ECON349 Midterm 2 Chapters 16,17,18,19
Given the following data: Et = yen 115 = $1.00 Et+1 = yen 80 = $1.00 {one year later} iJapan = 15 % annually iU.S. = 12 % annually Calculate the future value of a $1,000 investment. If the $1000 is invested in the U.S., the future value is ??? . (Round your response to two decimal places.) If the $1000 is invested in Japan (and repatriated back to dollars), the future value is ??? . (Round your response to two decimal places.)
$1120.00 $1653.13
A college textbook is selling for (US) $140 in the United States. That same textbook sells in Canada for (CA) $150. The exchange rate is (CA) $1.10 = (US) $1.00. Shipping costs are (US) $5.00. Ignoring the shipping costs. What is the U.S. price of the textbook purchased in Canada? (US) ??? (Enter your response rounded to the nearest penny.) What is the Canadian price of the textbook purchased in the U.S.? (CA) ??? (Enter your response rounded to the nearest penny.) When you take shipping costs into account, are textbooks likely to be purchased in the U.S. and sold in Canada? A. Yes B. No When you take shipping costs into account, are textbooks likely to be purchased in Canada and sold in the U.S.? A. Yes B. No
$136.36 $154.00 NO NO
Correctly sign the relationship between the following components and aggregate demand ('+' a positive relationship, 'minus ' a negative relationship). Disposable income Taxes Investment Spending Government Spending Real Exchange Rate
+ - + + +
Given the following data: Upper E Subscript t = yen 115 = $1.00 Upper E Subscript t plus 1 Superscript e Baseline nbsp = yen 120 = $1.00 R U.S. = 8 % Assuming that Japan is the domestic currency, if the interest parity condition is expected to hold, interest rates in Japan (RJapan) should equal ?? % (Enter your answer as a percentage rounded to two decimal places).
12.35
The Economist magazine is famous for its publication of the Big Mac indexlong dash a table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world. Given the following abbreviated table: Country PriceBig Mac China Rb 10,000 U.K. pound 1.25 U.S. $2.50 Suppose that the exchange rate between China and the U.K is: Rb (Rembini) 15,000 = pound 1.00 and that the Big MacTM could be used as a standardized commoditylong dash easily transported and not perishable. Complete the following: 1,000 = Rb = Big MacsTM = pound
15000000 1500 1875
If the economy's output is initially above full employment, which of the following policy combinations could restore full employment and keep the exchange rate at the same level? A. Contractionary monetary and fiscal policy. B. Contractionary monetary policy and expansionary fiscal policy. C. Contractionary fiscal policy and expansionary monetary policy. D. Expansionary monetary and fiscal policy.
A. Contractionary monetary and fiscal policy
One argument against float is the lack of discipline imposed on central banks. How do the pro-floaters respond to this argument? A. Under float, inflation is contained in the country that creates it. B. Under float, the inflation is spread among countries and thus has lower impact in each of the countries. C. We have not observed an increase in the inflation rate since the breakdown of Bretton Woods. D. We have not observed any increase in budget deficits since the breakdown of Bretton Woods.
A. Under float, inflation is contained in the country that creates it.
Letting Upper E Subscript $ divided by pound and q Subscript $ divided by pound 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 increase occurs in the U.K. real money demand function? A. Upper E Subscript $ divided by pound increases and q Subscript $ divided by pound is unaffected. B. both Upper E Subscript $ divided by pound and q Subscript $ divided by pound will decrease . C. Upper E Subscript $ divided by pound decreases and q Subscript $ divided by pound is unaffected. D. both Upper E Subscript $ divided by pound and q Subscript $ divided by pound will increase .
A. Upper E Subscript $ divided by pound increases and q Subscript $ divided by pound is unaffected.
If the prices of identical commodity baskets, after conversion to a single currency, differ markedly across countries, it can be concluded that A. absolute PPP is way off the mark . B. relative PPP holds up less well than absolute PPP. C. absolute PPP holds up quite well . D. both versions of PPP are meaningful .
A. absolute PPP is way off the mark
If the central bank purchases assets, it will result in A. an increase in the money supply. B. a decline in the money supply. C. an increase in the central bank's net worth. D. a decline in the central bank's net worth.
A. an increase in the money supply.
If one compares low-inflation economies with economies in which inflation is high and very volatile, the degree of exchange rate pass-through is likely to be A. higher in the high-inflation economies. B. the same in both countries. C. higher in the low-inflation economies. D. indeterminate since information beyond comparative inflation rates affects the degree of pass-through. The reasoning behind the correct response given above centers on the A. legality of altering prices to "defeat" the effects of a changing exchange rate. B. political ramifications of offsetting exchange rate price effects. C. ability and willingness of foreign sellers to alter their foreign currency prices.
A. higher in the high-inflation economies. C. ability and willingness of foreign sellers to alter their foreign currency prices.
The Current Account may fall after a real depreciation because A. import orders are placed in advance and a depreciation raises the domestic price. B. imports and exports are actually insensitive to the exchange rate. C. foreign purchasers refuse to buy home goods even though they are cheaper. D. central bank intervention will distort market mechanisms.
A. import orders are placed in advance and a depreciation raises the domestic price.
If home assets and foreign assets are imperfect substitutes, a purchase of home assets and sale of foreign assets (in the same amount) will A. leave money supply unchanged and shift the interest parity line. B. have no effect on the interest parity line unless the money supply changes. C. increase the money supply and shift out the interest parity line. Your answer is not correct. D. leave money supply and interest parity lines unchanged.
