the nominal exchange rate between the U.S. and another country should equal the price level for that country divided by the price level for the U.S.

7. When the U.S. real interest rate rises, purchases of foreign assets by domestic residents fall and purchases of U.S. assets by foreigners rise. Thus, net capital outflow is inversely related to the real interest rate.

II. Short Answers

1. Use the following data: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10.

a. Calculate the unemployment rate.

b. Calculate the labor participation rate.

c. If 50 workers were not counted in the labor force one month recalculate unemployment and labor force participation.

2. Assume only two countries, China and the US. If China decides to stimulate growth through a policy of running a large export trade surplus, does China’s national savings increase? Show the relationship between China’s national savings, domestic investment and net capital outflow (NCO).

3. Turning to the US, given China’s trade surplus, why does the US have to run a trade deficit (NX<0) and a net capital account deficit (NCO<0) if China runs a trade surplus?

4. Assume that domestic US savings equals domestic US investment, why would you think that in this case the “glut of savings” from China could be destabilizing in the US?

5. Suppose autonomous consumption is $500, government spending $1,000, panned investment is $1,250, and net exports are -$250 and the MPC is 0.8. What is the equilibrium value GDP?

6. If the marginal propensity to consume is 0.8, by how much will an increase in planned investment spending of $400 billion increase equilibrium real GDP?