Econ 0500 Exam 1

Which of the following will shift the LM curve to the right? a. An increase in the country's money supply b. A decrease in the country's interest rates c. A decrease in the country's taxes d. An increase in the country's GDP

a. An increase in the country's money supply

_________________ is the process by which an investor buys a currency in one market at a particular exchange rate and then almost immediately sells that currency in another market where the exchange rate for the currency is more advantageous, thereby ensuring an almost risk-free profit. a. Arbitrage b. Risk-free investing c. Appreciation d. Revaluation

a. Arbitrage

If C represents aggregate consumption, Id represents domestic investments, G represents government expenditures, E represents national expenditures on goods and services, X represents foreign demands for exports, and M represents domestic demand for imports, then aggregate demand in an economy equals: a. C + Id + G + (X - M). b. E + C + Id + (X - M ). c. C + Id + G + (M - X). d. C +Id+ G.

a. C + Id + G + (X - M).

Which of the following describes the change that occurred in China's currency policy in 2005? a. China linked the value of its currency to a basket of currencies and appreciated the value of its currency. b. China linked the value of its currency to a basket of currencies and depreciated the value of its currency. c. China pegged the value of its currency to the dollar and appreciated the value of its currency. d. China pegged the value of its currency to the dollar and depreciated the value of its currency.

a. China linked the value of its currency to a basket of currencies and appreciated the value of its currency.

Gross National Product is equal to a. Gross Domestic Product plus net primary income plus net secondary income. b. Gross Domestic Product plus net primary income minus net secondary income. c. Gross Domestic Product plus net primary income. d. Gross Domestic Product.

a. Gross Domestic Product plus net primary income plus net secondary income.

Suppose the US investor from the previous question decides to purchase the government bond from Argentine, but not to purchase the forward foreign exchange contract, because he believes that markets will provide uncovered interest rate parity. Which of the following statements best describes the reasoning behind this belief? a. He expects that market forces will cause the Argentine peso to depreciate by the necessary amount to achieve interest rate parity. b. He expects that market forces will cause the Argentine peso to appreciate by the necessary amount to achieve interest rate parity. c. He expects that market forces will cause the US dollar to depreciate by the necessary amount to achieve interest rate parity. d. He expects that market forces will create purchasing power parity between the United States and Argentina

a. He expects that market forces will cause the Argentine peso to depreciate by the necessary amount to achieve interest rate parity

What is the direct impact of an increase in the real money supply? a. Interest rates fall. b. Interest rates rise. c. The home currency depreciates. d. Output falls

a. Interest rates fall

In the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by U.S. residents? a. The dollar will depreciate. b. Demand for the dollar will increase. c. The supply curve for the dollar will shift to the left. d. The yen will depreciate.

a. The dollar will depreciate.

The Eurozone Crisis was initiated by a. an international banking crisis. b. an attack on the value of the euro through currency speculation . c. a depreciation of the euro that a balance of payments crisis. d. a large sale of euro-denominated reserve assets held by China.

a. an international banking crisis.

The European Economic Community was created a. by the Treaty of Rome in 1958 b. by the Single European Act of 1987 c. by the Maastricht Treaty of 1992 d. by Brexit in 2016

a. by the Treaty of Rome in 1958

Decisions about government spending and taxation are the major parts of a country's: a. fiscal policy. b. monetary policy. c. real GDP. d. internal balance.

a. fiscal policy

When a resident of Germany buys a U.S. Treasury bond, there will be a(n): a. increase in the demand for U.S. dollars . b. increase in the demand for German marks. c. decrease in the demand for U.S. dollars. d. decrease in the demand for German marks.

a. increase in the demand for U.S. dollars .

If a country's net foreign investment is positive (If > 0), that country: a. is acting as a net lender to the rest of the world. b. is acting as a net borrower from the rest of the world. c. imports more than it exports. d. is increasing its holdings of official international reserve assets.

a. is acting as a net lender to the rest of the world.