A. leave money supply unchanged and shift the interest parity line
In the Output-Exchange rate space, draw the AA schedule using the line or curve drawing tool. Label this schedule 'AA'. Note: 'E' = Upper E Subscript $ divided by euro . Carefully follow the instructions above and only draw the required object. As you move down the AA curve, the interest rate A. rises. B. first falls and then rises. C. falls. D. remains constant.
A. rises. AA slope down
If there is a decline in output, to keep the exchange rate fixed, the central bank has to A. sell foreign assets. B. purchase domestic assets. C. sell domestic assets. D. purchase foreign assets.
A. sell foreign assets.
If there is a decline in output, to keep the exchange rate fixed, the central bank has to A. sell foreign assets. B. sell domestic assets. C. purchase foreign assets. D. purchase domestic assets.
A. sell foreign assets.
A country is said to be in balance of payments equilibrium when A. the sum of its current and capital accounts comma less the nonreserve component of net financial flows comma equals zero. B. the current plus capital account balance is financed entirely by official reserve movements without private international lending. C. the current plus capital account balance is financed by official reserve movements and private international lending. D. the sum of its current and capital accounts equals the nonreserve component of net financial flows.
A. the sum of its current and capital accounts comma less the nonreserve component of net financial flows comma equals zero.
1.) Using the line drawing tool, show the impact of a rise in export demand under a fixed exchange rate regime.You will need to draw and properly label two lines. 2.) Using the point drawing tool, show the new point of equilibrium.
AA shift Up DD shift right
In the Output-Exchange rate space, an AA schedule has been drawn. Note: 'E' = Upper E Subscript $ divided by euro . How will the AA schedule be affected if the expected future exchange rate (Upper E Superscript e ) falls? Using the line drawing tool, draw a new AA schedule and label it 'AA2.' Carefully follow the instructions above and only draw the required object.
AA shift down
Refer to the balance sheet below for the Bank of Pecunia. Assets Liabilities Foreign assets $950 Deposits held by private banks $370 Domestic assets $1 comma 360 Currency in circulation $1 comma 940 Suppose the Bank of Pecunia goes to the foreign exchange market and purchases $140 worth of foreign assets. If the Bank of Pecunia paid for its purchase with domestic currency, fill in the new balance sheet for the Bank of Pecunia below. Assets Liabilities Foreign assets ? Deposits held by private banks ? Domestic assets ? Currency in circulation ? When the Bank of Pecunia purchases ? worth of foreign assets, there is an increase in the domestic money supply.
Assets Liabilities Foreign assets $1,090 Deposits held by private banks $370 Domestic assets $1,360 Currency in circulation $2,080 When the Bank of Pecunia purchases $140 worth of foreign assets, there is an increase in the domestic money supply.
In the real world where relative PPP fails to hold, suppose that U.S. inflation is expected to exceed European inflation left parenthesis pi Subscript font size decreased by 1 US Superscript e Baseline minus pi Subscript Upper E Superscript e Baseline right parenthesis by 6 percent for the foreseeable future. Furthermore, suppose that output demand and supply trends are widely expected to cause the dollar to decline against the euro in real terms at a rate of 1 percent per year. In this case, the international interest rate spread left parenthesis Upper R Subscript $ Baseline minus Upper R Subscript euro Baseline right parenthesis will actually be A. negative 5 percent. B. 7 percent. C. 5 percent. D. indeterminate, since expectations are unreliable.
B. 7 percent.
What moves the II / XX lines? A. Expenditure changing policies. B. A change in prices with foreign prices constant. C. Expenditure switching policies. D. All can move the II and XX lines.
B. A change in prices with foreign prices constant.
What is the effect of an increase in taxes under fixed exchange rates and perfect asset substitutability in the short run? A. A decline in output and interest rates. B. A decline in output and no change in interest rates. C. An increase in output and no change in interest rates. D. None of the above.
B. A decline in output and no change in interest rates.
You are an economic adviser to the government of China in 2008. The country has a large current account surplus, in excess of 9 percent of GDP, and is facing gathering inflationary pressures. Using the point drawing tool, show the location of the Chinese economy on the diagram to your right. Label the point 'China 2008'. Carefully follow the instructions above and only draw the required object. What would be your advice on how the authorities should move the renminbi's exchange rate? A. China needs to depreciate the exchange rate. B. China needs to appreciate the exchange rate. C. China does not need to change its exchange rate. What would be your advice about fiscal policy? You might want to take into accound two additional factors: 1. China currently provides a rather low level of government services to its people. 2. China's government would like to attract workers from the rural countryside into manufacturing employment, so Chinese officials would prefer to soften any negative impact of their policy package on urban employment. A. China would need to keep government spending the same. B. China would need to expand government spending. C. China would need to reduce government spending. D. There is no sufficient information to decide whether China needs to expand or to reduce government spending.
B. China needs to appreciate the exchange rate. B. China would need to expand government spending. Upper II section between zone 1 and 4
Which countries suffered most in the Great Depression? A. Countries who failed to maintain gold standard policies. B. Countries who stayed on Gold the longest. C. All countries suffered equally. D. Countries who left the Gold Standard during the depression
B. Countries who stayed on Gold the longest.
In the Output-Exchange rate space, draw a DD schedule using a line or curve drawing tool. Label this relationship 'DD'. Note: 'E' = Upper E Subscript $ divided by euro . Carefully follow the instructions above and only draw the required object. The DD curve describes the link between the exchange rate and the output in the short run. Through which variable does this link operate? A. Investment. B. Current account. C. Government spending. D. Consumption.
B. Current account. DD slope up
Which of the following events have we NOT observed in the global economy after 1973 and the demise of Bretton-Woods? A. Higher inflation rates. B. Increase in international economic policy coordination. C. Increase in volumes of foreign trade. D. Higher exchange rate volatility.
