International Econ FInal

either a temporary FALL in the British money supply; or a temporary RISE in the European money supply

A short-run appreciation of the British pound would be consistent with:

remain constant.

According to UIP, when interest rates are equal, the exchange rate of the country's home currency is expected to:

temporary

Consumption smoothing is possible as long as output shock is

a Ponzi game

Continually rolling the interest on a loan over into the principal is called

the adoption of the U.S. dollar as an official currency by nations outside the United States, such as El Salvador and Ecuador.

Dollarization refers to:

social efficiency

Economists are increasingly convinced that institutions, public policies, or culture may influence a nation's productivity more than technology acquisition. This impact is known as:

GREATER THAN the foreign interest rate

From uncovered interest parity, we know that when the domestic currency is expected to DEPRECIATE, the domestic INTEREST rate should be

5 to 6 5 * (1.2) = 6

If E$/£ increases by 20%, this is consistent with:

an interest payment of $5 million and no change in the debt amount

If a country has $100 million debt and the interest rate on the debt is 5% and the debt is services each year, this would result in:

The dollar has depreciated and the euro has appreciated.

If a euro costs $1.25 today, and it costs $1.50 tomorrow, what has happened to the dollar-euro exchange rate?

it remains the same (this is consumption smoothing)

If a nation's yearly trade balance exactly offsets the interest due on its net external wealth, what is the effect on its net external wealth?

decrease ... because there will be less money for the same amount of goods.

If all else remains constant, if the money supply decreases then prices will _______

real DEPRECIATION

If fewer home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a:

Ç 0.816 per dollar ... 1/1.225

If the dollar-euro exchange rate on June 30, 2010 is $1.225 per euro, then the euro-dollar exchange rate would be:

output per worker will never catch up to the rich nations, even with access to capital markets

If the productivity of capital in low-income nations is substantially lower than productivity in high-income nations, then:

$8,264

If you are scheduled to receive a $10,000 payment in 2 years and the interest rate is 10%, then the present value of this payment is

a futures contract

In which of the following categories would an agreement to trade currencies in pre-set AMOUNTS at a certain date in the future be included?

may be exaggerated because of faulty statistics, and the U.S. net external debt may be even larger.

Most experts believe that the favorable U.S. situation in world financial markets:

may be exaggerated because of faulty statistics, and the US net external debt may be even larger

Most experts believe that the favorable US situation in world financial markets:

gifts, charitable contributions, and aid to foreign residents minus the same types of transfers to residents of the home nation.

Net unilateral transfers refers to...

FALL at the same rate

Normally, whenever the central bank lowers the rate it charges banks for overnight loans; market rates of interest

the cost of producing social capital is higher in poor nations.

Poor nations are often poorly equipped to provide social capital, and compared with rich nations:

not all capital assets can be traded internationally, and the number of assets is comparatively small.

Risk sharing through asset trade internationally is limited because:

FR; up An increase in the LR expectation of the spot rate will increase the expected foreign return.

See the above graph. If the LR expectation of the spot rate increases (i.e. D/F increases), then the ____ curve will shift ______.

credit; financial FDI is part of the financial account.

Suppose Ford Motor Company builds a factory in Canada. This transaction would be entered as a ______ in Canada's _______ account.

DEBIT ; FINANCIAL

Suppose Ford builds a factory in Canada. This transaction would be entered as a________ in the United States' _______ account

CREDIT ; CURRENT

Suppose Ford pays a dividend to a shareholder based in Canada. This transaction would be entered as a ________ in Canada's _______ account

current account credit, current account debit.

Suppose that a German trades a mug of beer for a glass of wine from a Frenchman. For France, this counts as a: Group of answer choices

5%

Suppose that the present discounted value of a stream of payments is $1,000. If the yearly payment is $50, what is the interest rate

5%

Suppose that the present discounted value of a stream of payments is $200. If the yearly payment is $10, what is the interest rate?

interest rates; short-run

The asset approach basically looks at _______ as the fundamental variable affecting _______ exchange rates

the effective exchange rate.

The average of the bilateral rate changes for a nation, weighted by the importance of the trading partner, is known as:

the negative of the balance on the capital account

The balance on the current account equals the negative of the balance on the financial account plus:

foreigners' investments in the United States earn them less income than the U.S. investments abroad.

