Exchange rates 2
Expected real interest rates in all countries will be identical only when
-relative PPP is expected to hold. -real exchange rates are not expected to change.
Which of the following is not part of the definition for Gross National Product?
...produced within a country's borders...
Which of the following assets is the least liquid?
A house
Based on purchasing power parity (PPP), which of the following, all else being equal, could lead to a long-run real appreciation of the U.S. dollar?
A rise in the growth rate of the U.S. GDP
Which of the following would cause a country's nominal interest rate to fall and its currency to depreciate simultaneously, in a world of perfectly flexible prices?
A temporary decrease in world relative demand for the country's output.
What other macroeconomic change might bring about a currency depreciation coupled with a deterioration of the current account, even if there is no J-curve?
A. a decline in the foreign demand for domestic products. B. an increase in the domestic demand for foreign products.
Which of the following is most plausible as an explanation for relative PPP holding better in the long run than in the short run?
A. in the short run exchange rate fluctuations may be seen as temporary by trading firms. B. it takes time for international trading firms to acquire and/or expand their "presence" in higher price markets. C. prices tend to be less sticky in the long run, thus lessening any deviation from PPP. D. All of the above are plausible. <--
A temporary increase in government spending causes the current account to fall by a smaller amount than does a permanent increase in government spending because the
A. latter induces an appreciation of the currency's expected future value. B. latter induces a decrease in the expected future exchange rate. C. former has no effect on expectations on future exchange rates.
Which of the following is a correct prediction based on the PPP model of the exchange rates?
An increase in the U.S. interest rates leads to depreciation of the dollar.
Which of the following changes does NOT shift the AA schedule in the short run?
An increase in the exchange rate E$/e
Which of the following changes does NOT shift the DD schedule in the short run?
An increase in the exchange rate E$/e
Which of the following assets is the most liquid?
A traveler's check.
Which of the following is NOT a function of money?
Capital used to produce goods and services.
The DD curve describes the link between the exchange rate and the output in the short run. Through which variable does this link operate?
Current account
The current (strongly managed / fixed) exchange rate between the U.S. and China is Rb 7.85 = $1.00. If the Chinese monetary authorities allow their currency (the Rembini / Yuan) to float, would you expect the dollar to appreciate or depreciate relative to the Yuan?
Depreciate
After September 11, 2001, the U.S. government imposed greater restrictions on Student (F-1, J-1) visas making it more difficult for international students to enter the U.S. for undergraduate and graduate study. This is likely to cause a ... in real tuition rates (the price of education) among trading nations.
Divergence
Letting Upper E$/£ and q$/£ denote, respectively, the nominal and real exchange rates between the U.S. dollar and the U.K. pound, which of the following accurately describes how these rates change when a permanent decrease occurs in the U.S. real money demand function?
E$/£ increases and q$/£ is unaffected
If the money supply falls permanently and we began at full employment, which will NOT happen?
GDP stays constant in the short run and long run (due to monetary neutrality).
How do we distinguish in the model between the short run and the long run?
In the short run price level is fixed; in the long run, it is flexible
How do we distinguish in the model between the short run and the long run
In the short run price level is fixed; in the long run, it is flexible.
Suppose there is a permanent reduction in aggregate real money demand, that is, a negative shift in the aggregate real money demand function. Trace the short-run and long-run effects on the exchange rate, interest rate, and price level.
In the short run, the interest rate will fall, the expected return on foreign currency will increase, which results in a depreciation of the domestic currency. In the long run, the price level will rise to equate money demand with money supply at the initial (long run) interest rate.
Which of the following can make short-term macroeconomic stabilization difficult?
It can be difficult to isolate the type of shock hitting an economy.
Suppose a permanent decrease occurs in the expected rate of real appreciation of the dollar against the euro. All else equal, how would the nominal dollar/euro exchange rate be affected?
It too would be expected to appreciate at a slower pace.
Which of the following functions corresponds to a liquidity preference function and correctly identifies the relationship between the left-hand side variables and the right-hand side variables? (Note that Md is the quantity of money demanded, P the price level, i interest rates, Y real income, and f is the function operator that relates inputs to an output.)
Md/P= F(i-,y+)
Which statement is NOT true?
No permanent shock moves both AA and DD at the same time; they are separate.
What are the determinants of the aggregate money demand?
Price level, national income, and interest rate.
Which of the following theoretical constructions is most likely to be observed in practice?
Relative PPP.
For a given Euro interest rate, what is the correct causality chain in the short run?
The Fed determines real money balances, which in turn determine the interest rate, given money demand, which, given the interest parity condition, determines the Euro/dollar exchange rate.
Which economic institution determines or controls the money supply in the U.S.?
The Federal Reserve
What does exchange rate overshooting describe?
The exchange rate changes in the short run by more than in the long run.
Which of the following does NOT make fiscal policy a difficult stabilization tool?
The fast and unpredictable way in which fiscal policy operates.
Which of the following statements is true when considering liquidity?
The most liquid assets earn no interest.
What does PPP imply?
The real exchange rate is equal to 1.
Which of the following defines the long run effects of change in the money supply?
