Exam

Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
In a fixed exchange rate regime, an increase in the price level will cause

1)

_______
A)
a real depreciation and no shift in the aggregate demand curve.
B)
no change in the real exchange rate, and no change in aggregate demand.
C)
a real depreciation and a rightward shift in the aggregate demand curve.
D)
a real appreciation and no shift in the aggregate demand curve.
E)
a real appreciation and a leftward shift in the aggregate demand curve.

2)
Based on your understanding of the AS/AD open economy model, a devaluation causes which of the following in the
short run?

2)

_______
A)
an increase in output
B)
an increase in the price level
C)
an increase in net exports
D)
all of the above
E)
none of the above

3)
During the EMS crisis in 1992

3)

_______
A)
France was put in charge of the system.
B)
all the EMS countries stood firm, and refused to change central parities.
C)
Germany abandoned the system.
D)
England and Italy abandoned the system.
E)
all the EMS countries abandoned the system.

4)
For this question, assume that exchange rates are flexible and that the exchange rate expected to occur in one year is NOT
constant. Suppose that individuals now expect that the foreign central bank will pursue expansionary monetary policy in
one year. This expected future monetary expansion by the foreign central bank will cause which of the following to occur?

4)

_______
A)
The current nominal exchange rate will increase.
B)
The current nominal exchange rate will not change.
C)
The current nominal exchange rate will decrease.
D)
The effects on the current nominal exchange rate are ambiguous.

5)
Which of the following is an advantage of a common currency in Europe?

5)

_______
A)
Exchange rate uncertainty within the common currency area would be eliminated.
B)
Each country could conduct its own, independent fiscal policy.
C)
Each country could conduct its own, independent monetary policy.
D)
all of the above
E)
none of the above

6)
In a fixed exchange rate regime, which of the following policies could be implemented to increase a trade deficit and leave
aggregate demand constant?

6)

_______
A)
increase government spending and devalue the currency
B)
decrease government spending
C)
decrease government spending and revalue the currency
D)
increase government spending
E)
revalue the currency

7)
Policy makers can select from a number of different exchange rate regimes and exchange rate policies. Which of the
following policies would most likely represent a hard peg?

7)

_______
A)
a devaluation

B)

a dollarization
C)
a flexible exchange rate regime

D)

a revaluation

8)
An increase in the foreign one-year interest rate expected to occur in, say, two years will, all else fixed, have which of the
following effects in a flexible exchange rate regime?

8)

_______
A)
Both the real and nominal exchange rate will decrease.
B)
No change in either the nominal or real exchange rate.
 C)
The real exchange rate will decrease with no change in the nominal exchange rate.
D)
The nominal exchange rate will decrease with no change in the real exchange rate.

9)
An increase in the domestic one-year interest rate expected to occur in, say, two years will, all else fixed, have which of the
following effects in a flexible exchange rate regime?

9)

_______
A)
The nominal exchange rate will increase with no change in the real exchange rate.
B)
The real exchange rate will increase with no change in the nominal exchange rate.
C)
Both the real and nominal exchange rate will increase.
D)
No change in either the nominal or real exchange rate.

10)
For this question, assume that policy makers are pursuing a fixed exchange rate regime and that output is initially greater
than the natural level of output. The economy will tend to move toward the natural level of output when which of the
following occur?

10)

______
A)
an increase in the price level
B)
an increase in the foreign price level
C)
a reduction in the domestic interest rate
D)
a devaluation of the currency
E)
none of the above

11)
Policy makers can select from a number of different exchange rate regimes. One of those options is a "hard peg." Which of
the following best represents a hard peg?

11)
______
A)
a currency board
B)
a flexible exchange rate regime
C)
the EMS
D)
a revaluation
E)
none of the above

12)
Part of the reason for the Mexican peso crisis of 1994 was Mexico's decision to

12)

______
A)
maintain relatively low nominal interest rates in the face of relatively high inflation.
B)
maintain a roughly fixed nominal exchange rate in the face of relatively high inflation.
C)
allow the peso to appreciate too rapidly.
D)
allow the peso to depreciate too rapidly.
E)
run a very small budget deficit in the face of relatively high inflation.

13)
Under the Gold Standard

13)

______
A)
real interest rates were fixed.
B)
exchange rates could float.
C)
real exchange rates were fixed.
D)
nominal interest rates were fixed.
E)
none of the above
 14)
Assume that policy makers are pursuing a fixed exchange rate regime and that the economy is initially operating at the
natural level of output. Which of the following will occur as a result of a revaluation?

14)

______
A)
The real exchange rate will be permanently lower in the medium run.
B)
The effects of this revaluation on the real exchange rate will be ambiguous in the medium run.
C)
The nominal exchange will initially fall in the short run and then increase in the medium run.
D)
The real exchange rate will be unchanged in medium run.
E)
The real exchange rate will be permanently higher in the medium run.

Use the following information to answer the questions below. The exchange rate between the British pound and the U.S.
dollar is 2. In England, the price level is 1.0 and the one-year interest rate is 20%. In the United States, the price level is .8
and the one-year interest rate is 8%. The inflation rate in both countries is zero.

15)
The price of U.S. goods measured in pounds is

15)

______
A)
.8.
B)
1.0.
C)
1.6.
D)
2.
E)
none of the above

16)
After Britain returned to the Gold Standard in the 1920s, the British pound was

16)

______
 A)
undervalued, contributing to a long period of inflation.
B)
overvalued, contributing to a long period of recession.
C)
overvalued, contributing to a long period of inflation.
D)
undervalued, contributing to a long period of recession.
E)
value about right, leading to a long period healthy growth with almost no inflation.

