Eco 1002 Final Review

Suppose the price of a cup of coffee is $3 in Boston and 6 euros in Berlin. Use this information to properly answer the following question. According to the theory of purchasing power parity, the exchange rate is 2 euros per dollar. 3 euros per dollar. 1/3 euros per dollar. 1/2 euros per dollar.

2 euros per dollar.

If 5 Swiss francs trade for $1, the U.S. price level equals $1 for a good, and the Swiss price level equals 2 francs for the same good, then the real exchange rate between Swiss goods and U.S. goods is _____ Swiss good(s) per U.S. good. 0.4 2.5 5 10

2.5

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: 0.6. 1.67. 2.0. 2.5.

2.5.

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals: 1,000. 2,500. 3,000. 5,000.

3,000

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is _____ times per year. 0.2 2 5 10

5

Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate? A B C D

A (moving from S1 - I to S2 - I, which increases NX and decreases real exchange rate)

A small open economy with a floating exchange rate is initially at equilibrium A with LM*1 equilibrium exchange rate e2, and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant. A B C D

D (higher output, lower exchange rate)

Which of the panels illustrates the impact of protectionist trade policies on the real exchange rate? A B C D

D (moving NX up and right while real exchange rate increases)

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _____ increase income, and under fixed exchange rates, expansionary monetary policy _____ increase income. can; can can; cannot cannot; can cannot; cannot

can; cannot

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which: capital is relatively scarce. capital is relatively abundant. technological production capabilities are inferior. labor is relatively scarce.

capital is relatively scarce.

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to: increase in the present. decrease in the present. remain constant in the present. decrease only in the future.

decrease in the present.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level. increase; IS decrease; IS increase; LM decrease; LM

decrease; LM

If the information technology boom increases investment demand in a small open economy, then net exports _____, and the real exchange rate _____. increase; appreciates increase; depreciates decrease; appreciates decrease; depreciates

decrease; appreciates

If the consumption function is given by C = 150 + 0.85 (Y - T) and T increases by 1 unit, then saving: decreases by 0.85 units. decreases by 0.15 units. increases by 0.15 units. increases by 0.85 units.

decreases by 0.15 units.

In a small open economy: Other things equal, an increase in government purchases of goods and services pushes the trade balance toward *blank* and causes the currency to *blank*

deficit; appreciate

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade _____ and _____ net capital outflow. deficit; negative surplus; negative deficit; positive surplus; positive

deficit; negative

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _____ and _____ net capital outflow. deficit; negative surplus; positive deficit; positive surplus; negative

deficit; negative

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to _____, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to _____. appreciate; appreciate appreciate; depreciate depreciate; depreciate depreciate; appreciate

depreciate; appreciate

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will _____, and net exports will _____ to restore the economy to its natural rate. appreciate; increase appreciate; decrease depreciate; increase depreciate; decrease

depreciate; increase

The goods produced in U.S. industries may be made more competitive in world markets by: appreciating the U.S. currency. depreciating the U.S. currency. keeping the exchange rate fixed. expanding the money supply.

depreciating the U.S. currency.

If a U.S. corporation sells a product to Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports _____, and net capital outflows _____. increase; increase decrease; decrease do not change; do not change do not change; increase

do not change; do not change

In a small, open economy, if net exports are negative, then: domestic spending is greater than output. saving is greater than investment. net capital outflows are positive. imports are less than exports.

domestic spending is greater than output.

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase: investment in the small open economy. saving in the small open economy. exports by the small open economy. imports by the small open economy.

exports by the small open economy.

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate: rises, while the real exchange rate rises and net exports fall. rises, while the real exchange rate falls and net exports rise. falls, while the real exchange rate rises and net exports rise. falls, while the real exchange rate rises and net exports fall.

falls, while the real exchange rate rises and net exports fall.

In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports: decrease, but the money supply falls and income falls. increase, the money supply increases, and income increases. are unchanged, but the money supply falls and income falls. are unchanged, the money supply is unchanged, and income is unchanged.

increase, the money supply increases, and income increases.

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports _____, and U.S. imports _____. increase; increase decrease; decrease increase; decrease decrease; increase

increase; decrease

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____, and net exports will _____. increase; increase increase; decrease increase; not change decrease; increase

increase; decrease

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports _____, and net capital outflows _____. increase; increase increase; decrease decrease; increase decrease; decrease

increase; increase

If nominal gross domestic product (GDP) increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP _____ by _____ percent. increased; 2 decreased; 2 increased; 8 decreased; 8

increased; 2

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit _____ net exports, and the real exchange rate _____. increases; appreciates increases; depreciates decreases; appreciates decreases; depreciates

increases; depreciates

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal? increasing taxes increasing government spending increasing investment tax credits imposing protectionist trade policies

increasing taxes

The real exchange rate: measures how many Japanese yen you can get for one U.S. dollar. is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the domestic price level divided by the foreign price level. is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the foreign price level divided by the domestic price level. domestic price level divided by the foreign price level.

is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the domestic price level divided by the foreign price level.

