Econ Exam 2 (HW 4)

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar.

0.712

Suppose the price of gold is initially 300 U.S. dollars per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ______ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ______ Canadian dollars per U.S. dollar.

1.50; 1.70

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is $25 per barrel in the United States, the price of oil is ______ pesos per barrel in Mexico.

200

Based on these data, the nominal exchange rate equals approximately ______ pesos per Canadian dollar or, equivalently, ______ Canadian dollars per peso.

6.222; 0.161

The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ______ pesos per U.S. dollar.

8.5

Suppose last year Moe faced a 25% marginal tax rate. This year tax rates increased and now Moe faces a 30% marginal tax rate. Moe chooses to work more hours this year because

Moe must work more hours to have the same after-tax income this year.

All of the following central banks have announced numerical targets for inflation EXCEPT the:

United States Federal Reserve System.

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

a decline in national saving caused largely by rapidly rising government budget deficits.

The aggregate supply curve will shift downward in response to:

a decrease in the expected rate of inflation.

A large increase in oil prices is an example of:

a negative inflation shock.

For a given inflation rate, if a rise in the stock market makes consumers more willing to spend, then the ______ shifts _____.

aggregate demand curve; right

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will shift the ______ curve to the left and generate ______.

aggregate demand; a recessionary output gap

As the available technology improves, ______ shifts to the _____.

aggregate supply; right

As the number or quality of available resources improves, ______ shifts to the _____.

aggregate supply; right

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:

an appreciation of foreign currencies relative to the U.S. dollar.

Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:

an appreciation of the U.S. dollar relative to other currencies.

Which of the following policies is likely to enhance a central bank's credibility?

announce inflation targets.

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ______ and the U.S. dollar has _____.

appreciated; depreciated

Purchasing power parity is the theory that nominal exchange rates are determined:

as necessary for the law of one price to hold.

When the interest rate in the U.S. rises, U.S. financial assets

become more attractive to both foreign and domestic buyers

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n):

capital inflow.

When an American buys stock in a French company, from the perspective of the United States, this is a(n):

capital outflow.

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

decrease.

An increase in the real exchange rate will tend to ______ exports and to ______ imports.

decrease; increase

Holding all else constant, a decrease in the real interest rate on Mexican assets will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

decrease; increase

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will ______ and the level of capital investment in the country will _____, holding other factors constant.

decrease; increase

At each value of the domestic interest rate, increases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

decrease; increase; decrease

A tax increase that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

decrease; may increase, decrease, or remain unchanged

Tight monetary policy will ______ net exports as a result of a ______ currency.

decrease; stronger

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

decreases

In an open economy, an increase in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

decreases; increases

Easy monetary policy reduces the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

decreases; increases; decreases

The credibility of monetary policy is the:

degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run costs.

Based on the purchasing power parity theory, in the long run, currencies of countries with significant inflation will tend to:

depreciate.

Anchored inflationary expectations are people's expectations of future inflation that:

do not change if inflation rises temporarily.

Announced numerical inflation targets are advocated for all of the following reasons EXCEPT that inflation targets:

eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks.

If the rate of inflation equals zero then the real rate of interest:

equals the nominal rate of interest.

The self-correcting tendency of the economy means that rising inflation eventually eliminates:

expansionary gaps.

Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ______ gap in the short-run and ____ inflation and ____ output in the long-run

expansionary; higher; potential

Relative to workers in Western Europe, workers in the U.S.

face a lower marginal tax rate and work more hours per year.

All else equal, if U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will:

fall

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.

falls; fall

The gold standard is an example of a ______ exchange rate system.

fixed

An inflation _____ may be more likely to stabilize output as well as inflation because they have established credibility and _____.

hawk; anchored inflationary expectations.

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ______ and there is a capital ______ to/from the United States.

imports increase; inflow

Most economists believe that the reduced variability of inflation in the U.S. is the result of:

improved monetary policymaking by the Fed.

Lower taxes on interest income

increase growth rates by increasing saving and thus investment.

Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to avoid a recession.

increase the target inflation rate.

