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ECO 302 Week 11 Quiz - Strayer

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Chapter 17 and 18
TRUE/FALSE
1.
With an international sector real GNP is consumption plus gross
investment plus government purchases plus net real asset income from abroad.

2.

3.
economy.

The balance of trade is net exports or imports less exports.

A higher current account deficit is caused by a declining domestic

4.
The real current account balance is real national saving less net
domestic investment.

5.
Tariffs and quotas lead to a higher real GDP growth rate in the country
imposing them.

6.
The law of one price says that there must be a unique price for a good
in each location where it is sold.

7.
If the home country has a real GNP which is greater than real domestic
expenditure, then the home country has a current-account deficit.

8.
Foreign direct investment occurs when the home country acquires
additional ownership of capital located in the rest of the world.

9.
If the home country has negative trade balance, then its real GDP is
less than real domestic expenditure.

10.
The equilibrium business-cycle model predicts that the real currentaccount balance will be countercyclical.

MULTIPLE CHOICE
1.
The law of one price:
a.
prohibits price discrimination.
c.
is a tax on imports.
b.
is that markets work to ensure that the same good has the same price in all
locations.
d.
prohibits price increases unless firms can show their are
unusual circumstances.

2.
The difference between real GDP in a closed economy and real GNP
in a open economy is:
a.
net real asset income from abroad. c.
net international investment
position.
b.
net imports. d.
the trade balance.

a.
b.

3.
Real GNP in an open economy is:
the closed economy real output less net real asset income from abroad.
c.
the closed economy real output less gross real asset income from abroad.
the closed economy real output plus gross real asset income from abroad. d.
the closed economy real output plus net real asset income from abroad.

a.
b.

4.
Net real asset income from abroad is:
rt-1Bft-1/P. c.
(Bft - Bft-1)/P.
Yt - (Ct +It +Gt ).
d.
((Bft - Bft-1)/P) - (rt-1Bft-1/P).

a.
b.

5.
Net real foreign investment is:
rt-1Bft-1/P. c.
(Bft - Bft-1)/P.
Yt - (Ct +It +Gt ).
d.
((Bft - Bft-1)/P) - (rt-1Bft-1/P).

a.
b.

6.
The trade balance is:
rt-1Bft-1/P. c.
(Bft - Bft-1)/P.
Yt - (Ct +It +Gt ).
d.
((Bft - Bft-1)/P) - (rt-1Bft-1/P).

a.
b.

7.
The balance on the current account:
rt-1Bft-1/P. c.
(rt-1Bft-1/P) + ((Bft - Bft-1)/P).
Yt + (rt-1Bft-1/P) - (Ct +It +Gt ). d.
((Bft - Bft-1)/P) - (rt-1Bft-1/P).

8.
The balance on the current account is:
a.
real GNP less net foreign investment income.
c.
real GNP less the
net international investment position.
b.
real GNP less net foreign investment.d.
real GNP less real domestic
expenditure.

9.
The real current-account balance is:
a.
net real asset income from abroad less trade balance
balance times the net real asset income from abroad.
b.
trade balance plus the net real asset income from abroad.
balance less the net real income from abroad.

c.

trade

d.

trade

10.
The real current account balance equals:
a.
net foreign investments.
c.
the trade balance plus net real asset
income from abroad.
b.
real GNP less real domestic expenditure.
d.
all of the above.

a.
b.

11.
The real current account balance equals:
net foreign investments.
c.
the trade balance.
the net international investment position.
d.
all of the above.

a.
b.

12.
The real current account balance equals:
the trade balance.
c.
the net international investment position.
real GNP less real domestic expenditure.
d.
all of the above.

13.
The real current account balance equals
a.
the net international investment position.
c.
real asset income from abroad.
b.
the trade balance.
d.
all of the above.

14.
The trade balance is:
a.
the difference between exports and imports. c.
balance less net real asset income from abroad.
b.
real GDP less real domestic expenditure.
d.

the trade balance plus net

the real current-account


all of the above.

a.
b.

15.
The trade balance is:
the difference between exports and imports. c.
net foreign investment.
real asset income from abroad.
d.
all of the above.

a.
b.