B. Increase in international economic policy coordination.
After convertibility was restored in Europe, what complicated monetary policy making for some countries in the mid to late 1960s? A. Beggar thy neighbor trade policies. B. Intermittent speculation of devaluations of revaluations. C. The inconvertibility of the US dollar. D. The incompetence of the IMF.
B. Intermittent speculation of devaluations of revaluations.
Suppose that under the postwar "dollar standard" system foreign central banks had held dollar reserves in the form of green dollar bills hidden in their vaults rather than U.S. Treasury bills. Which of the following is true about the international monetary adjustment mechanism in this situation? A. It would have been asymmetric. B. It would have been symmetric. C. It would have been the same as if they held Treasury bills. D. It would have been completely ineffective.
B. It would have been symmetric.
If a country changes its exchange rate, the value of its foreign reserves, measured in the domestic currency, also changes. This latter change may represent a domestic-currency gain or loss for the central bank. What happens when a country devalues its currency against the reserve currency? A. The value of foreign reserves measured in local currency will remain unchanged. B. The value of foreign reserves measured in local currency will increase . C. The value of foreign reserves measured in local currency will decrease . If this change in the exchange rate is expected, how will it affect the cost of holding foreign reserves? A. The cost of holding foreign reserves will increase. B. There will be no change in the cost of holding foreign reserve. C. The cost of holding foreign reserves will fall. If this change in the exchange rate is unexpected, how will it affect the cost of holding foreign reserves? A. There will be no change in cost of holding foreign reserves. B. There will be a capital loss on foreign reserves. C. There will be a capital gain on foreign reserves. D. There will be a permanent increase in the cost of holding foreign reserves. E. There will be a permanent decline in the cost of holding foreign reserves.
B. The value of foreign reserves measured in local currency will increase B. There will be no change in the cost of holding foreign reserve. C. There will be a capital gain on foreign reserves.
We noted in this chapter that foreign central banks, especially in Asia, accumulated large dollar foreign reserves after 2000. One persistent worry was that those central banks, fearing dollar depreciation, would shift their reserve holdings from dollars to euros. If dollar and euro assets are perfect substitutes, what is a likely effect of such actions? A. These actions will lead to dollar depreciation against the euro. B. These actions will have no effect on the exchange rate. C. These actions will lead to dollar appreciation against the euro. If dollar and euro assets are imperfect substitutes, what is a likely effect of such actions? A. These actions will lead to dollar appreciation against the euro. B. These actions will lead to dollar depreciation against the euro. C. These actions will have no effect on the exchange rate.
B. These actions will have no effect on the exchange rate. B. These actions will lead to dollar depreciation against the euro.
Which of the following is NOT a valid argument in favor of a floating exchange rate regime? A. This exchange rate regime is symmetrical. B. This regime increases the efficiency of international trade. C. It allows for monetary policy autonomy. D. Exchange rates work as automatic stabilizers.
B. This regime increases the efficiency of international trade.
Why did world central banks need to continue to accumulate dollars in the Bretton Woods system? A. They wanted to in order to by US goods. B. World gold was not rising fast enough to satisfy reserves demand. C. US assets provided the most risk free form of reserves. D. They were forced to by the US (based on its military supremacy).
B. World gold was not rising fast enough to satisfy reserves demand.
Under a floating exchange rate regime, in the short run an increase in taxes in Europe would necessarily lead to A. a decline in European output and increase in U.S. output. B. a decline in both European and U.S. output. C. an increase in European output and decline in U.S. output. D. an increase in both European and U.S. output.
B. a decline in both European and U.S. output.
A managed floating exchange rate refers to A. any hybrid exchange rate system. B. an exchange rate that is not pegged, but does not float freely. C. a fixed exchange rate that changes once a year. D. countries participating in the euro.
B. an exchange rate that is not pegged, but does not float freely.
Suppose the economy is hit by a favorable aggregate demand shock. In response to this shock, the central bank reacts to maintain a fixed exchange rate. As a result of these changes, A. AA will shift. B. both AA and DD will shift. C. DD will shift. D. neither AA nor DD will shift. The graph on the right depicts the initial equilibrium in the economy with the fixed exchange rate. Using the line drawing tool, add new AA and DD lines corresponding to a favorable aggregate demand shock, and label them "AA2" and "DD2." Carefully follow the instructions above and only draw the required objects. We can see that a favorable aggregate demand shock will lead to a ? in output. In order to maintain a fixed exchange rate, the money supply will ? .
B. both AA and DD will shift. Rise Rise DD shift right AA shift up
Under a gold standard of the kind analyzed by Hume, if there is a transfer of income from country B to country A, how would balance of payments equilibrium between the two countries be restored? Initially, the income transfer would A. not affect the current account in either A or B. B. create a current account surplus in A and a current account deficit in B. C. create a current account deficit in both A and B. D. create a current account surplus in B and a current account deficit in A. E. create a current account surplus in both A and B. Then, A. gold flows from A to B, pushing up prices in A and depressing prices in B, until equilibrium is restored. B. gold flows from B to A, pushing up prices in A and depressing prices in B, until equilibrium is restored. C. gold flows from B to A, pushing up prices in B and depressing prices in A, until equilibrium is restored. D. gold flows from A to B, pushing up prices in B and depressing prices in A, until equilibrium is restored. E. there will be no gold flows because there was no disequilibrium.
B. create a current account surplus in A and a current account deficit in B. B. gold flows from B to A, pushing up prices in A and depressing prices in B, until equilibrium is restored.
