THE UNIVERSITY OF SYDNEY

Macroeconomic Theory: ECON5002

Week Nine

PRACTICE QUESTIONS

1) Assume that the nominal exchange rate decreases by 4%. If prices (both
domestic and foreign do not change), we know that:
A) domestic goods are now relatively more expensive.
B) foreign goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both A and C

2) A nominal appreciation of the Japanese yen (against all currencies) indicates

that:
A) the yen price of the U.K. pound has increased.
B) the yen price of the U.S. dollar has increased.
C) the number of units of foreign currency that one can obtain with one yen has
increased.
D) all of the above

3) Assume that the interest rate in a foreign country is 7% and that the foreign
currency is expected to depreciate by 3% during the year. For each dollar that a U.S.
resident invests in foreign bonds, he/she can expect to get back an approximate
total of:
A) $.93.
B) $.96.
C) $1.04.
D) $1.07.
E) $1.10.

4) A reduction in the real exchange rate indicates that:

A) domestic goods are now relatively more expensive.
B) foreign goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both A and C

5) For this question, suppose the domestic interest rate is 4% and that the foreign
interest rate is 7%. And finally, assume that the domestic currency is expected to
depreciate by 3% during the coming year. Given this information, we know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold foreign bonds.
C) individuals will only hold domestic bonds.
D) the interest parity condition holds.

6) Suppose the U.S. one-year interest rate is 3% per year, while a foreign country
has a one-year interest rate of 5% per year. Ignoring risk and transaction costs, a
U.S. investor should invest in foreign bonds as long as the expected yearly rate of
depreciation of the foreign currency is:
A) less than 1%.
B) less than 2%.
C) greater than 2%.
D) less than 5%.
E) greater than 5%.

7) When the dollar appreciates, we know that:

A) foreign currency is less expensive to Americans.
B) American goods are less expensive to foreigners.
C) foreign goods are less expensive to Americans.
D) the dollar is less expensive to foreigners.
E) none of the above

8) For this question, assume the interest parity conditions holds. Also assume that
the domestic interest rate is 5% and that the foreign interest rate is 9%. Given this
information, we would expect that:
A) the domestic currency is expected to appreciate by 4%.
B) the domestic currency is expected to depreciate by 4%.
C) individuals will only hold domestic bonds.
D) individuals will only hold foreign bonds.