Econ349 Midterm1
The graph on the right depicts real money supply. 1.) Using the three-point curve drawing tool, draw the aggregate money demand curve in the diagram to the right. Label this line 'L(R,Y)1 '. Now suppose that consumers' preferences change in such a way that they choose to carry less cash. 2.) On the same graph, using the three-point curve drawing tool, draw the new aggregate demand for money curve as a result of this change. Label this line 'L(R,Y)2'. Carefully follow the instructions above and only draw the required objects. As a result of this change in preferences, equilibrium in the money market will be at a ?? interest rate. Real money holdings will ??
lower remain unchanged L(R,Y)2 is downward from L(R,Y)1
A college textbook is selling for (US) $140 in the United States. That same textbook sells in Canada for (CA) $150. The exchange rate is (CA) $1.10 = (US) $1.00. Shipping costs are (US) $5.00. Ignoring the shipping costs. What is the U.S. price of the textbook purchased in Canada? (US) $?? What is the Canadian price of the textbook purchased in the U.S.? (CA) $?? When you take shipping costs into account, are textbooks likely to be purchased in the U.S. and sold in Canada? When you take shipping costs into account, are textbooks likely to be purchased in Canada and sold in the U.S.?
$136.36 $154 No No
We have the following data for a hypothetical open economy: GNP = $10 comma 000 Consumption (C) = $7 comma 800 Investment (I) = $1 comma 000 Government Purchases (G) = $1 comma 200 What is the value of the current account balance? $? . (Enter your answer as an integer. Include a minus sign if necessary).
0
The table below reports selected exchange rates not only against the US dollar, but also against the euro and the pound sterling. (Each row gives the price of the dollar, euro, and pound, respectively, in terms of a different currency.) At the same time, the table gives the spot dollar prices of the euro ($1.1332 per euro) and the pound sterling ($1.4518 per pound). Key Currency Cross Rates January 20, 2017 U.S. Dollar EU Euro U.K. Pound Switzerland (SFranc) 1.0107 1.0725 1.2435 Japan (Yen) 115.295 122.3458 141.8596 Mexico (Peso) 21.955 23.2976 27.0136 U.S. (Dollar) long dash long dash 1.1332 1.4518 Consider the Japanese yen . If $100 is expended to purchase this currency directly, the quantity of yen obtained is ? . (Round your answer to two decimal places.) An alternative method of acquiring yen is through triangular arbitrage LOADING... via the Euro. In this case, $100 is expended to first acquire euros and then yen , yielding ? yen . (Round your answer to two decimal places.) Using triangular arbitrage to obtain yen can also be done through the British pound. In this case, $100 is expended to first acquire pounds and then yen , yielding ? yen . (Round your answer to two decimal places.) From the preceding results we can say that triangular arbitrage is approximately ruled out as a source of riskless profit. However, we need to add the word "approximately" since A. transitory but very short-lived profit opportunities do arise. B. trading hours across currency markets are not synchronized. C. collusion among traders can allow for some triangular arbitrage. D. All of the above.
11529.50 10,796.49 9,771.29 A. transitory but very short-lived profit opportunities do arise.
The table on the right presents data from the U.S. current account in 2015. Using this data, what were U.S. income receipts on its foreign assets in 2015? ? billion U.S. dollars. (Round your answer to one decimal place and omit any negative sign.) Using the same data, what were U.S. payments on liabilities to foreigners in 2015? ? billion U.S. dollars. (Round your answer to one decimal place and omit any negative sign.) We know that the U.S. is a substantial net debtor to foreigners. How, then, is it possible that the U.S. received more foreign asset income than it paid out? A. According to these numbers, the US was not a net debtor in 2015 B. The rate of return on US holdings of foreign assets is lower that the rate foreigners earn on US assets C. The balance of payments shows flows, which have no connection to the stock of debt D. The rate of return on US holdings of foreign assets is higher than the rate foreigners earn on US assets
190.3 (line 6) 140.3 (line 14 but don'e put negative sign) D. The rate of return on US holdings of foreign assets is higher than the rate foreigners earn on US assets
Referring to the diagram on the right, in which years would you have chosen to visit the Tower of London rather than the Grand Canyon in Arizona?