Assume that PPP holds and that expected future exchange rate adjusts immediately. What will be the effect of an increase in the foreign price level P*? On the diagram on the right: 1.) Using the line drawing tool, draw the new AA curve. Properly label this line. 2.) Using the line drawing tool, draw the new DD curve. Properly label this line. 3.) Using the point tool, mark and label the new equilibrium point. Label this point '2'. Carefully follow the instructions above and only draw the required objects. As a result of an increase in the foreign price level, the A. exchange rate will appreciate and output will rise. B. exchange rate will appreciate and output will remain the same. C. exchange rate will depreciate and output will fall. D. exchange rate will depreciate and output will remain the same. Will the economy stay in internal and external balance? A. The economy will maintain internal balance but not external balance. B. The economy will maintiain external balance but not internal balance. C. The economy will not maintain external or internal balance. D. The economy will maintain both internal and external balance.
B. exchange rate will appreciate and output will remain the same. D. The economy will maintain both internal and external balance. DD shift right AA shift up
Which of the following correctly represents the formula for relative PPP? A. pi Subscript Upper E comma t = pi Subscript US comma t + (Upper E Subscript $ divided by euro comma t minus Upper E Subscript $ divided by euro comma t minus 1 )/Upper E Subscript $ divided by euro comma t minus 1 . B. pi Subscript US comma t = pi Subscript Upper E comma t + (Upper E Subscript $ divided by euro comma t minus Upper E Subscript $ divided by euro comma t minus 1 )/Upper E Subscript $ divided by euro comma t minus 1 . C. pi Subscript Upper E comma t = pi Subscript US comma t + (Upper E Subscript $ divided by euro comma t plus 1 minus Upper E Subscript $ divided by euro comma t )/Upper E Subscript $ divided by euro comma t . D. pi Subscript US comma t = pi Subscript Upper E comma t + (Upper E Subscript $ divided by euro comma t plus 1 minus Upper E Subscript $ divided by euro comma t)/Upper E Subscript $ divided by euro comma t.
B. pi Subscript US comma t = pi Subscript Upper E comma t + (Upper E Subscript $ divided by euro comma t minus Upper E Subscript $ divided by euro comma t minus 1 )/Upper E Subscript $ divided by euro comma t minus 1 .
Inflation bias is A. a higher inflation rate in the domestic country than in the foreign country. B. positive inflation resulting from policies designed to prevent recession. C. an inflation rate that is higher than the central bank would like. D. positive inflation resulting from the independence of the central bank.
B. positive inflation resulting from policies designed to prevent recession.
A return to the Gold Standard would NOT generate A. a constraint on domestic monetary policy. B. stable consumer prices. C. an increased power to gold-producing nations. D. stable gold prices. .
B. stable consumer prices.
Carefully follow the instructions above and only draw the required object. According to your diagram, the transfer from the Czech Republic to Poland means that A. the koruna has undergone a real appreciation against the zloty . B. the relative price of products from Poland has risen in terms of products from the Czech Republic . C. the koruna 's purchasing power within the borders of Poland has risen relative to its purchasing power within the Czech Republic . D. a smaller basket of goods from the Czech Republic is now required to purchase one basket from Poland .
B. the relative price of products from Poland has risen in terms of products from the Czech Republic . RD2 shift right
The asymmetry of a reserve currency system refers to the fact that A. there are fewer currencies than countries (specifically there are N-1 currencies). B. the reserve country has a fixed exchange rate but can still use domestically-oriented monetary policy. C. the reserve country must be the largest country. D. All of the above.
B. the reserve country has a fixed exchange rate but can still use domestically-oriented monetary policy.
We observed that "fixed" exchange-rate systems can result not in absolutely fixed exchange rates but in narrow bands within which the exchange rate can move. For example, the gold points produce such bands under a gold standard. To what extent would such bands for the exchange rate allow the domestic interest rate to move independently of a foreign rate? A. Interest rates of all maturities will be equally flexible. B. Short-maturities interest rates will be able to change by more than those on long-maturities. C. Interest rates of all maturities will be completely fixed. D. Long-maturities interest rates will be able to change by more than those on short-maturities. If a band is plus or minus 3 percent (the difference between the top and the bottom is 6 percent) what is the maximum possible change in the interest rate on 10-year loans, assuming no change in the foreign interest rate? (Enter your response rounded to one decimal place.) The maximum possible change in the 10-year loan rate is percent.
B. Short-maturities interest rates will be able to change by more than those on long-maturities. .06
If a country begins from full employment, a permanent increase in government spending will A. cause GDP to rise permanently B. Cause E$/Euro to fall C. Cause GDP to rise temporarily D. Cause taxes to fall
B. Cause E$/Euro to fall
If the money supply falls permanently and we began at full employment, which will NOT happen? A. there will be undershooting (short run E$/euro is below long run E$/Euro) B. GDP stays constant in the short run and long run (due to monetary neutrality) C. Both AA and DD curves move in the long run D. Prices will fall in the Long run
B. GDP stays constant in the short run and long run (due to monetary neutrality)
Suppose a temporary fall occurs in money demand. Using the line drawing tool, illustrate the impact of this event. Properly label your line. Carefully follow the instructions above and only draw the required object. Now let the government use temporary monetary contraction to restore full employment. In this case the policy re-establishes full employment A. but causes the currency to further depreciate B. and restores the current to its initial value C. and restores the currency to an unknown value D. but has an indeterminate effect on the exchange rate
B. and restores the current to its initial value AA shift up
A temporary fiscal expansion (with full employment) will A. cause the XX line to rise B. increase GDP C. increase the Current Account D. depreciate the home exchange rate
B. increase GDP
What is a potential problem resulting from an excessive current account deficit? A. Permanently excessive consumption. B. Investment that is too high. C. A lending crisis. D. Difficulties for creditors in collecting their money.