The_________________is based on the idea that a product that is freely traded in a competitive global market should have the same price everywhere if the prices at different places are expressed in the same currency . a. law of one price b. law of supply and demand c. floating exchange rate d. role of interest rates

a. law of one price

For the United States, _________ include(s) financial assets denominated in euros and Japanese yen. a. official international reserves b. official currencies c. statistical discrepancy d. legal tender

a. official international reserves

The sum of the debit items in the balance of payments equals the: a. sum of all credit items. b. overall balance. c. capital inflows. d. international investment position.

a. sum of all credit items.

Other things remaining unchanged, if American exports to Japan increase and American imports from Japan decrease, then under a floating exchange-rate system, we would expect: a. the U.S. dollar to appreciate b. the yen value of a U.S. dollar to be higher in Tokyo than in New York. c. the demand for Japanese yen to increase in the foreign exchange market. d. the supply curve of Japanese yen to shift inward.

a. the U.S. dollar to appreciate

The IS curve illustrates all combinations of domestic output levels and interest rates for which: a. the domestic product market is in equilibrium. b. the domestic money market is in equilibrium. c. there is a zero balance in the country's official settlements balance. d. there is full employment.

a. the domestic product market is in equilibrium

Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 dollar is exchanged for 100 yen, the purchasing power parity model of exchange rate determination suggests that: a. the yen is overvalued . b. the yen value is about correct. c. the price of a Big Mac in Japan will rise. d. the dollar will depreciate against the yen.

a. the yen is overvalued

Suppose under a gold standard the price of gold in the United States is $550 per ounce and the price of gold in the United Kingdom is £200 per ounce. The exchange rate is thus: a. $0.45 per pound. b. $2.75 per pound. c. £0.54 per dollar. d. £2.75 per dollar.

b. $2.75 per pound

Which of the following capital transaction items is entered as a debit in the U.S. balance of payments? a. A U.S. resident transfers the equivalent of $1,000 from his account at The Bank of England to his account at an Atlanta branch of the Bank of America. b. A Spanish resident transfers the equivalent of $100 from his account at Bank America in Chicago to his Credit Suisse account in Basel (Switzerland) c. A U.S. resident sells his General Motors stock to a citizen of Brazil d. A U.S. resident sells his classic Mercedes to a French resident

b. A Spanish resident transfers the equivalent of $100 from his account at Bank America in Chicago to his Credit Suisse account in Basel (Switzerland)

Which of the following will shift the IS curve to the left? a. A decrease in the country's interest rates b. An increase in the country's tax rate c. A decrease in the country's money supply d. A decrease in the country's savings rate

b. An increase in the country's tax rate

What is the difference between a Customs Union and a Common Market? a. A customs union lowers trade barriers between its members, but allows members to maintain separate external trade policy. A common market lowers trade barriers between its members and establishes a common external trade policy. b. Both a customs union and a common market establish a common external trade policy, but only a common market allows for the free flow of labor and capital. c. Both a customs union and a common market allow for the free flow of labor and capital, but only a common market establishes a common currency. d. Both a customs union and a common market establish a common currency, but only a common market coordinates fiscal and monetary policy.

b. Both a customs union and a common market establish a common external trade policy, but only a common market allows for the free flow of labor and capital.

Which of the following contributed to the abandonment of the Bretton Woods Exchange Rate System? a. Political and economic instability between World War I and World War II. b. Expansionary fiscal policy in the United States during the 1960s. c. Contractionary fiscal policy in the United States during the 1960s. d. Excessive lending preceding the financial crisis of 2008-2009.

b. Expansionary fiscal policy in the United States during the 1960s.

Beginning in the mid-1990s, what did the Chinese government do to bring stability to the value of the Chinese yuan? a. It sold yuan and bought gold. b. It bought U.S. dollars and sold yuan . c. It bought yuan on the international market. d. It restricted the purchase of yuan.

b. It bought U.S. dollars and sold yuan .

If the exchange rate of a currency is determined by the foreign exchange market without the intervention of government, the exchange rate system is known as a(n) ___________________ exchange rate system. a. equilibrium b. fixed c. floating d. pegged

c. floating

If a country has fixed the exchange rate for its currency at 25 units of currency per U.S. dollar and the market supply and demand forces are pushing that country's currency toward 28 units of currency per U.S. dollar, what must that country do to defend its fixed exchange rate? a. It must buy foreign currencies other than the U.S. dollar b. It must sell U.S. dollars and buy its own currency c. It must buy U.S. dollars with its own currency d. It must urge the U.S. government to raise U.S. interest rates

b. It must sell U.S. dollars and buy its own currency

Does the European Union meet the requirements for creating an optimal currency zone? a. No, because it has eliminated border controls. b. No, because it does not have a centralized fiscal policy. c. No, because it is a free trade zone. d. Yes, it meets all of the requirements.

b. No, because it does not have a centralized fiscal policy.