1985 or 2001
The Economist magazine is famous for its publication of the Big Mac indexlong dash a table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world. Given the following abbreviated table: Country PriceBig Mac China Rb 12,000 Indonesia Rp 20,000 U.K. pound 1.25 U.S. $2.50 If the 'Law of One Price' holds, what are the following implied exchange rates: $? = pound 1.00 (Enter your response rounded to the nearest penny.) Rp ? = $1.00 (Enter your response as an integer.)
2.00 8000
In the real world where relative PPP fails to hold, suppose that U.S. inflation is expected to exceed European inflation left parenthesis pi Subscript font size decreased by 1 US Superscript e Baseline minus pi Subscript Upper E Superscript e Baseline right parenthesis by 5 percent for the foreseeable future. Furthermore, suppose that output demand and supply trends are widely expected to cause the dollar to decline against the euro in real terms at a rate of 3 percent per year. In this case, the international interest rate spread left parenthesis Upper R Subscript $ Baseline minus Upper R Subscript euro Baseline right parenthesis will actually be A. 8 percent. Your answer is correct. B. negative 2 percent. C. 2 percent. D. indeterminate, since expectations are unreliable.
A. 8
How does a fall in the value of the pound sterling as shown in the diagram to the right affect British consumers? A. Foreign goods are now relatively more expensive. British consumers are hurt. B. Domestic goods are now relatively more expensive. British consumers are hurt. C. Domestic interest rates increase. British consumers find it more expensive to borrow. D. Foreign goods are now relatively cheaper. British consumers will benefit. How does this fall in the value of the pound affect American exporters? ?
A. Foreign goods are now relatively more expensive. British consumers are hurt. Makes them worse off.
What is the formal representation of the law of one price, if P is domestic price for good X, P* is foreign price for the same good, and E is the exchange rate (units of domestic currency per units of foreign currency)? A. P = Upper E Subscript $ divided by euro times P*. B. P* = Upper E Subscript $ divided by euro times P. C. P = Upper E Subscript $ divided by euro /P*. D. P* = Upper E Subscript $ divided by euro /P.
A. P = Upper E Subscript $ divided by euro times P*.
Does our discussion of money's usefulness as a medium of exchange and unit of account suggest reasons why some currencies become vehicle currencies for foreign exchange transactions? (The concept of a vehicle currency was discussed in Chapter 14.) A. Yes. The more currencies used in trade, the closer the trade becomes to barter, which raises transaction and calculation costs. B. No. A currency becomes a vehicle currency because of its stability and credibility, not because of its usefulness as a medium of exchange and unit of account. C. No. A currency becomes a vehicle currency because of its instability and lack of credibility, not because of its usefulness as a medium of exchange and unit of account. D. Yes. The fewer currencies used in trade, the closer the trade becomes to barter, which raises transaction and calculation costs.
A. Yes. The more currencies used in trade, the closer the trade becomes to barter, which raises transaction and calculation costs.
In an open economy holding GNP and consumption spending constant and where private savings equals domestic investment, a government budget deficit must be matched by A. a current account deficit. B. a positive difference between domestic exports and imports. C. a current account balance. D. a current account surplus.
A. a current account deficit.
Consider the following two scenarios: I. When a change in a country's nominal interest rate is caused by a rise in the expected real interest rate, the domestic currency appreciates. II. When a change in a country's nominal interest rate is caused by a rise in the expected rate of inflation, the domestic currency depreciates. Of these two scenarios, which is consistent with the monetary approach to the exchange rate? A. II, since the monetary approach finds that a rise in a country's interest rate will be associated with a depreciation of its currency. B. I, since the monetary approach asserts a positive link from the expected real interest rate to the domestic currency's value. C. both scenarios are consistent with the monetary approach since both involve a change in the nominal interest rate. D. neither is consistent with the monetary approach since both involve expectations, something not part of the monetary approach.
A. II, since the monetary approach finds that a rise in a country's interest rate will be associated with a depreciation of its currency.