C. A lending crisis.
Devaluation is often used by countries to improve their current accounts. The current account, however, equals national saving less domestic investment. Given the assumptions we made about saving and investment, how will devaluation affect national saving and investment? What is the effect on saving? A. Both public saving and private saving will fall. B. Public saving will fall, but private saving will rise by more. C. Both public saving and private saving will rise. D. Private saving will fall, but public saving will rise by more. E. One needs additional assumptions to answer this question. What is the effect on investment? A. Investment will fall. B. Investment will remain the same. C. Additional information is needed. D. Investment will rise.
C. Both public saving and private saving will rise. B. Investment will remain the same.
At the end of the Bretton Woods system, what combination of policies would have maintained the system? A. Expansionary monetary policy in the US and contractionary policy abroad. B. Expansionary monetary policy in the US and expansionary policy abroad. C. Contractionary monetary policy in the US and expansionary policy abroad. D. Contractionary monetary policy in the US and contractionary policy abroad.
C. Contractionary monetary policy in the US and expansionary policy abroad.
If a country has overemployment and a balanced Current Account, what policy is necessary? A. Fiscal contraction and devaluation. B. Fiscal contraction only. C. Fiscal contraction and revaluation. D. Fiscal ease only.
C. Fiscal contraction and revaluation.
How does an increase in government spending ultimately affect the central bank's balance sheet under a fixed exchange rate? A. The central bank's foreign assets fall as do domestic liabilities (currency in circulation). B. The central bank's foreign assets fall and domestic assets increase. C. The central bank's foreign assets rise as do domestic liabilities (currency in circulation). D. The central bank's foreign assets increase and domestic assets fall. E. A change in domestic liabilities is offset by the change in deposits held by private banks. How is this purchase of foreign assets in the foreign exchange market by a central bank reflected in the balance of payments accounts? The credit transaction is: The debit transaction is: A. Official financial inflow B. Private financial inflow C. Private financial outflow D. Official financial outflow A. Private financial inflow B. Official financial outflow C. Private financial outflow D. Official financial inflow
C. The central bank's foreign assets rise as do domestic liabilities (currency in circulation). Debit: B. Private financial inflow Credit: B. Official financial outflow
Why did the British run contractionary monetary policy in the years after 1925? A. To avoid importing inflation from the United States. B. To slow its overheating economy following WWI. C. To stay on its prewar gold parity despite the fact that its prices were higher. D. To combat rampant inflation caused by general economic instability in Europe.
C. To stay on its prewar gold parity despite the fact that its prices were higher.
Under a floating exchange rate regime, an increase in money demand will lead to A. an increase in output that is smaller than would be under a fixed exchange rate regime. B. a decline in output that is smaller than would be under a fixed exchange rate regime. C. a decline in output that is larger than would be under a fixed exchange rate regime. D. an increase in output that is larger than would be under a fixed exchange rate regime.
C. a decline in output that is larger than would be under a fixed exchange rate regime.
A sterilized foreign exchange intervention A. always increases the money supply. B. always involves the sale of foreign assets. C. always leaves the money supply unchanged. D. always involves the sale of domestic assets.
C. always leaves the money supply unchanged.
Suppose a temporary fall occurs in world demand for domestic products. Using the line drawing tool, illustrate the impact of this event. Properly label your line. Carefully follow the instructions above and only draw the required object. Now let the government use temporary monetary expansion to restore full employment. In this case the policy re-establishes full employment A. and restores the currency to its initial value . B. but causes the currency to further appreciate . C. but causes the currency to further depreciate . D. but has an indeterminate effect on the exchange rate.
C. but causes the currency to further depreciate DD shift left
Imperfect asset substitutability: A. is a requirement for sterilized intervention to be effective. B. suggests a purchase of home bonds weakens the currency. C. can arise if different assets have different levels of risk. D. All of the above.
C. can arise if different assets have different levels of risk.
A reserve currency system A. constrains the center country from pursuing domestic goals. B. means for any country the bilateral rate with the center is fixed, but all other rates float. C. describes the world currency system from 1945-73. D. is unworkable unless all currencies are backed by gold.
C. describes the world currency system from 1945-73.
We will analyze the effect of expansionary monetary policy, which corresponds to an increase in the money supply, under fixed exchange rates. As a result of this change, A. DD will shift. B. AA will shift. C. neither AA nor DD will shift. D. both AA and DD will shift. Initial equilibrium exists in the graph to the right. Since neither the AA nor the DD curve shifts, this is also a new equilibrium. Monetary policy is completely ineffective under fixed exchange rates.
C. neither AA nor DD will shift. AA2 shifts upward from AA1
Suppose the figure to the right depicts an economy where the expected future exchange rate, Upper E Superscript e , is fixed. An open-market expansion of the money supply in this zero-interest economy would A. increase equilibrium output. nothing B. eventually lead to progressive currency depreciation along the downward minus sloping segment of AA. C. shift AA to the right.
C. shift AA to the right.
Under a Gold Standard, A. prices are fixed. B. interest rates are fixed. C. the exchange rate is fixed. D. All of the above. Question is complete.
C. the exchange rate is fixed.
In a typical balance of payments crisis A. the interest parity curve shifts in. Your answer is not correct. B. real money supply must rise. C. the interest parity curve shifts out. D. exchange rate expectations are constant.
C. the interest parity curve shifts out.
Worldwide importing inflation from the U.S. at the end of Bretton Woods was caused by A. synchronized business cycles. B. the increase in the cost of goods from the U.S. C. the need to increase monetary growth to match the U.S. D. the increase in the cost of oil (oil shocks) caused by excess U.S. demand.
C. the need to increase monetary growth to match the U.S.
Worldwide importing inflation from the U.S. at the end of Bretton Woods was caused by A. the increase in the cost of oil (oil shocks) caused by excess U.S. demand. B. synchronized business cycles. C. the need to increase monetary growth to match the U.S. D. the increase in the cost of goods from the U.S.