16.
The trade balance is:
the balance on the current account. c.
real GDP less real domestic expenditure.

net foreign investment.


d.
all of the above.

17.
The trade balance is:
a.
net foreign investment.
c.
the real current-account balance less net
real asset income from abroad.
b.
the net international investment position.
d.
all of the above.

18.
In the market clearing model with world markets for goods and credit,
an increase in technology, A, in the home country causes:
a.
an increase in the MPK.
c.
an increase in borrowing from
foreigners.

b.
an increase in home country gross domestic investment.
above.

d.

all of the

19.
In the market clearing model with world markets for goods and credit,
an increase in technology, A, in the home country causes:
a.
an increase in the MPK.
c.
an increase in lending to foreigners.
b.
an decrease in home country gross domestic investment. d.
all of the
above.

20.
In the market clearing model with world markets for goods and credit,
an increase in technology, A, in the home country causes:
a.
an decrease in the MPK.
c.
an increase in lending to foreigners.
b.
an increase in home country gross domestic investment.
d.
all of the
above.

21.
In the market clearing model with world markets for goods and credit,
an increase in technology, A, in the home country causes:
a.
a decrease in the MPK.
c.
an increase in borrowing from
foreigners.
b.
a decrease in gross domestic investment.
d.
all of the above.

22.
In the market clearing model with world markets for goods and credit,
an increase in technology, A, in the home country causes:
a.
a larger current account deficit.
c.
a lower MPK.
b.
a smaller current account deficit.
d.
lower domestic gross investment.

23.
In the market clearing model with world markets for goods and credit,
a decrease in technology, A, in the home country causes:
a.
a larger current account deficit.
c.
a higher MPK.
b.
a smaller current account deficit.
d.
higher domestic gross
investment.

24.
The open economy equilibrium business-cycle model predicts that the
real current account balance will be:
a.
acyclical.
c.
countercyclical.
b.
procyclical. d.
exogenous.

25.
The open economy equilibrium business-cycle model predicts that the
real current account balance will be:
a.
the same in expansions and recession.
c.
high in expansions and
low in recessions.
b.
low in expansions and high in recessions. d.
invariant with the
business cycle.

26.
In US data the real current account balance is:
procyclical when the model predicts it will be countercyclical.
c.
countercyclical when the model predicts it will be procyclical.
b.
procyclical as the model predicts.
d.
countercyclical as the model
predicts.
a.

a.
b.

27.
In US data the real current account balance is:
procyclical. c.
countercyclical.
weakly procyclical. d.
weakly countercyclical.

28.
While according to the model the current account balance will be
countercyclical, the balance can also decline due to:
a.
a temporary negative shock like a harvest failure. c.
a temporary
increase in government purchases as in war time.
b.
a less developed country having a low capital stock.
d.
all of the
above.

29.
While according to the model the current account balance will be
countercyclical, the balance can also decline due to:
a.
a temporary negative shock like a harvest failure. c.
a permanent
decrease in government purchases.
b.
a less developed country having poor institutions for growth.
d.
all
of the above.

30.
While according to the model the current account balance will be
countercyclical, the balance can also decline due to:
a.
a temporary positive shock like a good harvest.
c.
a permanent
decrease in government purchases.
b.
a less developed country having a low capital stock.
d.
all of the
above.

31.
While according to the model the current account balance will be
countercyclical, the balance can also decline due to:
a.
a temporary positive shock like a positive harvest c.
a temporary
increase in government purchases as in war time.
b.
a less developed country having a high capital stock.
d.
all of the
above.

32.
In the Ricardian case, if the government budget deficit is increased,
then the trade balance:
a.
moves toward a deficit too. c.
is unaffected.
b.
moves toward a surplus.
d.
is exogenous.

33.
The terms of trade are:
a.
($ per home good)/($ per foreign good).
c.
foreign good per home
good.
b.
the number of units of foreign goods that can be imported for each unit of
home goods exported.
d.
all of the above.

34.
The terms of trade are:
a.
($ per home good)/($ per foreign good).
c.
home good per foreign
good.
b.
the number of units of home goods that can be exported for each unit of
foreign goods imported.
d.
all of the above.

