econ quiz

An executive from Switzerland checked into a hotel room in Spain and was told by the hotel manager that 1 EUR will buy 1.2983 CHF. From the executive's perspective, an indirect exchange rate quote would be: 0.7702 EUR per CHF. 0.7702 CHF per EUR. 1.2983 EUR per CHF.

A is correct. An indirect quote takes the foreign country as the price currency and the domestic country as the base currency. To get CHF—which is the executive's domestic currency—as the base currency, the quote must be stated as EUR/CHF. Using the hotel manager's information, the indirect exchange rate is (1/1.2983) = 0.7702.

Which is the most accurate statement regarding the demand for money? Precautionary money demand is directly related to GDP. Transactions money demand is inversely related to returns on bonds. Speculative demand is inversely related to the perceived risk of other assets.

A is correct. Precautionary money demand is directly related to GDP. Precautionary money balances are held to provide a buffer against unforeseen events that might require money. Precautionary balances tend to rise with the volume and value of transactions in the economy, and therefore rise with GDP.

A European foreign exchange dealer gives the following exchange rate information to a European client: USD/EUR spot rate = 1.1640; three-month forward points = 12.8. The best interpretation of the exchange rate information is that: the US dollar is trading at a premium to its forward rate. the three-month US real interest rate is expected to rise. three-month eurozone interest rates are lower than those in the United States.

C is correct. A positive forward premium indicates that the interest rates in the base currency region (eurozone) are lower than the interest rates in the price currency region (United States).

Assuming that there are no changes in the fiscal or trade balances, if investment expenditures become highly sensitive to interest rates, the aggregate demand curve is most likely to be: A flatter. B steeper. C unaffected.

A is correct. Since there are no changes in the fiscal or trade balances, the balance between aggregate expenditure and aggregate income requires that changes in investment spending equal changes in private savings. Assume that interest rates fall: Investment will increase (by a larger amount, given the increased sensitivity to rates); savings will have to fall (this arises because there is less incentive to save, given the lower interest rate; consumption will increase; and national income will increase. The IS curve will be flatter the more sensitive investments are to interest rates. This means that income will have to move more to induce a large enough change in savings to match the change in investment spending, which implies a flatter aggregate demand curve.

Assuming its trading partner does not retaliate, which of the following conditions must hold in order for a large country to increase its national welfare by imposing a tariff? The deadweight loss must be smaller than the benefit of its improving terms of trade. It must auction the import licenses for a fee to offset the decline in the consumer surplus. It must have a comparative advantage in the production of the imported good.

A is correct. The large country is able to cause the foreign exporter to reduce price in order to retain market share. In the large country, domestic producers gain from higher volume and the government gains from collecting the tariff. The sum of these two gains must exceed the deadweight loss to domestic consumers to achieve a national welfare gain. The change in terms of trade causes income redistribution from the foreign exporter to the domestic producer. C is incorrect. If the large country had a comparative advantage, it would be exporting more than importing. This is not relevant to whether there is a net domestic gain from the tariff. The tariff hurts domestic consumers. Unless the gain from the tariff exceeds the loss to consumers, national welfare will decrease.

If the GDP deflator values for year 1 and year 2 were 190 and 212.8, respectively, which of the following best describes the annual growth rate of the overall price level? 5.8%. 6%. 12%.

A is correct. sqrt(212.8/190) - 1 = 0.0583 or 5.8%.

A BRL/MXN spot rate is listed by a dealer at 0.1378. The 6-month forward rate is 0.14193. The 6-month forward points are closest to: -41.3. +41.3. +299.7.

B is correct. The number of forward points equals the forward rate minus the spot rate, or 0.14193 - 0.1378 = 0.00413, multiplied by 10,000: 10,000 × 0.00413= 41.3 points. By convention, forward points are scaled so that ±1 forward point corresponds to a change of ±1 in the last decimal place of the spot exchange rate.

The structural deficit is equal to the budget deficit: adjusted for inflation. that would exist at full employment. excluding the impact of automatic stabilizers.

B is correct. The structural deficit is the deficit that would exist if the economy was at full employment (or full potential output). Economists often consider the structural deficit as an indicator of the fiscal policy stance. A is incorrect because the structural deficit makes no adjustment for inflation. C is incorrect because the structural deficit includes (rather than excludes) the impact of automatic stabilizers on the budget assuming full employment.

A country in fiscal balance with a trade surplus will most likely: sell assets to foreigners to reduce the imbalance. increase the imbalance by lending to foreign countries. have an excess of domestic saving relative to investment spending.

C is correct. A trade surplus arises when exports exceed imports—that is, X > M. A fiscal balance arises when government spending equals taxation—that is, G = T. Since X - M = (S - I) + (T - G), if T = G, then a trade surplus can arise only when there is an excess of domestic saving over investment spending.

Over the past month, the Swiss Franc (CHF) has depreciated 12 percent against pound sterling (GBP). How much has the pound sterling appreciated against the Swiss Franc? 12% Less than 12% More than 12%

C is correct. The appreciation of sterling against the Swiss franc is simply the inverse of the 12% depreciation of the Swiss franc against Sterling: [1/(1 - 0.12)] - 1 = (1/0.88) - 1 = 0.1364, or 13.64%.

According to the concept of money neutrality, over the long term, the money supply is least likely to affect: inflation expectations. inflation. the real rate of interest.

C is correct. The concept of money neutrality implies that an increase in the money supply will leave real variables like output and employment unaffected. The real rate of interest will be unaffected by money supply changes but inflation and inflation expectations will be affected. B is incorrect. According to money neutrality, real variables are not affected by changes in money supply but inflation will be. A is incorrect. According to money neutrality, real variables are not affected by changes in money supply but inflation expectations can be.

A three-month forward exchange rate in CAD/USD is listed by a dealer at 1.0123. The dealer also quotes 3-month forward points as a percentage at 6.8%. The CAD/USD spot rate is closest to: 0.9478. 1.0550. 1.0862.

Given the forward rate and forward points as a percentage, the unknown in the calculation is the spot rate. The calculation is as follows: Spot rate × (1 + Forward points as a percentage) = Forward rate Spot rate × (1 + 0.068) = 1.0123 Spot = 1.0123/1.068 = 0.9478