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output.

increase; decrease

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; decrease

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate.

increase; decrease

In an open economy, an increase in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant.

increase; decrease

Holding constant risk and the real returns available abroad, higher domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

increase; decrease; increase

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; increase

For a given domestic and foreign price level, an increase in the nominal exchange rate ______ the real exchange rate.

increases

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ______ the real exchange rate.

increases

Tight monetary policy raises the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

increases; decreases; increases

A reduction in the marginal tax rate can cause potential output to increase by

increasing the incentive to invest more in education and earn advanced degrees.

Someone who is not strongly committed to achieving and maintaining low inflation is called a(n):

inflation dove.

Inflation inertia is the result of the behavior of ____ and the existence of ______.

inflation expectations; long-term wage and price contracts

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

inflation inertia.

Following an adverse inflation shock the economy will return to potential more rapidly if:

inflationary expectations are anchored.

The delay between the date a policy change is needed and the date it is implemented is called the:

inside lag.

Benefits of net capital inflows to a country include all of the following EXCEPT:

interest and dividend payments owed to foreign investors.

An inflation hawk is someone who:

is committed to maintaining low inflation even at the cost of reduced output and employment.

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

is more expensive in the United States.

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

large; high

If the interest rate in the U.S. falls, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will fall.

less; demand for

A low rate of expected inflation tends to lead to a ___ rate of actual inflation and a high rate of expected inflation tends to lead to a ____ rate of actual inflation.

low; high

Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to keep inflation at the initial target level.

maintain the initial target inflation rate.

All of the following are ways to enhance central bank credibility EXCEPT to:

make central bank actions subject to frequent review and veto by the executive and legislative branches of government.

The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short-run because:

many goods and services are not traded internationally and not all internationally-traded goods are standardized.

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

monetary policy must be used to keep the exchange rate's market equilibrium value at its official value.

The inside lag is relatively shorter for _____ policy and the outside lag is relatively shorter for _____ policy.

monetary; fiscal

As U.S. real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar.

more; depreciation

All else equal, relative to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

more; flexible

The greater the credibility of monetary policy the ____ likely inflationary expectations are to be anchored and the _____ the recessions caused by adverse inflation shocks.

more; shorter

Firms suddenly becoming pessimistic about future business prospects is an example of a ______ demand shock, which would shift the AD curve to the ______.

negative; left

Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy.

no longer; monetary

When actual output equals potential output there is ____ output gap and the rate of inflation will tend to ____.

no; remain the same

The delay between the date a policy change is implemented and the date when most of its effects have occurred in the economy is called the:

outside lag.

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates

planned consumption and investment; net exports

A sudden increase in household wealth is an example of a ______ demand shock, which would shift the AD curve to the ______.

positive; right

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will appreciate when:

real GDP in Japan increases.

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____.

real interest rate; exchange rate

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

recessionary; decrease

An increase in marginal tax rates

reduces the opportunity cost of leisure (not working).

When the Fed tightens U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.

rise; increasing

The fact that output gaps will not last indefinitely, but will be closed by rising or falling prices is the economy's

self-correcting property.

Anchored inflationary expectations are beneficial to an economy because they:

shorten recessions caused by adverse inflation shocks.

Policymakers' use of stabilization policy to eliminate output gaps is more appropriate when an economy self corrects very ______ and when the output gap is very ____.

slowly; large

All of the following are examples of the independence of the U.S. Federal Reserve System EXCEPT that:

the Federal Reserve Act does not explicitly prohibit legislative interference in monetary policy

The marginal tax rate is:

the amount by which taxes increase when before-tax income rises by an additional dollar.

The AD curve slopes downward because an increase in ______ causes ______ to fall, which in turn causes real GDP to fall

the inflation rate; planned spending

The speed at which an economy returns to potential following an adverse inflation shock depends on:

the public's expectations of how the Federal Reserve will act.

If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession:

the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank.

The average tax rate is

total taxes divided by total before-tax income.

A flexible exchange rate is an exchange rate whose value:

varies according to the supply and demand for the currency in the foreign exchange market.

The economy is in short-run equilibrium

when the AD and AS curves intersect at a level of real GDP that is above or below Y*

The economy is in long-run equilibrium

when the AD and AS curves intersect at potential output Y*.