35.
The terms of trade are:
($ per foreign good)/($ per home good).

a.
c.
home good per foreign
good.
b.
the number of units of foreign goods that can be imported for each unit of
home goods exported.
d.
all of the above.

36.
The terms of trade are:
($ per home foreign/($ per home good).

a.
c.
foreign good per home
good.
b.
the number of units of home goods that can be exported for each unit of
foreign goods imported.
d.
all of the above.

37.
An increase in the terms of trade:
a.
raises real GDP.
c.
increases real national saving if the change in
terms of trade is less than fully permanent.
b.
increases consumption.
d.
all of the above.

a.
b.

38.
An increase in the terms of trade:
raises real GDP.
c.
lowers real national saving.
decreases consumption.
d.
all of the above.

a.
b.

39.
An increase in the terms of trade:
reduces real GDP.
c.
lowers real national saving.
increases consumption.
d.
all of the above.

40.
An increase in the terms of trade:
a.
reduces real GDP.
c.
increases real national saving if the change in
terms of trade is less than fully permanent.
b.
decreases consumption.
d.
all of the above.

41.

A decrease in the terms of trade:

a.
reduces real GDP.
c.
decreases real national saving if the change in
terms of trade is less than fully permanent.
b.
decreases consumption.
d.
all of the above.

42.
A decrease in the terms of trade:
a.
reduces real GDP.
c.
increases real national saving if the change in
terms of trade is less than fully permanent.
b.
increases consumption.
d.
all of the above.

a.
b.

43.
If the government reduces tariffs or quotas on imports, then:
real GDP will increase.
c.
net domestic investment will rise.
the real current account balance falls.d.
all of the above.

a.
b.

44.
If the government reduces tariffs or quotas on imports, then:
real GDP will increase.
c.
net domestic investment will fall.
the real current account balance rises.
d.
all of the above.

a.
b.

45.
If the government reduces tariffs or quotas on imports, then:
real GDP will decrease.
c.
net domestic investment will fall.
the real current account balance falls.d.
all of the above.

a.
b.

46.
If the government reduces tariffs or quotas on imports, then:
real GDP will decrease.
c.
net domestic investment will rise.
the real current account balance rises.
d.
all of the above.

47.
If the government imposes or increases tariffs or quotas on imports,
then:
a.
real GDP will decrease.
c.
net domestic investment will fall.
b.
the real current account balance rises.
d.
all of the above.

48.
If the government imposes or increases tariffs or quotas on imports,
then:
a.
real GDP will decrease.
c.
net domestic investment will rise.
b.
the real current account balance falls.d.
all of the above.

49.

If the government imposes or increases tariffs or quotas on imports,

then:
a.
real GDP will increase.
c.
net domestic investment will rise.
b.
the real current account balance rises.
d.
all of the above.

a.
b.

50.
If the government reduces tariffs or quotas on imports, then:
real GDP will increase.
c.
net domestic investment will fall.
the real current account balance falls.d.
all of the above.

51.
If we observe that the price of a good is higher in one location than in
another location, this observation
a.
violates the law of one price. c.
violates the law of one GDP.
b.
validates the law of one price.d.
validates the law of one GDP.

a.
b.

52.
Foreign direct investment is
the home countrys additional supply of labor to the rest of the world.
c.
the home countrys additional demand for labor from the rest of the world.
the home countrys additional ownership of capital in the rest of the world. d.
the foreign countrys additional demand for labor in the home country.

53.
When the home country acquires additional ownership of capital
located in the rest of the world, it has is
a.
reduced foreign indirect investment. c.
acquired foreign direct
investment.
b.
acquired foreign divested investment.
d.
reduced foreign direct
intervention.

a.
b.

54.
Real gross national product in an open economy includes
real GDP.
c.
net real labor costs from abroad.
net real asset income from abroad. d.
(a) and (b).

55.
If the home country has a real GNP which is greater than real domestic
expenditure, then the home country has
a.
a current-account suplus.
c.
balance on the current account.
b.
a current-account deficit.
d.
none of the above.