C. the need to increase monetary growth to match the U.S.
The asymmetry of a reserve currency system refers to the fact that A. there are fewer currencies than countries (specifically there are N-1 currencies). B. the reserve country must be the largest country. C. the reserve country has a fixed exchange rate but can still use domestically-oriented monetary policy. D. All of the above.
C. the reserve country has a fixed exchange rate but can still use domestically-oriented monetary policy.
Suppose that Britain's current plus capital account deficit is greater in absolute value than its nonreserve financial account balance. According to the price-specie-flow mechanism, A. there is an increase in British demand for foreign goods and services. B. gold flows automatically reduce foreign money supplies and swell Britain's money supply. C. there is a reduction in British demand for foreign goods and services. D. the shortfall must be matched by flows of international reserves left parenthesis gold right parenthesis into Britain.
C. there is a reduction in British demand for foreign goods and services.
How might restrictions on private financial account transactions (capital controls) alter the problem of attaining internal and external balance with a fixed exchange rate? The difference between a fixed exchange rate regime with capital controls and fixed exchange rate regime without capital controls is that A. with capital controls monetary policy can be used to achieve external balance. B. with capital controls fiscal policy can be used to achieve internal balance. C. with capital controls monetary policy can be used to achieve internal balance. D. with capital controls fiscal policy can be used to achieve external balance. What costs might such restrictions involve? (Mark all that apply.) A. Loss of effectiveness of monetary policy B. Inability to achieve external balance C. Inefficiency due to the interest rate differential D. High costs of enforcing capital controls Your answer is correct. E. Loss of effectiveness of fiscal policy
C. with capital controls monetary policy can be used to achieve internal balance. C. Inefficiency due to the interest rate differential
A partial opening of the financial account will allow some cross-border borrowing and lending. At the same time, fixing the exchange rate in the face of domestic interest rate changes will require ______ volumes of intervention than would be needed if cross-border financial transactions were entirely prohibited, and the central bank's ability to guarantee exchange rate stability will therefore ______. A. smaller; rise B. smaller; decline C. larger; decline. D. larger; rise
C. larger; decline.
The monetary approach to the exchange rate predicts that the dollar will depreciate in the long run if, ceteris paribus, A. US money supply falls or Eurpoean money supply rises B. European output falls or US output rises C. US interest rate rises or European interest rate falls D. US interest rate falls and US money supply falls
C. US interest rate rises or European interest rate falls
Which of the following components is NOT included in the equation for aggregate demand? A. Y(domestic output) B. T(taxes) C. Y^F(foreign output) D. E(the nominal exchange rate)
C. Y^F(foreign output)
In the Output-Exchange rate space, draw a DD schedule using a line or curve drawing tool. Label this relationship 'DD'. Note: 'E' = Upper E Subscript $ divided by euro . Carefully follow the instructions above and only draw the required object. The DD curve describes the link between the exchange rate and the output in the short run. Through which variable does this link operate? A. Current account. B. Investment. C. Government spending. D. Consumption.
Current account. DD slope upward
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. prices tend to be less sticky in the long run, thus lessening any deviation from PPP. B. in the short run exchange rate fluctuations may be seen as temporary by trading firms. C. it takes time for international trading firms to acquire and/or expand their "presence" in higher price markets. D. All of the above are plausible. E. A and B, but not C.
D. All of the above are plausible.
Using the diagram on the right, show what effect a devaluation will have on the current account. Note: 'E' = Upper E Subscript $ divided by euro . 1) Using the line drawing tool, shift any lines, making sure to label them appropriately. 2) Using the point drawing tool, label new equilibrium "B". The sample correct answer is drawn for the case of devaluation. Carefully follow the instructions above and only draw the required objects. As a result of a devaluation , the current account will rise . What is the intuition for this effect of devaluation on the current account? A. Imports rise but exports are unaffected Your answer is not correct. B. Imports fall but exports are unaffected C. Imports rise and exports fall as domestically-produced goods become more expensive D. Imports fall and exports rise as domestically-produced goods become less expensive E. Exports fall but imports are unaffected F. Exports rise but imports are unaffected
D. Imports fall and exports rise as domestically-produced goods become less expensive AA new shift up B is intersect of new AA and original DD
After convertibility was restored in Europe, what complicated monetary policy making for some countries in the mid to late 1960s? A. Beggar thy neighbor trade policies. B. The inconvertibility of the US dollar. C. The incompetence of the IMF. D. Intermittent speculation of devaluations of revaluations.
D. Intermittent speculation of devaluations of revaluations.
Which of the following can make short-term macroeconomic stabilization difficult? A. Macroeconomists have no model which makes predictions regarding appropriate policies. B. Consumers rarely respond to stimulus policy. C. Recessions are a natural phenomenon that cannot be combated. D. It can be difficult to isolate the type of shock hitting an economy.
D. It can be difficult to isolate the type of shock hitting an economy.
Which is true? A. All industrialized countries that peg today peg to the US dollar. B. All developing countries that peg today peg to the US dollar. C. No countries peg to the dollar because the dollar floats. D. Some countries peg to a basket of currencies.
D. Some countries peg to a basket of currencies.
An increase in the real exchange rate (real depreciation of domestic currency) will result in A. a decline in exports. B. an increase in imports only. C. a decline in imports. D. an increase in net exports.
D. an increase in net exports.
After a depreciation, which do you NOT expect to see A. long term increase in the CA. B. import prices increase less than the exchange rate. C. short term fall in the CA. D. import prices that fall.
