Beruflich Dokumente
Kultur Dokumente
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Commence each question on a new page. Carry out the instructions on the front cover of this
3.
paper
Complete all student and course information on the Multiple Choice Answer Sheet. You must
4. write your student number in the spaces provided AND fill in the corresponding bubbles
(omitting any letters)
All multiple choice responses MUST be recorded on the Multiple Choice Answer Sheet. DO
5.
NOT record these answers in the exam script book.
This exam contains Two sections A& B. Attempt ALL questions in Section A and any three of
8.
five questions in Section B
This exam paper adds to 100 marks and comprises 50% of the total marks allocated in this
9. course. To obtain a pass in this course, you must achieve at least 50 % overall in course
assessment
All mobile phones must be switched off and placed INSIDE your bag. You are in breach of
10.
exam conditions if it is on your person (i.e. pocket)
QUESTION 1
A current account surplus
(a) Corresponds to an exactly equal accumulation of net financial assets by domestic residents
on the rest of the world.
(b) Corresponds to an exactly equal accumulation of net financial liabilities to the rest of the
world.
(c) Has no implications for a countrys wealth.
(d) Increases the countrys net debt to the rest of the world.
QUESTION 2
A nations current account balance can be expressed
(a) As a nations export receipts and income received from abroad minus import expenditure and
income paid to foreign residents
(b) As the difference between national savings and investment
(c) In terms of inter-temporal trade
(d) All of the above
QUESTION 3
If the sum of the financial account and current account is less than zero, there will be
(a) A reduction in international reserves under a flexible exchange rate regime
(b) A reduction in international reserves under a fixed exchange rate regime.
(c) An increase in international reserves under a fixed exchange rate regime.
(d) None of the above.
QUESTION 4
If a New Zealand company purchases a factory in Vietnam it will be reflected in the New Zealand
balance of payments as
a A credit in the current account and a debit in the financial account.
b A credit in the current account and a credit in the financial account.
c A debit in the financial account and a credit in the financial account.
d A debit in the current account and a credit in the financial account.
QUESTION 5
Which of the following statements is incorrect?
a The level of net foreign debt is determined by the current account of the Balance of Payments.
b A debit item on the financial account may be counterbalanced by a credit item on the same
account.
c If a current account deficit is financed by the Central Bank the economys net foreign assets
remain unchanged.
d None of the above.
QUESTION 7
Assuming an economy is initially experiencing internal balance, a reduction in the real exchange
rate will
a Result in an excess supply of non-tradeables
b Result in an excess demand for non-tradeables
c Result in a balance of trade deficit
d Result in a balance of trade surplus
QUESTION 8
Assuming covered interest parity holds, if i = 8%, i* = 10%, e= 1.7, what does the forward exchange
rate equal?
(a) 1.67
(b) 1.32
(c) 1.18
(d) 1.78
QUESTION 9
Assuming a closed economy, where I= 35-4r and S= r+25, then the cost of one unit of current
consumption in country A equals ___ units of future consumption.
a 0.98
b 1.3
c 1.02
d 1.20
QUESTION 10
Assuming uncovered interest parity holds, if the e = 2.45, i = 6% and i* = 8%, then the expected
spot exchange rate equals
(a) 2.20
(b) 2.40
(c) 2.62
(d) 2.88
QUESTION 11
Assuming covered interest parity holds, if i = 5%, i * = 7%, f = 2.40, then the current spot exchange
rate equals
a 3.55
b 2.40
c 2.70
d 2.45
QUESTION 13
Relative purchasing power parity asserts
a That the country that has the higher expected rate of inflation will have the currency that is expected
to increase in value.
b That the country that has the higher expected rate of inflation will have a forward rate that equals
the expected spot rate.
c That the country that has the higher expected rate of inflation will have the currency that is expected
to fall in value.
d That a basket of goods will have the same cost in different countries if stated in terms of the same
currency
QUESTION 14
Which of the following is true for the J-curve effect? It:
a Suggests that following an increase in the exchange rate a countrys trade balance will
deteriorate before it improves.
b Suggests that following an increase in the exchange rate a countrys trade balance will
improve before it deteriorates.
c Applies to the interest rate effect of a change in the exchange rate.
d Applies to the income effect of a change in the exchange rate.
QUESTION 15
According to the international fisher relationship the economy that has the higher expected rate of
inflation will
a Have the higher real rate of interest.
b Have a lower real rate of interest.
c Have the higher nominal rate of interest.
d Have the lower nominal rate of interest.
QUESTION 16
According to the Dornbusch model, following an increase in the rate of growth of the domestic
money supply,
(a) The short run response of the exchange rate will be greater than its long run response.
(b) The domestic price level will immediately increase.
(c) Domestic nominal interest rates will increase in the short run to ensure money market
equilibrium is restored.
(d) Domestic nominal interest rates will fall in the long run.