56.
If the home country has a real GNP which is less than real domestic
expenditure, then the home country has
a.
a current-account suplus.
c.
balance on the current account.
b.
a current-account deficit.
d.
none of the above.

57.
If the home country has a real GNP which is equal to real domestic
expenditure, then the home country has
a.
a current-account suplus.
c.
balance on the current account.
b.
a current-account deficit.
d.
none of the above.

58.
If the home country has a real GNP which is greater than net foreign
investment, then the home country has
a.
a current-account suplus.
c.
balance on the current account.
b.
a current-account deficit.
d.
none of the above.

59.
If the home country has a real GDP which is greater than real domestic
expenditure, then the home country has
a.
a trade balance that is positive.
c.
a trade balance that is zero.
b.
a trade balance that is negative.
d.
none of the above.

60.
If the home country has a real GDP which is less than real domestic
expenditure, then the home country has

a.
b.

a trade balance that is positive.


a trade balance that is negative.

c.
d.

a trade balance that is zero.


none of the above.

61.
Historical data on the U.S. current account balance show
a.
a deficit from the turn of the twentieth century through the mid-1970s.
c.
a surplus for the twentieth century through the mid-1970s.
b.
a surplus in most of the past two decades. d.
a zero current account
balance for most of the twentieth century.

62.
Historical data on the U.S. current account balance show that one of
the largest ratios for the current-account balance relative to GDP occurred
a.
as a surplus, in the early 1970s.
c.
as a surplus, in the early 2000s.
b.
as a deficit, in the early 1990s.
d.
as a deficit, in the early 2000s.

63.
Historical data on the ratio of U.S. nominal exports and imports to
GDP show
a.
a generally rising ratio since 1950. c.
a generally positive but steady
ratio since 1950.
b.
a generally falling ratio since 1950. d.
a ratio hovering around zero
since 1950.

64.

Historical data on the ratio of U.S. net international investment to GDP

show
a.
a steady increase in the ratio since 1980.
b.
a steady decline in the ratio since 1980.
the ratio since 1980.

c.
d.

a steady ratio since 1980.


no discernable pattern in

65.
Historical data on the ratio of U.S. net factor income from abroad to
GDP show
a.
a steady increase in the ratio since 1980.
c.
a peak in the ratio around
1980, followed by a decline through 1987.
b.
a steady decline in the ratio since 1960.
d.
no discernable pattern in
the ratio since 1980.

66.
A developing country with good prospects means that the countrys
current-account balance would likely be
a.
negative.
c.
zero.
b.
positive.
d.
impossible to determine.

SHORT ANSWER
1.

What is the real current account balance?

2.
What are the effects of a permanent increase in technology in the open
market clearing model?

3.
What does the open market clearing model predict about the
association of the real current account balance and real GDP growth and what do the
data on the US show?

4.

Does a government budget deficit lead to a real current-account

deficit?

5.
What are the effects of reducing tariffs and quotas in the open market
clearing model?

Chapter 18
TRUE/FALSE
1.

If the dollar per yen exchange rate rises, then so does the value of the

2.

When absolute purchasing power parity holds, the real exchange rate is

dollar.

1.

3.
Relative purchasing power parity says that the country with the higher
inflation rate will see its currency depreciate.

4.

The interest rate differential between two countries is the real interest

5.

If a country fixes its exchange rate, it gives up control of its money

rate.

supply.

6.
The nominal exchange rate is measured by quantities of currencies
exchanged, while the real exchange rate is measured by quantities of goods
exchanged.

7.

Fixed exchange rates are determined by market forces.

8.

Flexible exchange rates are determined by market forces.

9.
Poorer countries tend to have high real exchange rates because the
prices for nontradable goods is low in these countries.

10.
The combination of interest rate parity and relative purchasing power
parity implies that expected real incomes are the same in the home country and the
foreign country.

MULTIPLE CHOICE
1.
The nominal exchange rate is:
a.
foreign good per home good. c.
the number of units of foreign currency
per one unit of the home currency.

b.
the number of units of foreign currency per one unit of home currency divided
by the ratio of the foreign price level to the home price level.
d.
all of the
above.