An appreciation of the U.S. dollar refers to: a. an increase in the dollar price of a foreign currency b. a decrease in the dollar price of a foreign currency c. a decrease in the amount of financial assets held by U.S. interests d. the high regard that foreigners have for the U.S. financial system

b. a decrease in the dollar price of a foreign currency

When the United States imports goods, those imports create a(n): a. supply of a foreign currency and a demand for U.S. dollars b. demand for foreign currencies and a supply of U.S. dollars c. equilibrium in the foreign exchange markets d. opportunity for triangular arbitrage

b. demand for foreign currencies and a supply of U.S. dollars

The monetary trilemma describes the choice an economy faces between a. potential output, price levels, and the trade balance. b. exchange rate stability, monetary policy autonomy , and freedom of financial flows. c. aggregate demand, the multiplier effect, and fiscal policy. d. interest rates, income levels, and the real money supply .

b. exchange rate stability, monetary policy autonomy , and freedom of financial flows.

The IS curve has a: a. negative slope because a higher interest rate leads to a decrease in government spending, which reduces the domestic output level b. negative slope because a higher interest rate leads to a decrease in aggregate demand, which results in lowering of the domestic production level c. positive slope because a higher interest rate leads to an increase in aggregate savings and thus an increase in domestic real investment d. positive slope because a higher interest rate leads to an increase in foreign investment and thus raises the level of aggregate income

b. negative slope because a higher interest rate leads to a decrease in aggregate demand, which results in lowering of the domestic production level.

The annual flows of earnings on foreign assets are reported in a country's current account, whereas the principal amounts (ie, the investment amounts) of financial assets traded between a country's residents and the rest of the world are : a. not reported . b. reported in the country's capital/financial account balance. c. considered to be part of the country's transactions in official reserve assets . d. reported only when the assets are sold.

b. reported in the country's capital/financial account balance.

The Chinese government's intervention in the foreign exchange market by buying US dollars and selling yuan had the effect of a. weakening the US dollar and increasing the US trade deficit with China. b. strengthening the US dollar and increasing the US trade deficit with China. c. strengthening the yuan and increasing the US trade deficit with China. d. weakening the yuan and decreasing the US trade deficit with China.

b. strengthening the US dollar and increasing the US trade deficit with China.

The LM curve illustrates all combinations of domestic output levels and interest rates for which: a. the domestic product market is in equilibrium. b. the domestic money market is in equilibrium. c. there is a zero balance for the country's official settlements balance. d. there is full employment.

b. the domestic money market is in equilibrium.

In the IS-LM model, nominal interest rates equal real interest rates because we assume that in the short run a. the exchange rate is fixed . b. the price level is fixed. c. the output level is fixed. d. the tax rate is fixed.

b. the price level is fixed.

The intersection of the IS and LM curves shows: a. the balance of payments deficit or surplus b. the short-run equilibrium interest rate and the output level in the economy. c. the short-run trade balance. d. the long-run equilibrium inflation rate and the natural rate of unemployment in the economy.

b. the short-run equilibrium interest rate and the output level in the economy

In August 2018, the Argentine peso continued to fall in value despite the central bank's efforts to stabilize the currency by raising interest rates to 60%. Why did the central bank expect a high interest rate to stabilize the currency? a. A high interest rate might slow inflation by discouraging borrowing b. A high interest rate might create additional demand for the Argentine peso, leading to an depreciation of the currency c. A high interest rate might create additional demand for the Argentina peso, leading to an appreciation of the currency d. A high interest rate might create supply of the Argentine peso, leading to an appreciation of the currency

c. A high interest rate might create additional demand for the Argentina peso, leading to an appreciation of the currency.