When the dollar is worth less in relation to currencies of other countries (for example relative to the Japanese Yen in the diagram to the right), are you more likely to buy American-made or foreign-made electronics? ? Are U.S. companies that manufacture semi-conductors happier when the dollar is strong or when it is weak? ? What about an American company that is in the business of importing electronic consumer goods into the United States? ?
American (domestic) products When the dollar is weaker. When the dollar is stronger.
How do we distinguish in the model between the short run and the long run? A. The short run is up to one year; the long run is over a year. B. In the short run price level is fixed; in the long run, it is flexible. C. In the short run exchange rates are fixed; in the long run they are flexible. D. The short run is up to 3 months; the long run is over 3 months.
B. In the short run price level is fixed; in the long run, it is flexible.
What does PPP imply? A. Inflation rates are equal in both countries. B. The real exchange rate is equal to 1. C. The real exchange rate is equal to 0. D. The Law of One Price holds for all the goods. Your answer is not correct.
B. The real exchange rate is equal to 1.
Nominal interest rates are quoted at a variety of maturities, corresponding to different lengths of loans. For example, in late 2004 the U.S. Government could take out 10-year loans at an annual interest rate of slightly over 4 percent, whereas the annual rate it paid on loans of only three months' duration was slightly under 2 percent. (An annualized interest rate of 2 percent on a three month loan means that if you borrow a dollar, you repay $1.005 = $1 + (3/12) times $0.02 at the end of three months.) Typically, though not always, long-term rates are above short-term rates, as in the preceding examples from 2004. In terms of the Fisher effect, that pattern would say that investors expect A. higher real interest rates. B. a higher value for the sum of expected inflation and expected real interest rates. C. higher inflation in the future. D. both higher inflation and higher real interest rates.
B. a higher value for the sum of expected inflation and expected real interest rates.
The Economist magazine has observed that the price of Big Macs is systematically positively related to a country's income level, just as is the general price level. The figure on the right depicts the relationship between Big Mac dollar prices (from The Economist magazine) and GNI (Gross National Income) per capita for 54 countries (from the World Bank), with each dot representing a different country. According to this graph, the relationship between Big Mac prices and per capita income might be described as A. initially positive, then becoming negative. B. loosely positive. C. positive and exact. D. indeterminate.
B. loosely positive.
incorrect, Chapter Problem 19 Suppose that residents of the U.S. consume relatively more of U.S. export goods than do residents of foreign countries. In other words, U.S. export goods have a higher weight in the U.S. CPI than they do in other countries. Conversely, foreign exports have a lower weight in the U.S. CPI than they do abroad. What would be the effect on the dollar's real exchange rate of a rise in the U.S. terms of trade (the relative price of U.S. exports in terms of U.S. imports)? A. The dollar's real exchange rate will change in an indeterminate way. B. A real depreciation of the dollar occurs. C. A real appreciation of the dollar occurs. D. The dollar's real exchange rate will be unaffected.
C. A real appreciation of the dollar occurs.
Which of the following is a correct prediction based on the PPP model of the exchange rates? A. An increase in the U.S. output leads to depreciation of the dollar. B. An increase in the U.S. output will lead to the proportional increase in inflation rate. C. An increase in the U.S. interest rates leads to depreciation of the dollar. D. An increase in the U.S. money supply leads to a long-run appreciation of the dollar.
C. An increase in the U.S. interest rates leads to depreciation of the dollar.
Which economic institution determines or controls the money supply in the U.S.? A. The International Monetary Fund. B. The Department of Treasury. C. The Federal Reserve. D. Commercial banks.
C. The Federal Reserve.
What does exchange rate overshooting describe? A. The exchange rate increases by more in the long run than the price level. B. The exchange rate changes by more in the long run than in the short run. C. The exchange rate changes in the short run by more than in the long run. D. The exchange rate changes by more than the interest rate in the long run.