2.
The real exchange rate is:
a.
foreign good per home good. c.
the number of units of foreign currency
per one unit of the home currency.
b.
nominal exchange rate divided by the ratio of the foreign price level to the
home price level.
d.
all of the above.

a.
b.

3.
Flexible exchange rates are determined by:
the market.
c.
the UN.
the home country government.
d.
the International Monetary Fund.

4.
Fixed exchange rates are determined by:
a.
the market.
c.
the UN.
b.
the governments of the two countries.
d.
Monetary Fund.

a.
b.

the International

5.
Purchasing power parity is the idea that:
the nominal exchange equals the ratio of the foreign price to the home price.
c.
the nominal exchange equals the home price less the foreign price.
the nominal exchange rate equals the foreign price time the home price. d.
the nominal exchange equals the home price less the foreign price.

a.
b.

6.
Purchasing power parity may not hold due to:
inflation.
c.
market clearing.
nontraded goods such as services. d.
all of the above.

a.
b.

7.
Purchasing power parity may not hold due to:
inflation.
c.
shifts in the terms of trade.
market clearing.
d.
all of the above.

8.
Absolutely purchasing power parity means:
a.
the quantity of goods that can be bought in the home country equals the
quantity of good that can be bought in the foreign country. c.
the nominal
exchange rate is the ratio of the foreign price to the home price.
b.
buying and selling goods looks equally attractive in both countries.
all of the above.

9.
Absolute purchasing power parity means:
a.
the quantity of goods that can be bought in the home country equals the
quantity of good that can be bought in the foreign country. c.
the nominal
exchange rate is the ratio of the home price to the world price.
b.
buying and selling goods looks more attractive in the home country.
all of the above.

d.

d.

10.
Absolute purchasing power parity means:
a.
the quantity of goods that can be bought in the home country is greater than
the quantity of goods that can be bought in the foreign country.
c.
the
nominal exchange rate is the ratio of the foreign price to the world price.
b.
buying and selling goods looks equally attractive in both countries.
d.
all of the above.

11.
Absolutely purchasing power parity means:
a.
the quantity of goods that can be bought in the home country is greater than
the quantity of goods that can be bought in the foreign country.
c.
the
nominal exchange rate is the ratio of the foreign price to the home price.
b.
buying and selling goods looks more attractive in the home country.
d.
all of the above.

a.
b.

12.
Non-traded goods include:
personal services like haircuts.
durable goods like tv sets.
d.

c.
consumer goods like shirts.
all of the above.

a.
b.

13.
Non-traded goods include:
commodities like wheat.
c.
consumer goods like shirts.
real estate.
d.
all of the above.

14.
Relative purchasing power parity says that:
a.
the growth rate of the nominal exchange rate is the foreign inflation rate less
the home inflation rate.
c.
the growth rate of the nominal exchange rate is
the home inflation rate plus the foreign inflation rate.
b.
the growth rate of the nominal exchange rate is the foreign inflation rate times
the home inflation rate.
d.
the growth rate of the nominal exchange rate is
the foreign inflation rate divided by the home inflation rate.

15.
Relative purchasing power parity implies a country will see its
currency fall in value, if
a.
its inflation rate is lower than the foreign inflation rate.
c.
its inflation
rate is higher than the foreign inflation rate.
b.
its price level is higher than the foreign price level. d.
its price level is
lower than the foreign price level.

16.
Relative purchasing power parity implies a country will see its
currency rise in value, if
a.
its inflation rate is lower than the foreign inflation rate.
c.
its inflation
rate is higher than the foreign inflation rate.
b.
its price level is higher than the foreign price level. d.
its price level is
lower than the foreign price level.

17.
Relative purchasing power parity implies a country will see its
currency keep the same value, if
a.
its inflation rate is lower than the foreign inflation rate.
c.
its inflation
rate is equal to the foreign inflation rate.
b.
its price level is higher than the foreign price level. d.
its price level is
equal to the foreign price level.

18.
If the home inflation rate is 5% and the foreign inflation rate is 9%,
then by relative purchasing power parity the home country would expect is exchange
rate to:
a.
rise in value by 5%. c.
rise value by 4%.
b.
fall in value by 5%. d.
fall in value by 4%.