D. import prices that fall.
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? A. purchasing of long-term government bonds so as to reduce long-term interest rates B. purchasing of foreign exchange C. buying specific categories of assets with newly issued money D. selling of long-term government bonds so as to increase demand for housing
D. selling of long-term government bonds so as to increase demand for housing
If an economy does not start out at full employment, is it still true that a permanent change in fiscal policy has no current effect on output? A. It depends on the type of fiscal policy. Permanent changes in taxes have a different effect than permanent changes in purchases. B. No, a permanent change in fiscal policy can alter output provided it is "accommodated" by a permanent change in monetary policy. C. Yes, even though the initial value of output is not equal to its long-run level, it is still true that permanent fiscal policy is neutral in terms of its effect on output. D. No, there is no reason for output to remain constant in this case since its initial value is not equal to its long-run level.
D. No, there is no reason for output to remain constant in this case since its initial value is not equal to its long-run level.
An increase in disposable income worsens the current account because A. it raises the real exchange rate and therefore worsens the current account.. B. it raises consumption which reduces exports because now there are fewer goods that can be exported, and more are consumed domestiaclly. C. it lowers the real exchange reate and therefore worsens the current account D. Consumers demand more of all goods, including imported goods, including imported goods while exports are not affected
D. Consumers demand more of all goods, including imported goods, including imported goods while exports are not affected
In the Output-Exchange rate space, draw the AA schedule using the line or curve drawing tool. Label this schedule 'AA'. Note: 'E' = Upper E Subscript $ divided by euro . Carefully follow the instructions above and only draw the required object. As you move down the AA curve, the interest rate A. Remain constant B. first falls and then rises C. Falls D. Rises
D. Rises AA curve slope downward on graph
We will analyze the effect of expansionary fiscal policy in an economy with fixed exchange rates. The graph on the right depicts an initial equilibrium in the economy with the fixed exchange rate. Note: 'E' = Upper E Subscript $ divided by euro . Using the line drawing tool, add new AA and DD curves, corresponding to expansionary fiscal policy, and label them "AA2" and "DD2." Draw two lines here. Carefully follow the instructions above and only draw the required objects. We can see that expansionary fiscal policy will lead to a ? in output. In order to maintain a fixed exchange rate, the money supply will ? .
DD shift Right AA shift Up Rise Rise
The government implements a temporary contractionary fiscal policy, which corresponds to a decline in US government spending or a rise in the US tax rates. Using the line drawing tool, draw a new AA line or DD line. Properly label this line. Carefully follow the instructions above and only draw the required object. As a result of temporary contractionary fiscal policy, output will ? and the exchange rate will ? in the short run.
DD shift left Fall, Rise
partial credit, Exercise 9.4 A permanent fiscal contraction combined with a permanent monetary contraction by home. Evaluate the following outcomes given the above statement concerning macroeconomic interdependence under a floating exchange rate regime. Enter 'T' for true, 'F' for false. Home output falls: Home's currency appreciates: Foreign output rises:
T F F
Large-scale wars typically bring a suspension of international trading and financial activities. Exchange rates lose much of their relevance under these conditions, but once the war is over governments wishing to fix exchange rates face the problem of deciding what the new rates should be. The PPP theory has often been applied to this problem of postwar exchange rate realignment. If you were the British Chancellor of the Exchequer and World War I had just ended, a good first approximization to identifying the appropriate post-war dollar/pound exchange rate might be obtained by A. adjusting the pre-war rate according to the contribution each country made to the war effort. B. adjusting the pre-war rate according to the income changes experienced by the two countries during the war. C. allowing market forces to determine the appropriate rate. D. adjusting the pre-war rate according to the price level changes experienced by the two countries during the war. E. simply restoring the pre-war rate. If, during the war, the U.S. price level increased by 15 % while the U.K. level rose by 10 %, a best-guess post-war dollar/pound exchange rate would be, compared to the pre-war rate,?? Using the PPP theory in this manner may be a bad idea if A. relative demands for the goods produced in the countries changed substantially. B. the two countries had significantly different wartime changes in productive capacity. C. productivity trends in the two countries were disparate during the war. D. all of the above are reasons why reliance upon PPP theory may be less than satisfactory.
adjusting the pre-war rate according to the price level changes experienced by the two countries during the war. 5% higher all of the above are reasons why reliance upon PPP theory may be less than satisfactory.
In the short run of a model with sticky prices, an expansion in the money supply reduces the nominal interest rate and depreciates the currency. In this case the country's expected real interest rate will ??? . In addition, the real exchange rate, after initially ??? , will subsequently ??? . The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real appreciation when its real interest rate ??? real interest rates elsewhere.
decrease increasing decrease falls below
The diagram to the right shows the determination of the long-run real exchange rate between Home's currency and Foreign's currency, q Subscript h divided by f . Suppose that the overall level of spending doesn't change, but Home residents decide to spend less of their income on nontraded products and more on tradables. Using the line drawing tool, assess the impact of this spending shift on q Subscript h divided by f . Properly label this line. Carefully follow the instructions above and only draw the required object. According to your graph, the Home currency has undergone a real ??? against Foreign's currency. Starting again with q Subscript font size decreased by 1 font size increased by 1 h divided by font size decreased by 1 font size increased by 1 f Superscript font size decreased by 1 1 , this time suppose that Foreign residents shift their demand away from their own goods and toward Home's exports . Using the line drawing tool, assess the impact of this spending shift on q Subscript h divided by f . Properly label this line. Carefully follow the instructions above and only draw the required object. According to this second graph, the Home currency has undergone a real ??? against Foreign's currency.