C. The exchange rate changes in the short run by more than in the long run.
How would you expect a fall in a country's population to alter its aggregate money demand function? Would it matter if the fall in population were due to a fall in the number of households or to a fall in the average size of a household? A. There would be an increase in money demand because fewer people will need to produce and consume GNP. The increase in money demand would be larger if the decrease in population was due to a fall in the number of households. B. There would be a decrease in money demand because there would be fewer transactions. The decrease in money demand would be larger if the decrease in population was due to a fall in the average size of a household. C. There would be a decrease in money demand because there would be fewer transactions. The decrease in money demand would be larger if the decrease in population was due to a fall in the number of households. D. There would be an increase in money demand because fewer people will need to produce and consume GNP. The increase in money demand would be larger if the decrease in population was due to a fall in the average size of a household.
C. There would be a decrease in money demand because there would be fewer transactions. The decrease in money demand would be larger if the decrease in population was due to a fall in the number of households.
Capital gains and losses on a country's net foreign assets are not included in the national income measure of the current account. How would economic statisticians have to modify the national income identity Upper Y equals Upper C plus Upper I plus Upper G plus Upper X minus Upper M nbsp if they did wish to include such gains and losses as part of the definition of the current account? A. Y = C + I + G + X minus M + Gross capital gain. B. Y = C + I + G + X minus Mminus Net capital gain. C. Y = C + I + G + X minus M + Net capital gain. D. Y = C + I + G + X minus M minus Gross capital gain.
C. Y = C + I + G + X minus M + Net capital gain.
The GATT was A. a collection of tariff standards. B. an International Monetary Fund agency with trade oversight. C. an international treaty governing trade. D. an international U.N. agency with trade oversight. E. a U.S. government agency.
C. an international treaty governing trade.
Suppose Home left parenthesis Upper H right parenthesis imposes a tariff on imports from Foreign left parenthesis Upper F right parenthesis . All else equal, this action will cause the long-run real Home/Foreign exchange rate to ______ and the long-run nominal Home/Foreign exchange rate to ______. A. increase ; increase B. decrease ; increase C. decrease ; decrease D. increase ; decrease
C. decrease ; decrease
The opportunity cost of money holdings is A. the reduction in purchasing power brought on by deflation. B. the liquidity foregone from not holding some other asset. C. the alternative interest income foregone from not holding some other asset. D. All of the above.
C. the alternative interest income foregone from not holding some other asset.
The figure on the right shows the United States' end-of-year international investment position (IIP) as a percent of its nominal GDP for the period 1976-2012. The United States has run current account deficits in almost every year since the mid-1980s. Do the data in the graph therefore surprise you? (Hint: To answer this question you will need to compare the current account deficit, as a percent of nominal GDP, with the growth rate of nominal GDP. Select here LOADING... to view these rates.) A. Yes, current account deficits indicate that the U.S. imports more than exports, including assets. Thus, the IIP must be negative for other reasons. B. Yes, the data appear to be contradictory. The trend for the growth rate of nominal GDP matches the trend for the current account as a percent of nominal GDP, so the ratio of the IIP to nominal GDP should be flat. C. No, increasingly large current account deficits coupled with slowing growth in nominal GDP imply the trend shown for (IIP/NGDP) at right. D. None of the above.
C. No, increasingly large current account deficits coupled with slowing growth in nominal GDP imply the trend shown for (IIP/NGDP) at right.
Identify the following as debit or credit entries in the Balance of Payments: Export Expenditure: Foreign Assets held in the U.S: Income Payments: Official Reserve Assets: U.S. Assets held abroad:
Credit, Current Account Debit, Financial Account Debit, Current Account Credit, Financial Account Credit, financial Account
Suppose a bond issued by the European Central Bank and denominated in euros pays 2 % per year. Today the exchange rate is 1.29 dollars per euro. It is expected that the exchange rate in one year will be 1.42 dollars per euro. What is the annual dollar return on this bond? A. 2 percent. B. 15 percent. C. negative 7 percent. D. 12 percent.
D. 12 percent.
What is the "arbitrage" opportunity in the foreign exchange market? A. A difference between the exchange rate for buying and selling the currency from the same bank. B. A cross-rate. C. A fee that brokers charge for trading currency of their clients. D. A difference between the exchange rates in different trading centers.