19.
If the home inflation rate is 9% and the foreign inflation rate is 5%,
then by relative purchasing power parity the home country would expect is exchange
rate to:
a.
rise in value by 5%. c.
rise value by 4%.
b.
fall in value by 5%. d.
fall in value by 4%.

20.
If the home inflation rate is 5% and the foreign inflation rate is 5%,
then by relative purchasing power parity the home country would expect is exchange
rate to:
a.
rise in value by 5%. c.
have no change in its value.
b.
fall in value by 5%. d.
fall in value by 10%.

21.
Interest rate parity says that:
the interest rate differential is the growth rate of the nominal exchange rate.
c.
the interest rate differential is the growth rate of the real exchange rate.
b.
the interest rate differential is ratio of the foreign price level to the home price
level. d.
the interest rate differential is ratio of the home price level to the
foreign price level.
a.

22.
If the home interest rate is 5% and the foreign interest rate is 7%, then
the expected growth of the nominal exchange rate is:
a.
2%. c.
-2%.
b.
5%. d.
-12%.

23.
If the home interest rate is 5% and the foreign interest rate is 7%, then
the difference in the expected inflation rates is:
a.
2%. c.
-2%.
b.
5%. d.
-12%.

24.
If the home interest rate is 7% and the foreign interest rate is 5%, then
the expected growth of the nominal exchange rate is:
a.
2%. c.
-2%.
b.
7%. d.
-12%.

25.
If the home interest rate is 7% and the foreign interest rate is 5%, then
the difference in the expected inflation rates is:
a.
2%. c.
-2%.
b.
7%. d.
-12%.

26.
If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate equals the foreign interest rate.
c.
the growth
rate of the nominal exchange rate is zero.
b.
the home inflation rate equals the foreign inflation rate.
d.
all of the
above.

27.
If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate equals the foreign interest rate.
c.
the growth
rate of the nominal exchange rate is positive.
b.
the home inflation is lower than the foreign inflation rate. d.
all of the
above.

28.
If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate is higher than the foreign interest rate.
c.
the
growth rate of the nominal exchange rate is negative.
b.
the home inflation rate equals the foreign inflation rate.
d.
all of the
above.

29.
If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate is higher than the foreign interest rate.
c.
the
growth rate of the nominal exchange rate is zero.

b.
the home inflation rate is lower than the foreign inflation rate.
of the above.

30.

all

If a country with a fixed exchange rate tries to raise its money stock it

will:
a.
see its central bank gain domestic government bonds.
money stock fall back to its initial level.
b.
see its central bank lose international reserves.
d.

31.

d.

c.

see its

all of the above.

If a country with a fixed exchange rate tries to raise its money stock it

will:
a.
see its central bank gain domestic government bonds.
money stock continue to rise.
b.
see its central bank gain international reserves.
d.

c.

see its

all of the above.

32.
If a country with a fixed exchange rate tries to raise its money stock:
a.
see its central bank lose domestic government bonds.
c.
see its
money stock continue to rise.
b.
see its central bank lose international reserves.
d.
all of the above.

33.
If a country with a fixed exchange rate tries to raise its money stock:
a.
see its central bank lose domestic government bonds.
c.
see its
money stock fall back to its initial level.
b.
see its central bank gain international reserves.
d.
all of the above.

34.
A revaluation is when a country:
a.
allows its currencys value to float. c.
currency.
b.
raises the fixed value of its currency. d.
by the market.

35.

A devaluation is when a country:

lowers the fixed value of its


allows its currency value to be set

a.
allows its currencys value to float. c.
currency.
b.
raises the fixed value of its currency. d.
by the market.

lowers the fixed value of its


allows its currency value to be set

36.
A depreciation is when the value of a countrys currency:
a.
is fixed by the government. c.
falls in value in the exchange market.
b.
rises in value in the exchange market.
d.
is fixed in relationship to
gold.

37.
An appreciation is when the value of a countrys currency:
a.
is fixed by the government. c.
falls in value in the exchange market.
b.
rises in value in the exchange market.
d.
is fixed in relationship to
gold.

