Principles of Macroeconomics
1. Explain the difference between nominal and real variables and give two examples of each. According to the principles of monetary neutrality, which variables are affected by changes in the quantity of money?
2. Explain the 6 cost of inflation. How do they affect the citizens of an economy when a high level of inflation occurs?
3. How would the following transactions affect U.S. exports, imports, and net exports?
(a) An American art professor spends the summer touring museums in Europe
(b) Students in Paris flock to see the latest movie from Hollywood.
(c) Your uncle buys a new Volvo.
(d) The student bookstore at Oxford University in England sells a pair of Levi's 501 jeans.
(e) A Canadian citizens shops at a store in northern Vermont to avoid Canadian sales taxes.
4. How would the following transactions affect U.S. net capital outflow? Also, state whether each involves direct investment or portfolio investment.
(a) An American cellular phone company establishes an office in the Czech Republic.
(b) Harrods of London sells stock to the General Electric pension fund.
(c) Honda expands its factory in Marysville, Ohio.
(d) A Fidelity mutual fund sells its Volkswagen stock to a French investor.
5. Would each of the following transactions be included in net exports or net capital outflow? Be sure to say whether it would represent an increase or a decrease in that variable.
(a) An American buys a Sony TV.
(b) An American buys a share of Sony stock.
(c) The Sony pension fund buys a bond from the U.S. Treasury.
(d) A worker at a Sony plant in Japan buys some Georgia peaches from an American farmer.
6. A can of soda costs $.75 in the United States and 12 pesos in Mexico. What would the peso-dollar exchange rate be if purchasing-power parity holds? If a monetary expansion caused all prices in Mexico to double so that soda rose to 24 pesos, what would happen to the peso-dollar exchange rate?
7. Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.
(a) Explain how you would make a profit from this situation. What would be your profit per bushel of rice? If other people exploit the same opportunity, what would happen to the price of rice in Japan and the price of rice in the U.S.?
(b) Suppose that rice is the only commodity in the world. What would happen to the real exchange rate between the U.S. and Japan?
8. Suppose that real interest rates increase across Europe. Explain how this development will affect U.S. net capital outflow. Then explain how it will affect U.S. net exports by using a formula from the chapter and by drawing a diagram. What will happen to the U.S. real interest rate and real exchange rate?
9. Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a three-panel diagram, show what happens to national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance. Also explain in words how this U.S. policy affects the amount of imports, exports, and net exports.
10. Over the past decade, some of Chinese saving has been used to finance American investment. That is, the Chinese have been buying American capital assets.
(a) If the Chinese decided they no longer wanted to buy U.S. assets, what would happen in the U.S. market for loanable funds? In particular, what would happen to U.S. interest rates, U.S. savings, and U.S. investment?
(b) What would happen in the market for foreign-currency exchange? In particular, what would happen to the value of the dollar and the U.S. trade balance?

Principles of Macroeconomics 1. Explain the difference between nom...