D. A difference between the exchange rates in different trading centers.
incorrect, Exercise 2.4 If a contract contains a promise that a specified amount of foreign currency will be delivered on the specified date in the future, this is: A. A forward contract. B. A foreign exchange option. C. A swap. D. A futures contract. E. A spot contract.
D. A futures contract.
What accounts for most of the activity in the foreign exchange market? A. Trading currency between importers and exporters. B. Currency trade among central banks. C. Trading by financial institutions. D. Interbank trading.
D. Interbank trading.
Imagine that everyone in the world pays a tax of tau percent on interest earnings and on any capital gains due to exchange rate changes. How would such a tax alter the analysis of the interest parity condition? A. The interest parity condition will become left parenthesis 1 minus tau right parenthesis Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro . B. The interest parity condition will become Upper R Subscript $ Baseline equals left parenthesis 1 minus tau right parenthesis Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro . C. The interest parity condition will become Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis 1 minus tau right parenthesis left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro . D. The interest parity condition will be unchanged Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro . Now suppose that the tax applies to interest earnings, but capital gains are untaxed. How would we have to modify the interest parity condition? A. The interest parity condition will become Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis 1 minus tau right parenthesis left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro . B. The interest parity condition will become Upper R Subscript $ Baseline equals left parenthesis 1 minus tau right parenthesis Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro . C. The interest parity condition will become Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by left parenthesis 1 minus tau right parenthesis Upper E Subscript $ divided by euro . D. The interest parity condition will become left parenthesis 1 minus tau right parenthesis Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro .
D. The interest parity condition will be unchanged Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by Upper E Subscript $ divided by euro C. The interest parity condition will become Upper R Subscript $ Baseline equals Upper R Subscript euro Baseline plus left parenthesis Upper E Subscript $ divided by euro Superscript e Baseline minus Upper E Subscript $ divided by euro Baseline right parenthesis divided by left parenthesis 1 minus tau right parenthesis Upper E Subscript $ divided by euro .
f a currency reform has no effects on the economy's real variables, why do governments typically institute currency reforms in connection with broader programs aimed at halting runaway inflation? (There are many instances in addition to the Turkish case mentioned in the text. Other examples include Israel's switch from the pound to the shekel, Argentina's switches from the peso to the austral and back to the peso, and Brazil's switches from the cruzeiro to the cruzado, from the cruzado to the cruzeiro, from the cruzeiro to the cruzeiro real, and from the cruzeiro real to the real, the current currency, which was introduced in 1994.) A. There may be a psychological benefit in that currency reform can have a positive effect on inflation expectations. However, for the stabilization plan to succeed, it must be backed up by concrete policies to reduce fiscal growth. B. Governments mistakenly believe that people view the new currency as more valuable; thus making concrete policies to reduce monetary growth less necessary. C. Governments mistakenly believe that people view the new currency as more valuable; thus making concrete policies to reduce fiscal growth less necessary. D. There may be a psychological benefit in that currency reform can have a positive effect on inflation expectations. However, for the stabilization plan to succeed, it must be backed up by concrete policies to reduce monetary growth.
D. There may be a psychological benefit in that currency reform can have a positive effect on inflation expectations. However, for the stabilization plan to succeed, it must be backed up by concrete policies to reduce monetary growth.
Which of the following correctly represents the formula for absolute PPP? Remember that P stands for the price level and E stands for the level of the exchange rate. A. Upper P Subscript Upper E = Upper E Subscript $ divided by euro + Upper P Subscript US . B. Upper P Subscript US = Upper E Subscript $ divided by euro + Upper P Subscript Upper E . C. Upper P Subscript Upper E = Upper E Subscript $ divided by euro times Upper P Subscript US . D. Upper P Subscript US = Upper E Subscript $ divided by euro times Upper P Subscript Upper E .
D. Upper P Subscript US = Upper E Subscript $ divided by euro times Upper P Subscript Upper E
Since the end of World War II, the view within the advanced democracies concerning the amount of trade has A. been unwaveringly in favor of more trade as a force for prosperity and peace. B. see-sawed over the decades between pro- and anti-free trade. C. been dictated by the United Nations. D. recently been questioned by a largely political movement composed of traditional protectionists and new ideologues.