The figure given below illustrates the market for British pounds . D£ and S£ are the demand and supply curves of the British pound, respectively. If the British government wants to peg the dollar-pound exchange rate at $2.50 per pound, what action would British monetary authorities have to undertake? a. Sell 1 million pounds and buy 2.5 million dollars. b. Buy 1 million pounds and sell 1 million dollars. c. Buy 1 million pounds and sell 2.5 million dollars. d. Buy 6 million pounds and sell 12 million dollars.

c. Buy 1 million pounds and sell 2.5 million dollars.

What are the endogenous variables in the IS-LM model? a. Price level and unemployment rate b. Income and interest rates c. Exchange rates and money supply d. Fiscal and monetary policy

c. Exchange rates and money supply

Which of the following best describes the way in which imports are included in national balance of payment accounting: a. Imports are a credit, because they represent funds flowing out of the importing or purchasing country . b. Imports are a credit, because they represent goods flowing into the importing or purchasing country. c. Imports are a debit, because they represent funds flowing out of the importing or purchasing country. d. Imports are not included in national balance of payments accounting because they are private transactions.

c. Imports are a debit, because they represent funds flowing out of the importing or purchasing country.

If the GDP of an economy is at its potential output level, what impact will an increase in aggregate demand have? a. Output will increase and prices will fall. b. Output will decrease and prices will fall. c. Output will stay the same and prices will rise. d. Output will stay the same and prices will fall.

c. Output will stay the same and prices will rise.

Suppose a US investor decides to buy a government bond in Argentina, which has been offered at an interest rate of 60%. A comparable US government bond is offering an interest rate of 3%. The investor wants to assure that he will make at least 3% at the end of the bond period and so buys a forward foreign exchange contract. Assume the current exchange rate is R$/peso = 1. What exchange rate should the investor set in the contract in order to establish covered interest rate parity? a. R$/peso = 1.6 b. R$/peso = 1.57 c. R$/peso = 0.43 d. R$/peso = 1

c. R$/peso = 0.43

What is the set of accounts that records all of the flows of value between a nation's residents and the residents of the rest of the world called: a. The official settlements balance. b. The international investment position. c. The balance of payments. d. The overall balance.

c. The balance of payments

When Honduran immigrants in the United States send money back to Honduras, how is money recorded in the Honduran Balance of Payments? a. The financial account is credited b. The financial account is debited c. The current account is credited d. The current account is debited

c. The current account is credited

Which of the following results from the establishment of policies that control access to foreign currency? a. An efficient foreign exchange market that eliminates deadweight loss b. An efficient foreign exchange market that eliminates administrative costs c. The development of a black market in foreign currency d. All of the above

c. The development of a black market in foreign currency

Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen? a. The dollar will depreciate. b. The peso will be worth 1.5 dollars in the foreign exchange market. c. The peso will depreciate. d. The dollar will be worth 1.5 pesos in the foreign exchange market.

c. The peso will depreciate

The central bank of Alanza, a developing economy, persistently intervenes in the foreign exchange market to prevent its currency from appreciating against the dollar. Which of the following is the most probable consequence of this intervention by the central bank? a. The money supply in Alanza will decline. b. Alanza's exports will decline in the near future. c. The rate of inflation in Alanza will increase . d. Alanza is most likely to have a trade deficit with the United States .

c. The rate of inflation in Alanza will increase

Under the EU concept of subsidiarity, over which of the following policies does the European Commission have authority? a. Welfare policies related to unemployment. b. Tax policy. c. Trade agreements with Japan. d. All of the above.

c. Trade agreements with Japan.

The Bretton Woods exchange rate system was a fixed exchange rate system based on: a. the British pound sterling b. the IMF special drawing rights c. a fixed price of gold in dollar terms d. European currency units (ECUs)

c. a fixed price of gold in dollar terms

Which one of the following is a benefit of establishing a fixed exchange rate policy? a. the British pound sterling b. the IMF special drawing rights c. a fixed price of gold in dollar terms d. European currency units (ECUs)

c. a fixed price of gold in dollar terms

The figure given below illustrates the market for British pounds. D£ and S£ are the demand and supply curves of the British pound, respectively. A downward movement along the vertical axis would correspond to a(n) ________ of the U.S. dollar a. arbitrage b. swap c. appreciation d. depreciation

c. appreciation

A government can fix the exchange rate of its currency by: a. raising its interest rates to make the currency more attractive to foreigners. b. refusing to engage in foreign trade. c. buying or selling its currency to keep the exchange rate in a preestablished range. d. joining a trade bloc

c. buying or selling its currency to keep the exchange rate in a preestablished range.