When a nation runs a trade deficit, its output exceeds the sum of its consumption, investment, and government purchases. it experiences a capital inflow. all of the above its saving exceeds its domestic investment.

it experiences a capital inflow.

The lower the real exchange rate is, the _____ expensive domestic goods are relative to foreign goods, and the _____ the demand is for net exports. more; greater more; smaller less; greater less; smaller

less; greater

The intersection of the IS* and LM* curves shows the _____ and the _____ at which both the goods market and the money market are in equilibrium. interest rate; price level price level; exchange rate level of output; exchange rate level of output; price level

level of output; exchange rate

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to: make loans to the domestic government. make loans to foreigners. repay the national debt. repay loans to the Federal Reserve.

make loans to foreigners.

The real exchange rate is determined by the equality of: saving and the demand for net exports. investment and the demand for net exports. net capital outflow and the demand for net exports. the negative value of net capital outflow and the demand for net exports.

net capital outflow and the demand for net exports.

In a large open economy, the real exchange rate adjusts so that net exports equal: domestic saving. domestic investment. net capital outflow. domestic investment plus net capital outflow.

net capital outflow.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to: a fall in consumption and income. no change in consumption or income. no change in income but a rise in net exports. no change in income or net exports.

no change in income but a rise in net exports.

An expansionary fiscal policy leads to _____ in investment spending for a small open economy, while it leads to _____ in investment spending for a large open economy. a decrease; no change no change; decrease a decrease; an increase a decrease; a decrease

no change; decrease

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate. increase decrease not change either increase or decrease

not change

Protectionist policies implemented in a small open economy with a trade deficit have the effect of _____ the trade deficit and _____ the quantity of imports and exports. decreasing; decreasing not changing; decreasing decreasing; not changing not changing; not changing

not changing; decreasing

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: r2, Y2. r3, Y2. r2, Y3. r1, Y2.

r3, Y2. (lower output, lower interest)

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income: r2, Y2. r3, Y2. r2, Y3. r3, Y3.

r3, Y3. (higher output, lower interest)

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade _____ and _____ net capital outflow. deficit; negative surplus; positive deficit; positive surplus; negative

surplus; positive

The value of net exports is also the value of: net investment. net saving. national saving. the difference of national saving and domestic investment.

the difference of national saving and domestic investment.

A depreciation of the real exchange rate in a small open economy could be the result of: a domestic tax cut. an increase in government spending. a decrease in the world interest rate. the expiration of an investment tax-credit provision.

the expiration of an investment tax-credit provision.

In a short-run model of a large open economy with a floating exchange rate: net exports determine the exchange rate, which in turn determines net capital outflow. net exports determine net capital outflow, which determines the interest rate. the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow. the interest rate determines investment and net capital outflow, which are equal within the IS-LM framework; the exchange rate then determines net exports.

the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow.

If the gross domestic product (GDP) deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009? $12 trillion $12.5 trillion $15 trillion $18.75 trillion

$12 trillion

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals: $100 billion. $150 billion. $600 billion. $650 billion.

$600 billion.

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: −$25 billion. -$10 billion. $10 billion. $25 billion.

-$10 billion.

A small open economy with a floating exchange rate is initially in equilibrium at A with IS*1. Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____. LM; LM2* LM; LM3* IS; IS2* IS; IS3*

IS; IS2*

In a small open economy: If an import restriction does not influence domestic investment or saving, it causes a country's currency to *blank*, resulting in *blank*

appreciate; an unchanged trade balance

According to recent estimates produced by economists, the trade restrictions announced by President Donald Trump at the beginning of 2018 had this effect: an increase in exports. a decrease in the trade deficit as a percentage of gross domestic product (GDP). an increase in imports. a decrease in the overall volume of trade.

a decrease in the overall volume of trade.

Which of the following events would cause a currency to depreciate? a rise in the price level a tax cut an investment boom a tax increase abroad

a rise in the price level

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income. aggregate demand; aggregate supply aggregate supply; aggregate demand monetary policy; fiscal policy fiscal policy; monetary policy

aggregate supply; aggregate demand

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction: raises the interest rate, lowers investment and income, but does not affect the exchange rate. raises the exchange rate, lowers net exports and income, but does not affect the interest rate. initially raises the exchange rate, causing arbitrageurs to sell dollars and return the money supply to its initial level. raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to _____, and expansionary monetary policy causes the exchange rate to _____. rise; rise rise; fall fall; fall fall; rise

rise; fall

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to _____ the central bank, which causes the money supply to _____. sell domestic currency to; increase sell domestic currency to; decrease buy domestic currency from; increase buy domestic currency from; decrease

sell domestic currency to; decrease

According to purchasing-power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will _____ oil in New York and _____ oil in London to drive _____ the price of oil in New York. buy; sell; up buy; sell; down sell; buy; up sell; buy; down

sell; buy; down

In a small open economy: Other things equal, an increase in the world interest rate pushes the trade balance toward *blank* and causes the currency to *blank*

surplus; depreciate

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade _____ and _____ net capital outflow. surplus; negative deficit; positive surplus; positive deficit; negative

surplus; positive