There is no effect on the long-run values of the interest rate or real output, resulting in a proportional change in the money supply and price level's long-run value in the same direction
The monetary approach to the exchange rate predicts that the dollar will depreciate in the long run if, ceteris paribus,
US interest rate rises or European interest rates fall
The monetary approach to the exchange rate predicts that the dollar will depreciate in the long run if, ceteris paribus,
US interest rate rises or european interest rate falls.
Which of the following components is NOT included in the equation for aggregate demand?
Y^f (foreign output)
In an open economy holding GNP and consumption spending constant and where private savings equals domestic investment, a government budget deficit must be matched by
a current account deficit.
A permanent increase in the money supply (beginning from full employment) will lead to
an increased price level (P).
In the long run, the exchange rate will
appreciate some as the interest rate returns to its long-run value but will depreciate relative to its initial value.
XX is flatter than DD because
as GDP increases along DD, domestic demand increases less than supply, so some must be exported.
If a country begins from full employment, a permanent increase in government spending will
cause E$/e to fall.
Let the government use temporary monetary expansion to restore full employment. In this case the policy re-establishes full employment
causes the currency to further depreciate
A century ago each country's exports were shaped largely by
climate and natural resources
An increase in disposable income worsens the current account because
consumers demand more of all goods, including imported goods while exports are not affected.
The sources of modern trade are largely rooted in
country differences in human and human-created resources
An increase in domestic interest rates are likely to ... aggregate demand.
decrease
if the expected real interest rate in the United States is 2 percent per year while that in Europe is 7 percent per year, it can be anticipated that over the next year the real dollar/euro exchange rate will
decrease, resulting in a real appreciation of the dollar against the euro
The Ricardian trade model put forth by British economist David Ricardo nearly two centuries ago is one that
expounds principles still valid in today's world.
Suppose Russia's inflation rate is 100 percent over one year but the inflation rate in Switzerland is only 5 percent. According to relative PPP, over the year the Swiss franc's exchange rate against the Russian ruble (Upper E Subscript SFr divided by Upper R) should
fall by 95 percent.
Which account is the likely culprit of this discrepancy?
financial account
Cost-benefit analysis of international trade
focuses attention on conflicts of interest within countries.
Which of the following is NOT an account in the balance of payments?
future account
Suppose that output demand and supply trends induce people to expect Home's currency to depreciate in real terms against the currency of Foreign, its key trading partner. This implies that the expected real interest rate should be
higher in Home.
The Current Account may fall after a real depreciation because
import orders are placed in advance and a depreciation raises the domestic price.
After a depreciation, which do you NOT expect to see
import prices that fall
A temporary fiscal expansion (with full employment) will
increase GDP
An increase in the real exchange rate (real depreciation of domestic currency) will result in
increase in net exports
An open-market expansion of the money supply in this zero-interest economy would
increases equilibrium output.
Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of
international trade analysis.
International economics can be divided into two broad subfields:
international trade and money
An important insight of international trade theory is that when countries exchange goods and services one with the other, it
is usually beneficial to both countries.
You observe that a country's currency depreciates but its current account worsens at the same time. Which of the following data would suggest you are witnessing a J-curve effect?
lower import volume and higher export volume, along with an increase in the value of imports in terms of domestic products.
In the real world, the dividing line between trade and monetary issues is
neither simple nor clear-cut.
GNP (Gross National Product) equals GDP plus
net receipts of factor income from the rest of the world
At a nominal interest rate of zero
people would be indifferent
The vertical intercept of aggregate demand is
positive
The slope 'm' of aggregate demand: Y = D(EP*/P, YminusT, I, G) is
positive and less than one (0 < m < 1)
Inflation bias is
positive inflation resulting from policies designed to prevent recession.
In the pre-World War I period, the United Kingdom imported primarily
primary products including agricultural.
Expected real interest rates in all countries will be identical only when
real exchange rates are not expected to change. relative PPP is expected to hold.
Since the end of World War II, the view within the advanced democracies concerning the amount of trade has
recently been questioned by a largely political movement composed of traditional protectionists and new ideologues.
Interest rate differences between countries depend exclusively upon differences in expected inflation only when
relative PPP holds.
Suppose that American consumers decide to purchase fewer European goods for a given relative price of US and European goods. This change will affect the ... of US goods versus European goods.
relative demand
Which of the following is not an unconventional monetary policy adopted by the Fed as well as other central banks in an attempt to avoid deflation similar to that experienced in Japan
selling of long-term government bonds so as to increase demand for housing
The opportunity cost of money holdings is
the alternative interest income foregone from not holding some other asset
According to the gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is
the distance between them.
The volume effect is
the effect of a change in the real exchange rate on imports and exports.
The value effect is
the effect of a change in the real exchange rate on the value of foreign imports in terms of domestic output.
It is often asserted that exporters prosper when their home currencies depreciate in real terms against foreign currencies. This exporter "experience" stems from the fact that, ceteris paribus,
the price of home goods relative to foreign goods falls when the home currency depreciates.
If there are large disparities in wage levels between countries, then
trade is likely to be harmful to neither country.
The nature of political battles over trade in the modern era
typically centers on issues involving the trade-induced devaluation of labor skills.
Over the past forty years the composition of developing-country exports has
undergone a dramatic shift from primary products to manufactures.
In claiming that "size matters," the gravity model asserts that there is a strong empirical relationship between the size of a country's economy and the
volume of its imports and exports.
