Question 2

(a) Describe the difference between foreign direct investment and foreign portfolio investment.

(b) Discuss how changes in local real interest rates and foreign interest rates impact the decision to carry out investment by (i) foreigners and (ii) locals.

Learning Activity 10.2A

Question 3

Illustrate and explain the impact on the real exchange rate and the trade balance due to:

(a) A successful campaign encourage residents to buy local

(b) A reduction in remittances from family overseas due to the world economic recession.

(c) Excessive snowstorms during winter encourage tourist arrivals. d) An increase in the real interest rate

Question 4

State the impact of each of the following changes (other variables remaining unchanged) on the real exchange rate.

(a) The Consumer Price Index (which measures the price level) in the United States rises by 4 percent.

(b) The Consumer Price Index in Jamaica rises by 9 percent.

(c) The two Consumer Price Index changes above occur at the same time.

(d) The nominal exchange rate moves from 86 to 90 for a U.S. dollar.

(e) The nominal exchange rate depreciates by 10 percent at the same time that local inflation is 10 percent and the U.S. price level is stable.