1. What are the net capital outflow and the trade balance? Explain how they are related.

2. Define the nominal exchange rate and the real exchange rate.

3. If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

4. If a small open economy bans the import of Japanese video game systems, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

5. According to the theory of purchasing-power parity, if Japan has low inflation and Mexico has high inflation, what will happen to the exchange rate between the Japanese yen and the Mexican peso?