20072anskeyprbset10 - METU Department of Economics Econ 202...

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METU Department of Economics Econ 202 Macroeconomic Theory Part I: True/False/Uncertain Decide whether each of the following statement is true, false, or uncertain and justify your answer with a short argument. 1. If the nominal exchange rate between the euro and dollar is 0.90, it means that one Euro is worth 90 cents. TRUE . Follows from the definition of the nominal exchange rate as price of foreign currency in terms of domestic currency. 2. If the real exchange rate between the United Kingdom and the United States is 2, this means that goods are twice as expensive in the United Kingdom than in the United States. FALSE. The real exchange rate is an index number and therefore its level is arbitrary. It does not give us an information like one foreign good (here U.K.) is worth 2 domestic goods (here U.S.) or the rekative price of a foreign good in temrs of a domestic good. 3. The ratio of imports to GDP cannot be larger than 1. FALSE. GDP is about value added, whereas imports (and exports) are about the total value of goods. A country can import $100 worth of intermediate goods, add $10 to the value of the goods and export them for a value of $110. If that is the only source of imports, and the only value added in this economy, the ration of imports to GDP will be 10, far more than 1. 4. If General Motors decides to use only French made Michelin tires for its cars instead of Firestone US made tires, the total demand for US goods decreases. TRUE. The demand by US residents (GM) shifts from domestic goods towards foreign goods. Therefore the demand for domestic goods decreases. 5. A Turkish tourist spends his holidays in Egypt. Once in Egypt, he pays 500 YTL for his hotel, 100 YTL for kebabs and a 150 YTL statue of Nefertiti to bring back home for his mother. He generated 750 YTL worth of exports from Egypt to Turkey. TRUE. The sale of domestic goods and services to a foreign resident is counted as exports. 6. If the uncovered interest parity does not hold, it surely means that there is an arbitrage opportunity.
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FALSE. The uncovered interest parity does not take in account several factors that can justify differences in returns: risk and transaction costs, for example. 7. Nominal exchange rates and real exchange rates tend to move in the same direction over short periods of time. TRUE. Remember that the real exchange rate is given by E P* / P. In the short run (over a few weeks or months) E will be much more volatile than P* or P (since inflation rates are not generally that volatile over short periods of time). Thus, the real exchange rate and the nominal exchange rate (E) will generally move in the same direction over short periods of time. 8. A country can have exports larger than its GDP. TRUE.
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20072anskeyprbset10 - METU Department of Economics Econ 202...

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