QUESTION 17
According to the monetary approach, an increase in domestic output will lead to in the long-run:
a A lower real money demand, a higher price level, and a proportional depreciation of the
domestic currency.
b A higher real money demand, a lower price level, and a proportional appreciation of the
domestic currency.
c A higher real money demand, an unchanged price level and an unchanged value of
domestic currency.
d None of the above
QUESTION 19
If the value of a countrys currency decreases and the foreign currency price of its imports
decreases, it must mean
a The country is a price taker.
b Its demand curve for imports is positively sloped.
c It faces a horizontal supply curve of imports.
d None of the above.
QUESTION 20
Which of the following statements is correct?
a A country cannot be a large country in both its export and import markets.
b If a country is a large country in the export market, the effect on the foreign currency value of
export receipts as a result of an exchange rate change is uncertain.
c The flatter the demand curve for exports, the greater the degree of market power the
domestic economy has in the export market.
d Both (b) and (c) are correct statements.
QUESTION 21
The absorption approach
a Ignores the effect of a change in income on the trade balance
b Incorporates the financial account.
c Ignores both the financial account and the effect of a change in income on the trade balance.
d None of the above.
QUESTION 22
According to the basic absorption approach, a reduction in the value of the domestic currency
a Will improve the trade balance through a decrease in income and output if the economy is
above full employment.
b Will improve the trade balance through an increase in income and output if the economy is
above full employment.
c May improve the trade balance through a reduction in absorption
d May improve the trade balance through an increase in absorption.
QUESTION 23
Under the Australian model (Swan model), changes to government spending should be the policy
weapon used
a For the objective which has the flattest balance schedule
b For the objective which has the steepest balance schedule
c To achieve internal balance
d To achieve external balance
QUESTION 25
Which of the following statements are correct?
(a) In response to an excess demand for non-traded goods, producers of these goods would be
expected to increase prices, which will increase the real exchange rate.
(b) An excess demand for tradable goods will reduce the nominal exchange rate under a flexible
exchange rate regime.
(c) An excess demand for tradables will increase international reserves under a fixed exchange
rate, resulting in an increase in the money supply and an expansionary effect on absorption.
(d) None of the above
QUESTION ONE
(a) Assume that Singapore is currently achieving internal balance, but experiencing a trade
deficit. Also assume that Singapore faces a relatively elastic IB schedule and a relatively
inelastic EB schedule. Explain how and why an attempt to restore external balance will disrupt
internal balance and how internal balance would be restored.
(10 marks)
(b) Assume that China is currently achieving internal balance, but experiencing a trade surplus.
Also assume that China faces a relatively elastic IB schedule and a relative inelastic EB
schedule. Explain how and why an attempt to restore external balance will disrupt internal
balance and how internal balance would be restored.
(10 marks)
(c) What automatic mechanisms of adjustment might eliminate an excess demand for non
tradeables?
(5 marks)
(10 + 10 + 5 = 25 Marks)
QUESTION TWO
(a) With reference to the IS-LM-BP analysis of a small economy, answer the following questions
and provide the required explanation
(i) Assuming zero capital mobility, examine the effect that an increase in the level of
government expenditure has for the domestic economy. Consider both the case of a
fixed and flexible exchange rate.
(10 marks)
(ii) Assuming perfect capital mobility examine the effect that an increase in the money
supply has for the domestic economy. Consider both the case of a fixed and flexible
exchange rate
(10 marks)
(b) Consider two countries with perfect capital mobility and flexible exchange rates. Making use
of appropriate diagrams, and assuming the domestic economy is large, examine the effect of
an expansionary domestic fiscal policy on both the domestic and foreign economy.
(5 marks)
(10 + 10 + 5 = 25 Marks)
QUESTION THREE
(a) With reference to the IS-LM-BP analysis of a small economy, answer the following questions
and provide the required explanation
(i) Assuming perfect capital mobility, examine the effect that an increase in the level of
government expenditure has for the domestic economy. Consider both the case of a
fixed and flexible exchange rate.
(10 marks)
ii) Assuming zero capital mobility examine the effect that an increase in the money supply
has for the domestic economy. Consider both the case of a fixed and flexible exchange
rate.
(10 marks)
QUESTION FOUR
(a) Critically comment on the following statement.
the advantages of fixed exchange rate regimes increase with the degree of economic
integration while the advantages of flexible exchange rate regimes diminish.
(10marks)
(7 marks)
QUESTION FIVE
Financial crises can stem from problems of private or public sectors balance sheets and have
domestic or external origins. Irrespective of its origins, a financial crisis is often an amalgam of
events, including substantial changes in credit volume and asset prices, severe disruptions in
financial intermediation, notably a reduction in the supply of external financing, large-scale balance-
sheet problems, and often a need for substantial government and international support
Reflecting on your learning in this course, in particular the theory of optimum currency areas and
currency crises, critically assess the statement above.
In your answer consider an example / examples of an economy or region that has experienced a
currency crisis.
(25 Marks)