ECON182 Multiple Choice

The long-run monetary model of the price level provides that:

as long as prices are flexible, a change in the supply of money or the demand for money will result in a change in the price level to restore equilibrium.

if investors can cover themselves in the forward market, they will take advantage of interest rate differentials by:

buying assets denominated in the high-interest rate currency, and selling assets in the low-interest rate currency.

Nominal anchors restrain inflation and rising interest rates by

forcing restrictions on easy monetary policies

the situation in which the difference in interest rates between two currencies is equal to the expected change in the spot rate over the same time period is known as:

uncovered interest parity

Under what circumstances would there be a "no-arbitrage" situation in goods markets between two nations?

when the relative price of the currencies is equal to one

If Europe has a real GDP growth rate of 5%, and the United States has a real GDP growth rate of 6%, while money growth in Europe is 7%, and money growth in the United States is 5%, what would the monetary exchange rate model predict for exchange rates in the long run?

The U.S. dollar would appreciate by 3% against the euro.

When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, which of the following occurs?

The increase in interest rates and inflation after a change in the monetary growth rate affect exchange rates but also cause secondary effects on exchange rates and price levels because of a decrease in the demand for real balances.

for real interest parity to hold, we require:

both PPP and UIP

Using the relationship between expected exchange rates and inflation differentials in combination with uncovered interest parity, we find:

changes in inflation rates are directly related to changes in nominal interest rates.

More realistically, the liquidity function is not ______ but a(n) ______ function of the demand for real balances based on changes in the ______.

constant; decreasing; nominal rate of interest

With relative PPP, a rise in a nation's inflation rate is always offset by an increase in the rate of __________ of its currency.

depreciation

Nominal anchors limit overshooting by:

distinguishing between permanent and temporary changes.

Using the UIP equation, what would happen to the spot rate for euros if the expected dollar-euro exchange rate fell?

dollar appreciation

Using the UIP equation, what would happen to the spot rate for euros if the interest rate on euro deposits rises ceteris paribus?

dollar depreciation

Using the asset model of short-run exchange rate determination, once the domestic rate of return is determined by MS and MD, the short-run equilibrium _____ can be determined if prices are inflexible and expectations are given.

exchange rate

In the money market, equilibrium is achieved:

in the long run by the adjustment of prices.

If prices are held constant and income increases by 12%, the demand for money will:

increase by 12%

An increase in the money supply in the short run changes ____, whereas in the long run, ____ change.

interest rates; inflation rates

Whenever there is excess demand for real balances, short-run adjustment occurs because:

investors and borrowers sell bonds (convert to cash) and drive down their prices (drive up nominal rates of interest).

Other nominal anchors or targets, such as rules for monetary growth, sometimes fail to optimize economic conditions in the short run because:

low monetary growth may curb inflation but may also constrain growth of real income.

if the prices of goods in Europe increase, while the nominal exchange rate between the euro and the U.S. dollar remains the same, we say that the U.S. dollar has experienced a:

real depreciation

absolute PPP and relative PPP differ in what way?

relative PPP may hold even when absolute PPP does not

If UIP holds, the foreign interest rate is 6%, and the home currency is expected to appreciate by 2%, then the home interest rate is:

4%

If inflation in the United States is 4% per year and in the United Kingdom it is 8% per year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that the interest rate in the United States is:

2%

Assuming sticky prices and given expectations of future exchange rates, what is the short-run effect on the exchange rate of the U.S. dollar (purchasing euros) and on domestic and foreign rates of return if there is a temporary increase in the quantity of U.S. dollars?

Domestic and foreign rates of return converge as the dollar depreciation lowers returns forU.S. investors who purchase euro-based assets.

a sudden and pronounced loss of value of one nation's currency against others is known as

a currency crisis

Under the monetary approach to exchange rates, if there is a rise in a country's home money supply, ceteris paribus, then the exchange rate should:

depreciate

If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will depreciate:

only if the U.S. inflation rate exceeds Canada's inflation rate.

From full long-run equilibrium, expectations of future exchange rates can only change when there is a:

permanent change in the quantity of money.

When the exchange rate depreciates in the short run and then appreciates slightly in the long run, it implies that the foreign money supply has:

permanently fallen

When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the foreign money supply has:

temporarily risen

Assuming short-run sticky prices, the same monetary policy result may be achieved by targeting the money supply or the nominal rate of interest whenever:

the demand for money is stable.

Combining the relative PPP with the monetary model of exchange rates, we find: the rate of depreciation of a currency (relative to another nation) in the long run is equal to:

the difference between the nominal money supply growth rates in each nation minus the difference between growth rates of real GDP.

In equilibrium, all traded goods sell at the same price internationally. If the same goods are expressed in their home prices, then the ratio of the prices is equal to:

the exchange rate between the two countries

Covered interest parity refers to the situation in which:

the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies.

absolute purchasing parity implies that

the price of a basket of goods is the same in the two countries

Using monetary theory, one can show that the price level (index) in an economy is equal to:

the ratio of the nominal supply of money to the demand for real balances.

Using the UIP equation, equilibrium in the short run occurs when:

the spot rate is such that foreign and domestic investment returns are equalized.

if domestic returns are greater than foreign returns, then:

the spot rate is too high

A key assumption to ensure that domestic returns and foreign returns are in equilibrium is:

there are no capital controls preventing the movement of capital

Whenever nations impose capital controls on their currencies:

there is no opportunity for trade or arbitrage, and differences in returns persist.