38.
Under a fixed exchange rate regime, losses of international reserves
imply that:
a.
the pressure on a country that needs to devalue it currency is greater.
c.
countries are not under much pressure to change the value of their currency.
b.
the pressure on a country that needs to revalue its currency is greater.
d.
countries can not change the value of their currencies.

39.
Fixed exchange rates:
facilitate transactions between countries compared to floating exchange rates.
c.
constrain monetary policy officials.
b.
make monetary policy interdependent between the countries fixing their
exchange rate. d.
all of the above.
a.

40.
Fixed exchange rates:
facilitate transactions between countries compared to floating exchange rates.
c.
give domestic monetary policy officials more autonomy.
b.
make monetary policy independent between the countries fixing their
exchange rate. d.
all of the above.
a.

41.
Fixed exchange rates:
a.
make transactions between countries riskier compared to floating exchange
rates. c.
give domestic monetary policy officials more autonomy.
b.
make monetary policy interdependent between the countries fixing their
exchange rate. d.
all of the above.

42.
Fixed exchange rates:
a.
make transactions between countries riskier compared to floating exchange
rates. c.
constrain monetary policy officials.
b.
make monetary policy independent between the countries fixing their
exchange rate. d.
all of the above.

43.
Floating exchange rates:
a.
make transactions between countries more difficult. c.
provide autonomy
for monetary policy authorities.
b.
make monetary policy independent. d.
all of the above.

44.
Floating exchange rates:
a.
make transactions between countries more difficult. c.
constrain
monetary policy officials.
b.
make monetary policy interdependent between the countries.
d.
of the above.

all

45.
Floating exchange rates:
a.
make transactions between countries easier. c.
constrain monetary policy
officials.
b.
make monetary policy independent. d.
all of the above.

46.
Floating exchange rates:
a.
make transactions between countries easier. c.
provide autonomy for
monetary policy authorities.
b.
make monetary policy interdependent between the countries.
d.
all
of the above.

47.
Under fixed exchange rates a countrys:
a.
money supply is fixed.
c.
monetary policy makers are not
independent.
b.
inflation rate is fixed. d.
all of the above.

a.
b.

48.
Under fixed exchange rates a countrys:
money supply is fixed.
c.
monetary policy makers are independent.
inflation rate will rise.
d.
all of the above.

49.
Under fixed exchange rates a countrys:
a.
money supply is domestically controlled.
c.
are independent.
b.
inflation rate is fixed. d.
all of the above.

monetary policy makers

50.
Under fixed exchange rates a countrys:
a.
money supply is domestically controlled.
c.
monetary policy makers
are not independent.
b.
inflation rate will rise.
d.
all of the above.

51.
Suppose the exchange rate between the U.S. dollar and the Argentinian
peso is 3 pesos per dollar today. It rises to 3.1 pesos per dollar the next day. This
means the dollar has
a.
appreciated and the peso has depreciated. c.
appreciated, and the peso
has appreciated.
b.
depreciated and the peso has appreciated. d.
depreciated, and the peso
has depreciated.

52.
In 1950, one U.S. dollar bought 361 Japanese yen, and in 2006, one
U.S. dollar bought 117 yen. The U.S. dollar
a.
gained over half of its value in terms of yen. c.
appreciated relative to the
yen.

b.
lost over half of its value in terms of yen.
most of the worlds currencies.

d.

appreciated relative to

53.
If a countrys government intervenes often in the exchange rate market,
then the country
a.
is operating closer to a flexible exchange-rate model than a fixed exchangerate model.
c.
is operating closer to a fixed exchange-rate model than a
flexible exchange-rate model.
b.
will experience repeated appreciations of its currency.
d.
is not a
member of the International Monetary Fund (IMF).

54.
At a simplified level, purchasing power parity makes sense because, if
it did not, housefholds would
a.
want to purchase all of their goods in one place, the more expensive country.
c.
not want to purchase any goods from either country.
b.
want to purchase equal portions of their goods in each country.
d.
want to purchase all of their goods in one place, the cheaper country.