D. recently been questioned by a largely political movement composed of traditional protectionists and new ideologues.
incorrect, Chapter Problem 2 It is often asserted that exporters prosper when their home currencies depreciate in real terms against foreign currencies. This exporter "experience" stems from the fact that, ceteris paribus, A. a real depreciation of the home currency enables exporters to increase prices. B. the price of home goods relative to foreign goods rises when the home currency depreciates . C. a real depreciation of the home currency causes home goods to become relatively pricier than foreign goods. D. the price of home goods relative to foreign goods falls when the home currency depreciates . E. B and C are both correct.
D. the price of home goods relative to foreign goods falls when the home currency depreciates
Using the line drawing tool, show the effect of a decline in the dollar interest rate. Properly label this line. Carefully follow the instructions above and only draw the required object. This shock will lead to a dollar ??
Depreciation R2 left of Rs1
The chapter explained why exporters cheer when their home currency depreciates. At the same time, domestic consumers find that they pay higher prices, so they should be disappointed when the currency becomes weaker. Why do the exporters usually win out, so that governments often seem to welcome depreciations while trying to avoid appreciations? (Hint: Think about the analogy with protective tariffs.) A. Individual consumers have little incentive to act politically. B. Exporters constitute a relatively small group that is very well organized and has a lot at stake. C. The promotion of exports by whatever means usually yields an increase in national welfare. D. All of the above. E. A and B only.
E. A and B only.
Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze exchange rate overshooting as a response to a permanent increase in the US nominal money supply. Assume that, in the short-run, prices are completely fixed and that they fully adjust in the long-run. Assume throughout the problem that real GNP remains unchanged. Start with the money market equilibrium. As the result of an increase in the nominal money supply, the interest rate will ? in the short-run. In the long-run, prices will fully adjustlong dash they will increase proportionally to the change in the nominal money supply. Therefore, in the long-run the interest rate will be A. lower than the new short-run interest rate. B. between the initial interest rate and a new short-run interest rate. Your answer is not correct. C. equal to the initial interest rate. D. equal to the new short-run interest rate. The figure on the right shows two lines for the expected return on euro deposits and two lines for the return on dollar deposits as a function of the dollar/euro exchange rate (Upper E Subscript $ divided by euro ). 1) Using the point drawing tool, indicate the initial equilibrium (before any changes occur) and label it "Initial." 2) Next, using the point drawing tool, indicate a short-run equilibrium (after the increase in the nominal money supply but before the prices adjusted) and label it "Short-run." 3) Finally, using the point drawing tool, indicate a new long-run equilibrium point (after prices fully adjusted) and label it "Long-run." Carefully follow the instructions above and only draw the required objects. Exchange rate overshooting occurs, as you can see from the graph, because in the short-run the exchange rate rises by more than it rises from the initial to the long-run level.
Fall C. equal to the initial interest rate. SR on Green After and Orange After LR on Green After and Orange Before Initial Green Before and Orange After
correct, Exercise 2.3 Classify each of the following transactions as belonging primarily to the sphere of international trade analysis (T) or international monetary analysis (M). (Enter T for Trade or M for Monetary.) Transaction Primary Sphere (T-trade, M-monetary) Foreigners purchase U.S. dollars. The U.S. imports crude oil from the Middle East. The U.S. imposes tariffs on foreign steel. The Chinese government purchases U.S. treasury bonds. The Chinese currency is seen as being undervalued.