depreciation appreciation RD2 shift right
The graph on the right represents initial output in the short run. Suppose the real exchange rate appreciates . Using the line drawing tool, draw a new line depicting the new aggregate demand. Label this line 'D2'. Carefully follow the instructions above and only draw the required object. If the real exchange rate appreciates , output in the short run will
fall Downward shift of D2
Carefully follow the instructions above and only draw the required object. According to your graph, the economy's output will initially ?? and its currency will ?? Because the fall in private aggregate demand is permanent, it will be the case that A. output ultimately declines and contractionary policy is needed. B. output ultimately declines and expansionary policy is needed. C. output ultimately does not change and no government response is warranted. D. None of the above.
fall depreciate C. output ultimately does not change and no government response is warranted DD shift left
Suppose the economy is initially in equilibrium as depicted on the graph to the right. Note: 'E' = Upper E Subscript $ divided by euro . The government implements a permanent contractionary monetary policy, which corresponds to a decline in the US (domestic) money supply. Using the line drawing tool, draw on the same graph a new AA line or new DD line. Properly label your line. Carefully follow the instructions above and only draw the required object. As a result of permanent contractionary monetary policy in the short run, output will ?? and the exchange rate will ?? . In the long run, the economy will slowly adjust to a new equilibrium since the change was permanent. In this new equilibrium, compared to the initial equilibrium, output will be ?? , and the exchange rate will be ?? .
fall fall the same as before lower AA shift down
The vertices of the triangle to the right show three features that policy makers in open economies would prefer their monetary system to achieve. Assuming that each of the three policy regime labels along the triangle's edges is consistent with the two goals that it lies between in the diagram, Policy regime 1 best represents financial controls .
financial controls
Suppose the figure to the right depicts an economy where the expected future exchange rate, Upper E Superscript e , is fixed. An open-market expansion of the money supply in this zero-interest economy would A. cause the horizontal stretch of AA to be shorter. B. decrease the equilibrium exchange rate. C. have no effect on equilibrium output. D. shift AA to the left.
have no effect on equilibrium output.
Using the graph on the right, analyze the effect of an import tariff under fixed exchange rates. Note: 'E' = Upper E Subscript $ divided by euro . 1) Using the line drawing tool, draw a new AA line. Properly label this line. 2) Using the line drawing tool, draw a new DD line. Properly label this line. 3) Using the point drawing tool, identify the new equilibrium. Label this point '2'. Carefully follow the instructions above and only draw the required objects. An import tariff would ? output and ? the balance of payments under fixed exchange rates. What would happen if all countries in the world simultaneously tried to affect their employment and the balance of payments as described above by imposing identical tariffs? A. All countries will increase output but the balance of payments will not be affected B. No country will improve output or the balance of payments C. All countries will improve output and the balance of payments
increase improve B. No country will improve output or the balance of payments DD shift right AA shift up
Imagine that a sufficient number of states (at least 38) affirms a constitutional amendment approved by the Congress requiring the U.S. government to maintain a balanced budget at all times. Thus, if the government wishes to change government spending, it must change taxes by the same amount, that is Upper Delta G = Upper Delta T always. Does the constitutional amendment imply that the government can no longer use fiscal policy to affect employment and output? ?? The figure to the right shows, in the framework of the DD-AA model, the U.S. economy's short-run equilibrium at point 1. Note: 'E' = Upper E Subscript $ divided by euro . If the government seeks to increase employment and output using fiscal policy within the stricture of the constitutional amendment, it will ?? G and T by the same amount. Using the line drawing tool, illustrate this "balanced budget" change in fiscal policy. Properly label your line. Carefully follow the instructions above and only draw the required object. The effect of the expansionary "balanced budget" fiscal policy will be to A. increase both output and employment and depreciate the dollar. B. increase both output and employment and appreciate the dollar.
no increase B. increase both output and employment and appreciate the dollar DD shift right
The slope 'm' of aggregate demand: Y = D(EP*/P, Yminus T, I, G) is ? The vertical intercept of aggregate demand is?
positive and less than one (0 < m < 1) . Positive
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. The graph on the right shows the relative supply of US versus European real output. 1.) Using the line drawing tool, draw a line depicting initial relative demand and label it "Initial." 2.) Using the line drawing tool, now add a line that depicts new relative demand, after relative demand for European goods decrease s. Label it "New." Carefully follow the instructions above and only draw the required objects. If relative demand for European goods decrease s, the dollar will ??? in real terms. As a result of this change, the dollar will also ??? in nominal terms in the long-run.
relative demand appreciate appreciate New is below initial (demand line)
Suppose the economy is initially in the long-run equilibrium as depicted on the graph to the right. Note: 'E' = Upper E Subscript $ divided by euro . The government implements a temporary expansionary fiscal policy, which corresponds to an increase in US government spending or a fall in the US tax rates. Using the line drawing tool, draw a new AA line or DD line. Properly label this line. Carefully follow the instructions above and only draw the required object. As a result of temporary expansionary fiscal policy, output will ?? and the exchange rate will ?? in the short run.
rise fall DD shift right
Suppose the Central Bank is trying to keep the exchange rate fixed; however, investors expect the exchange rate to depreciate. The graph on the right depicts an initial equilibrium in the economy with the fixed exchange rate. Note: 'E' = Upper E Subscript $ divided by euro . 1.) Using the line drawing tool, add a new AA curve corresponding to increased expectations, before the Central Bank reacts, and label it "AA2." 2.) To reflect how the Central Bank reacts to keep the exchange rate fixed, using the line drawing tool, add a third AA schedule corresponding to the equilibrium with new expectations and the old exchange rate. Label it "AA3." Carefully follow the instructions above and only draw the required objects. We can see that as a result of expected depreciation, output will ? . As the Central Bank is adjusting to keep exchange rate fixed, the money supply will ? and the interest rate will ? .
stay the same fall rise AA2 shift up AA3 is original AA1