55.
The real exchange rate is measured in units of
a.
goods bought in the foreign country relative to goods bought in the home
country.
c.
labor supply in the foreign country relative to labor supply in
the home country.
b.
prices in the foreign country relative to prices in the home country. d.
none of the above.

56.
If you can buy one pound of flour for $1.25 in the U.S. and one pound
of flour for 0.75 (pounds) in the U.K., then purchasing power parity implies the
a.
real exchange rate is 1.25 per $.
c.
nominal exchange rate is 1.67
per $.
b.
nominal exchange rate is 0.6 per $. d.
real exchange rate is 0.6 per $.

57.
Purchasing power parity implies the
a.
nominal exchange rate equals one. c.
real exchange rate equals one.
b.
nominal exchange is greater than one.
d.
real exchange rate is less
than one.

58.
The Balassa-Samuelson hypothesis identifies a pattern of poor
countries having
a.
low nominal exchange rates. c.
low real exchange rates.
b.
high nominal exchange rates. d.
high real exchange rates.

59.
The pattern of real exchange rates across countries that is identified by
the Balassa-Samuelson hypothesis occurs because
a.
low-income countries tend to have low prices for nontradable goods.
c.
low-income countries tend to have low prices for tradable goods.
b.
low-income countries tend to have high prices for nontradable goods.
d.
low-income countries tend to have low real exchange rates.

60.
The combination of interest-rate parity and relative purchasing power
parity leads to the conclusion that the
a.
foreign expected real interest rate is greater than the home expected real
interest rate. c.
foreign expected nominal interest rate equals the home
expected real interest rate.
b.
foreign expected real interest rate equals the home expected real interest rate.
d.
foreign expected nominal interest rate equals the home expected
nominal interest rate.

61.
The Bretton Woods System refers to
a.
the flexible exchange-rate system that the International Monetary Fund (IMF)
prefers.
c.
the fixed exchange-rate regime which linked other currencies to
the dollar and the dollar to gold.
b.
the flexible exchange-rate regime introduced just after World War II that gave
France the major role in stabilizing currencies.
d.
the fixed exchange-rate
regime which linked the U.S. and other currencies to silver.

62.
Under the Bretton Woods System, the U.S. dollar
a.
was allowed to vary around a wide band compared to other participating
countries.
c.
was not fixed, but the U.S. nominal interest rate was fixed
relative to other participating countries.

b.
varied according to market conditions, but the other participating countries did
not allow their currencies to vary.
d.
was the only participating currency
linked directly to gold.

63.
If the country of Colombia decides to fix its nominal exchange rate
with the U.S. dollar, then in the long run, it will have
a.
roughly the same inflation rate as the U.S. c.
roughly the same real
GDP as the U.S.
b.
a higher inflation rate than the inflation rate for the U.S.
d.
a higher
real GDP than the real GDP in the U.S.

64.
One reason that a country with a record of high inflation might want to
fix its nominal exchange rate with the U.S. dollar is that
a.
the country will, in the long run, have about the same inflation rate as the U.S.
c.
the fixed exchange-rate will act as a monetary-policy rule which
prevents the country from reneging on a pledge of low inflation.
b.
the fixed exchange-rate will help the country gain credibility in fighting high
inflation.
d.
all of the above.

65.
In exchange rate policy, sterilization refers to
a.
the markets ability to clear excess quantities of currency supplied rapidly. c.
anti-crime laws the U.S. passed to prevent money laundering.
b.
the central banks attempt to offset an initial intervention in the exchange
market.
d.
the process the International Monetary Fund (IMF) uses to lend
to a country in need.

a.
b.

66.
In a fixed exchange-rate regime, the money supply is
exogenous. c.
endogenous.
interdependent.
d.
highly skewed.

SHORT ANSWER
1.

What is a nominal exchange rate?

2.
What is absolute purchasing power parity, what does it imply and why
might it not hold?

3.
What is relative purchasing power parity and when does it say the
home country will see its currency lose value?

4.
What is interest-rate parity and what does this imply about when the
exchange rate will be stable?

5.

What are the advantages of fixed and floating exchange rates?