M T T M M
A decrease in the money supply leads to ? in the value of the U.S. dollar and ? in the value of foreign currency. This in turn, leads to ? in net exports and aggregate demand. A decrease in the money supply leads to ? interest rates. This, in turn, leads to ? in investment spending by firms and aggregate demand.
an increase a decrease a decrease an increase a decrease
Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze the effect of a decline in the future expected exchange rate (expectedleft parenthesis Upper E Subscript $ divided by euro Baseline right parenthesis ), i.e. expected dollar appreciation . The figure on the right shows the return on dollar deposits as a function of the dollar/euro exchange rate left parenthesis Upper E Subscript $ divided by euro Baseline right parenthesis . 1) Using the 3-point drawing tool, draw the line representing the dollar return on euro deposits. Label this line 'RET-euro 1'. 2) Using the 3-point drawing tool, draw a new line on the same graph representing the dollar return on euro deposits as the future expected exchange rate falls , and label it 'RET-euro 2'. Carefully follow the instructions above and only draw the required objects. As the result of a decline in the future expected exchange rate, the dollar will ? today.
appreciate RET-euro1 Downward shift RET-euro2
1.) Using the 3-point curve drawing tool, draw the aggregate money demand curve (nominal money balances) in the diagram to the right. Label this line 'L(R,Y)1". Now suppose that price level comma Upper P comma falls. nothing nothing nothing 2.) On the same graph, using the 3-point curve drawing tool, draw the new aggregate demand for money curve as a result of this change. Label this line 'L(R,Y)2". Carefully follow the instructions above and only draw the required objects. As a result of this change, the aggregate demand for money will ??
decrease L(R,Y)2 is below L(R,Y)1
In theory, the equality: current account + capital account + financial account = 0 must hold. In reality a statistical discrepancy is often included to achieve this balance. Which account is the likely culprit of this discrepancy? The ? .
financial account
Inflation targeting refers to a formal strategy followed by many central banks wherein a target (or target range) for the inflation rate is announced and maintained/pursued via adjustments in the ? The figure on the right shows the annual inflation rate for the period 1980-2012 for five advanced economies that adopted inflation targeting during the early 1990s. The individual countries and the year they adopted inflation targeting are displayed in the figure. Just looking at the graph, does inflation appear to behave differently after the adoption of inflation targeting? A. The time frame is too brief to reach any conclusion. B. No, inflation is still present after the early 1990s. C. The graph presents inconclusive evidence regarding the impact of inflation targeting. D. Yes, the period after the early 1990s shows lower and more stable inflation. The figure on the right shows the annual inflation rate for the period 1980-2012 for three emerging economies that adopted inflation targeting during the late 1990s/early 2000s. The individual countries and the year they adopted inflation targeting are displayed in the figure. Just looking at the graph, does inflation appear to behave differently after the adoption of inflation targeting? A. Yes, inflation appears lower and less volatile after targeting was adopted. B. No clear assessment is possible from the graph. C. No, inflation shows little change after targeting was adopted.
interest rate D. Yes, the period after the early 1990s shows lower and more stable inflation. A. Yes, inflation appears lower and less volatile after targeting was adopted.
Suppose that Europeans decide to purchase more US goods for a given relative price of US and European goods. This change will affect the ? of US goods versus European goods. The graph on the right shows relative supply of US versus European real output. 1.) Using the line drawing tool, add a line depicting initial relative demand and label it "Initial." 2.) Using the line drawing tool, now add a line that depicts new relative demand, after an increase in the relative demand for the US goods. Label it "New." Carefully follow the instructions above and only draw the required objects. As the result of an increase in relative demand for the US goods, the dollar will ? in real terms. As a result of this change, the dollar will also ? in nominal terms in the long-run.
relative demand appreciate appreciate initial AA, New AA downward
Suppose the equilibrium exchange rate is determined by the Uncovered Interest Parity (UIP) condition. The graph on the right depicts dollar return on a euro asset and a return on a dollar asset. Suppose the return on a dollar asset fall s. Using the line drawing tool, show how this will be reflected on the diagram. Properly label your line. Carefully follow the instructions above and only draw the required object. As a result of this change, the equilibrium exchange rate will ? .
rise Ret $2 to the left of R$1
Suppose the dollar exchange rate of the euro and the yen are equally variable. The euro, however, tends to depreciate unexpectedly against the dollar when the return on the rest of your wealth is unexpectedly high , while the yen tends to appreciate in the same circumstances. As a U.S. resident, which currency, the euro or the yen, would you consider riskier? For a U.S. resident, the ?? is more risky.
yen