If an item in an international transaction results in a resident of a foreign country getting a monetary claim against a resident of the United States, then in the U.S. balance of payments that item is a(n): a. credit item (or addition). b. official international reserve. c. debit item (or subtraction). d. credit item or a debit item, depending on which foreign country is involved .

c. debit item (or subtraction).

The steps to economic integration outlined in the Single European Act included the elimination of technical barriers, such as a. national border controls b. national procurement policies c. differing national product standards d. value added taxes

c. differing national product standards

With over $1 trillion in US Treasury Securities, China's leverage over the US economy can be best characterized as a. significant, because its holdings represent over 50% of the public portion of the US national debt. b. significant , because its holdings represent over 50% of foreign portion of the US national debt. c. limited, because its holdings represent less than the weekly trading volume of US treasury securities . d. limited, because its holdings are subject to IMF exchange controls .

c. limited, because its holdings represent less than the weekly trading volume of US treasury securities

As the value of the yen falls relative to the U.S. dollar in the foreign exchange market: a. Japanese goods become more expensive to the U.S. consumers. b. the supply of dollars will fall. c. the demand for Japanese goods will increase in the U.S. market. d. U.S. goods become less expensive to Japanese consumers.

c. the demand for Japanese goods will increase in the U.S. market

German reunification created macroeconomic conditions that contributed to a. the end of the gold standard b. the end of the Bretton Woods exchange rate system c. the end of the Exchange Rate Mechanism d. the end of the Schengen Agreement

c. the end of the Exchange Rate Mechanism

If Vladimir Putin buys real estate in Manhattan, a. the current account of the U.S. balance of payments will be credited b. the current account of the U.S. balance of payments will be debited c. the financial account of the U.S. balance of payments will be credited d. the financial account of the U.S. balance of payments will be debited

c. the financial account of the U.S. balance of payments will be credited

The U.S. current account does not include: a. net exports of goods. b. U.S. aid to foreign countries c. the sale of U.S. bonds to foreign interests. d. income receipts from foreigners .

c. the sale of U.S. bonds to foreign interests

If we add up all of the value outflows and value inflows in a country's balance of payments, the difference in the outflows and inflows will be: a. a positive value because countries gain from trading. b. different for every country because some countries have advantages over other countries . c. zero because there is value that flows out and value that flows in for every transaction. d. a positive value for the country because no country is going to be involved in a transaction where it receives less than it gives.

c. zero because there is value that flows out and value that flows in for every transaction.

If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the United States, then in Japan, the computer should cost: a. 2000 yen b. 3000 yen c. 250 yen d. 4000 yen

d. 4000 yen

Which of the following is advantage for the member states in the EuroZone? a. Greater economies of scale through market expansion. b. Reduced transaction costs for trade between member states. c. Better negotiating leverage in global trade agreements. d. All of the above

d. All of the above

Which of the following statements is captured by the accounting identity, S + (T-G) = I + CA? a. A country with a low savings rate and a government budget deficit needs investment from other countries to supplement its domestic investment funds. b. A country with a high savings rate and a government surplus has additional funds available to invest in other countries. c. A country that would like to reduce its government budget deficit and its current account deficit must lower domestic investment or increase private savings. d. All of the above.

d. All of the above

Which of the following policies would you expect to cause a depreciation of the US dollar? a. A decrease in the corporate tax rate . b. Increased government spending for border protection. c. Increased government spending for the domestic infrastructure . d. An increase in the personal tax rate .

d. An increase in the personal tax rate

Gross Domestic Product is equal to: a. Gross National Product plus net primary income plus net secondary income. b. Consumption plus investment plus exports minus imports. c. Consumption plus investment plus government spending plus exports minus imports. d. Consumption plus savings plus taxes.

d. Consumption plus investment plus government spending plus exports minus imports. Consumption plus savings plus taxes