17)
A number of situations can arise that will cause individuals to believe that policy makers might change the pegged value
of a fixed exchange rate. Suppose financial market participants expect a devaluation in the future. The interest parity
condition will be maintained if which of the following policy actions are taken in the current period?

17)

______
A)
an increase in i
B)
a reduction in government spending
C)
a reduction in i
D)
an increase in the pegged value of the domestic currency

18)
After continuing crises in 1993, the EMS countries

18)

______
A)
agreed to entirely abandon the system.
B)
narrowed the band of allowable fluctuations around central parities.
C)
widened the band of allowable fluctuations around central parities.
D)
stood firm, refusing to adjust central parities.
E)
removed France from its leading role in the system.
 19)
Suppose foreign exchange markets anticipate a revaluation for country A. Further assume that policy makers in country A
will continue to fix its nominal exchange rate. In order to peg the currency at its original level, which of the following must
occur?

19)

______
A)
decrease the domestic price level
B)
reduce the domestic interest rate
C)
convince trading partners to reduce their interest rates
D)
all of the above
E)
none of the above

20)
When policy makers decide to revalue the currency, such an action generally represents

20)

______
A)
an increase in the pegged value of the domestic currency.
B)
an increase in the domestic price level.
C)
a decision to let the currency float.
D)
a reduction in the foreign price level.
E)
none of the above

21)
Which of the following is an argument of opponents of devaluations?

21)

______
A)
Participants in foreign exchange markets have a short memory if the expected devaluation doesn't occur within a short
time-period, they will stop expecting it.
B)
A devaluation causes a nation with fixed exchange rates to lose credibility in the medium run, driving its interest rate
higher.
C)
Devaluations cause relatively slow adjustments.
D)
all of the above
E)
none of the above

22)
Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the economy is initially operating at
the natural level (i.e., Y = Yn). Now suppose that households as a result of an increase in consumer confidence increase
consumption. Given this information, we know that

22)

______
A)
the real exchange rate will be unchanged in the medium run.
B)
the real exchange rate will be permanently higher in the medium run.
C)
the real exchange rate will be permanently lower in the medium run.
D)
the effects of this devaluation on the real exchange rate will be ambiguous in the medium run.

23)
When policy makers decide to devalue the currency, such an action generally represents

23)

______
A)
a decision to let the currency float.
B)
a reduction in the foreign price level.
C)
a reduction in the domestic price level.
D)
a reduction in the pegged value of the domestic currency.
E)
none of the above

24)
An adjustment of central parities in the EMS is called a
24)

______
A)
nominal appreciation or nominal depreciation.
B)
real appreciation or real depreciation.
C)
re-coupling.
D)
realignment.
E)
re-paritization.

25)
Which of the following will occur in the medium run as a result of a revaluation?

25)

______
A)
a reduction in output
B)
a reduction in the price level
C)
a reduction in net exports
D)
all of the above
E)
none of the above

26)
In Chapter 21, the expected future nominal exchange rate in the long run say, E et+n, is assumed to be the nominal
exchange rate at which

26)

______
A)
the future rate of appreciation or depreciation is constant.
B)
the current account is in balance.
C)
domestic and foreign price levels are equal.
D)
one unit of foreign currency exchanges for one unit of domestic currency.
E)
none of the above

27)
Which of the following, according to the Maastricht treaty, was a condition for participating in the common currency
area?

27)

______
A)
a promise that any future devaluations will be announced in advance
B)
a relatively small amount of foreign aid to countries outside the area
C)
At least half the population of the country must speak German, French and English.
D)
a relatively small budget deficit-to-GDP ratio
E)
the replacement of the country's prime minister with an appointee of the new "United States of Europe"

28)
For this question, assume that policy makers are pursuing a fixed exchange rate regime and that output is initially less
than the natural level of output. The economy will tend to move toward the natural level of output when which of the
following occur?

28)

______
A)
a reduction in the foreign price level
B)
an increase in the price level
C)
an increase in the domestic interest rate
D)
a devaluation of the currency
E)
none of the above

Use the following information to answer the questions below. The exchange rate between the British pound and the U.S.
dollar is 2. In England, the price level is 1.0 and the one-year interest rate is 20%. In the United States, the price level is .8
and the one-year interest rate is 8%. The inflation rate in both countries is zero.

29)
The real exchange rate (from the United States' perspective) is
29)

______
A)
.625.
B)
.8.
C)
1.6.
D)
2.0.
E)
none of the above

30)
Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the economy is initially operating at
the natural level (i.e., Y = Yn). Suppose that government spending decreases. Given this information, we know that this
fiscal contraction will cause

30)

______
A)
the effects of this devaluation on the real exchange rate will be ambiguous in the medium run.
B)
the real exchange rate will be unchanged in the medium run.
C)
the real exchange rate will be permanently lower in the medium run.
D)
the real exchange rate will be permanently higher in the medium run.
E)
none of the above

1)

2)
D

3)
D
 4)
A

5)
A

6)
C

7)
B

8)
A

9)
C

10)
A

11)
A

12)
B

13)
E

14)
D

15)
C

16)
B
 17)
A

18)
C

19)
B

20)
A

21)
B

22)
C

23)
D

24)
D

25)
B

26)
B

27)
D

28)
D

29)
C
 30)
D