The exorbitant privilege for the United States implies that:

law of one price

The idea that with frictionless trade, all goods traded internationally will have the same equilibrium price no matter which currency they are priced in is known as:

opposite; corresponding

The long-run monetary model of exchange rates provides that real income changes result in an ________ change in the price level and a _______ change in the strength of the currency

long-run relationships between money, prices, and exchange rates.

The monetary approach to exchange rates describes:

nominal money supply ; demand for real money

The price level in the country is determined by ________ and ________

the value of one currency in terms of the goods and services a unit will purchase compared with an equivalent amount of another currency.

The relative purchasing power of a currency is:

the rate of return on the asset PLUS or MINUS the expected capital gain or loss on currency changes.

The total rate of return on an international asset is:

the ratio of the nominal SUPPLY of money to the DEMAND for the real balances.

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

the domestic currency is UNDERVALUED

What is the situation when a home currency purchases more goods and services at home than abroad when converted to a foreign currency?

RISES

When a domestic investor sells a domestic asset to a foreigner, the financial account:

more; strengthen

When a nation's currency appreciates, it purchases _______ units of a foreign currency and it is said to _____

the European Union

Which group of nations has the LEAST correlation between savings and domestic investment?

dollar buys more euros now, and the euro buys fewer dollars now

Which of the following statements are equivalent to an appreciation of the dollar relative to the euro?

exchange rate between 2 countries

a bilateral exchange rate is

monetary policy constraints in the long run and the short run

a country with a fixed exchange rate faces:

reduce risk through diversification smooth consumption over time build a productive national capital stock

a nation's use of international capital markets enables it to do all of the following:

the money demand curve will shift out

a rise in real income will have which of the following effects on money demand?

to fix, or peg , the value of its currency to some base currency over a sustained period

if a government wishes to limit or prohibit fluctuations in exchange rates, it will choose:

INCREASE

if real income increases, money demand will ________

it has negative net international wealth

if the United States is currently a net international DEBTOR, then:

their marginal products of capital are HIGHER than in high income nations

if there are diminishing marginal returns to capital, such as postulated in economic production models, what is the marginal product of capital for LOW INCOME NATIONS?

value added in the economy is equal to income paid to factors of production total spending is equal to the sum of consumer spending, business investment, and government purchases production in the nation must equal total demand (spending on final goods and services)

in a closed economy in which no international economic activity occurs, which of the following is TRUE

figuring in the capital differential and an interest rate differential on external assets and liabilities.

in the case of the United States, the long-run budget constraint is eased somewhat by:

GNE plus the trade balance (TB) are equal to GDP (total domestic production) GNE + TB = GDP

in the flow diagram representing an open economy, which of the following is true?

use access to the international markets to keep investment consumption stable

in theory, financially open economies can:

perfect competition

law of one price requires

flexible

nominal interest rates are considered to be______ in the short-run model

current account debit; financial account credit

suppose that an American buys a car from Germany with cash. For the US, this counts as a

nations must maintain a balance between the present value of deficits and the present value of surpluses that satisfy the LRBC.

the key lesson from LRBC model is: LRBC = Long Run Budget Constraint

the level of external debt, offset by the sum of the present value of future trade surpluses taken to infinity.

the long-run budget constraint (LRBC) for a nation is

long-run relationships between money, prices, and exchange rates.

the monetary approach to exchange rates describes:

a fixed exchange rate; international capital mobility; monetary policy autonomy

the trilemma refers to all the following

short-run prices tend to be sticky

we assume flexible prices in the long run, but whenever it is costly to change prices (menu costs) or when there are long term contracts for labor or capital:

savings will decline and the current account will move into a deficit.

when disaster strikes a country and destroys infrastructure and businesses, it is likely that:

long-run divergenence

when poor nations cannot compete with rich nations to attract capital because of their lower overall productivity, it creates:

ARE; IS; IS

when traders perceive a permanent money supply adjustment, short-term nominal interest rates _______, affected, the expected exchange rate _____ affected, and the spot exchange rate ______ affected.

interest rates in the home country and in foreign countries are equalized.

with fixed exchange rates and capital mobility