If a country's macroeconomic goals include monetary policy autonomy and freedom of financial flows, what policy must it adopt? a. Financial controls b. Exchange rate controls . c. Fixed exchange rate d. Floating exchange rate

d. Floating exchange rate

Which of the following describes a country's capital/financial account balance: a. It includes an official portion, which tracks consumer spending and investment, and an unofficial portion, which tracks government spending. b. It includes an unofficial portion, which tracks consumer spending and investment, and an official portion, which tracks government spending. c. It includes an official portion, which tracks international direct and portfolio investment flows, and an unofficial portion, which tracks international flows of currency and other official assets. d. It includes an unofficial portion, which tracks international direct and portfolio investment flows, and an official portion, which tracks international flows of currency and other official assets.

d. It includes an unofficial portion, which tracks international direct and portfolio investment flows, and an official portion, which tracks international flows of currency and other official assets.

If an Italian investor sells U.S. government securities to a U.S. buyer, how will this item be entered in the balance of payments? a. It will appear in the trade account as an import. b. It will appear in the trade account as an export. c. It will appear in the financial account as an increase in foreign assets held by U.S. residents. d. It will appear in the financial account as a decrease in the U.S. assets held by foreigners

d. It will appear in the financial account as a decrease in the U.S. assets held by foreigners

Do cryptocurrencies, like Bitcoin, meet the economic definition of a "currency"? a. Yes, because they are an accepted "medium of exchange" in multiple countries and in international transations. b. No, because they are too volatile to serve as a "store of value." c. No, because they are not backed by a physical commodity like gold. d. No, because they do not serve as a claim on the assets of any national government.

d. No, because they do not serve as a claim on the assets of any national government.

Which of the following best describes a weakness in a currency system based on the gold standard? a. The gold standard prevents the creation of exchange rates between national currencies. b. The gold standard sets the value of currency exchange rates too high. c. The gold standard allows for too much flexibility in monetary policy. d. The gold standard allows for too little flexibility in monetary policy.

d. The gold standard allows for too little flexibility in monetary policy

Which of the following statements describe a condition that contributes to a "doom loop" for national banking systems? a. Central banks have too much autonomy from the national legislature. b. Central banks print more money in order to reduce national debt. c. Central banks provide funds to insolvent private banks. d. There is a crises of confidence in the solvency of a central bank.

d. There is a crises of confidence in the solvency of a central bank.

The Eurozone Crisis was resolved by a. an appreciation of the Euro. b. the establishment of centralized deposit insurance for members of the Eurozon e. c. expansionary fiscal policy in several European nations . d. an emergency loan from the IMF and changes to banking policies in Europe .

d. an emergency loan from the IMF and changes to banking policies in Europe .

An increase in the U.S. exports of goods and services will result in a(n) ________foreign currency and a(n)________ U.S. dollars in the foreign exchange market. a. decrease in the supply of; decrease in the demand for b. increase in the demand for; increase in the supply of c. shortage of; surplus of d. increase in the supply of; increase in the demand for

d. increase in the supply of; increase in the demand for

A country's _______ is the country's current account balance plus its nonofficial financial account balance. a. balance of payments b. international investment position c. capital account d. official settlements balance

d. official settlements balance

Higher interest rates increase the cost of borrowing, thus: a. increasing foreign direct investment. b. increasing disposable income. c. decreasing domestic tax rates. d. reducing the amount of real investment undertaken in an economy .

d. reducing the amount of real investment undertaken in an economy

Government "crowding out"occurs when a. an expansion in the money supply creates inflation. b. a contraction in the money supply results in a decrease in domestic investment. c. the budget deficit causes interest rates to fall. d. the budget deficit causes interest rates to rise.

d. the budget deficit causes interest rates to rise.

The current account balance does NOT equal: a. the difference between domestic production and domestic expenditure b. the difference between national saving and domestic investment c. net foreign investment d. the difference between government saving and government investment

d. the difference between government saving and government investment

In the context of a country's balance of payments, unilateral transfers arise from: a. transactions where only one country is involved. b. transactions in which the inflow of value and the outflow of value are equal. c. payments that are made now for goods or services to be received in the future. d. transactions for which there are no offsetting transfers of value (eg, like gifts).

d. transactions for which there are no offsetting transfers of value (eg, like gifts).