Econ 4310 HW 2

10) Which one of the following statements is the MOST accurate? A) A permanent increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies. B) A temporary increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies. C) A permanent increase in a country's money supply causes a proportional long-run appreciation of its currency against foreign currencies. D) A permanent increase in a country's money supply causes a proportional short-run depreciation of its currency against foreign currencies. E) A permanent increase in a country's money supply causes a proportional short-run appreciation of its currency against foreign currencies.

A) A permanent increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.

26) Under sticky prices A) a fall in the money supply raises the interest rate to preserve money market equilibrium. B) a fall in the money supply reduces the interest rate to preserve money market equilibrium. C) a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. D) a fall in the money supply does not affect the interest rate in the short run, only in the long run. E) a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

A) a fall in the money supply raises the interest rate to preserve money market equilibrium.

30) Which of the following statements is the MOST accurate? The law of one price states A) in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. B) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. C) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. D) identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. E) in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs.

A) in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

28) If people expect relative PPP to hold A) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon. B) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively. C) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run. D) the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. E) the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

A) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon.

13) After a permanent increase in the money supply A) the exchange rate overshoots in the short run. B) the exchange rate overshoots in the long run. C) the exchange rate smoothly depreciates in the short run. D) the exchange rate smoothly appreciates in the short run. E) the exchange rate remains the same.

A) the exchange rate overshoots in the short run.

4) If there is an excess supply of money A) the interest rate falls. B) the interest rate rises. C) the real money supply shifts left to make an equilibrium. D) the real money supply shifts right to make an equilibrium. E) the interest rate stays constant, but consumer confidence falters.

A) the interest rate falls.

21) Which of the following statements is MOST accurate? A) In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate. B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate. C) In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate. D) In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate. E) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.

14) Which of the following can help to explain why higher inflation may lead to currency appreciations? A) The interest rate is not the prime target of monetary policy. B) Most central banks adjust their policy interest rates expressly so as to keep inflation in check. C) Central banks increase the money supply leading to overshooting of the exchange rate. D) Inflation will increase the purchasing power of a currency. E) The world market does not adjust their currency trade to reflect inflation.

B) Most central banks adjust their policy interest rates expressly so as to keep inflation in check.

12) In a world where the price level could adjust immediately to its new long-run level after a money supply increase A) The dollar interest rate would increase because prices would adjust immediately and prevent the money supply from rising. B) The dollar interest rate would fall because prices would adjust immediately and prevent the money supply from rising. C) The dollar interest rate would fall because prices would adjust immediately and prevent the money supply from decreasing. D) The dollar interest rate would decrease because prices would adjust immediately and prevent the money supply from decreasing. E) The dollar interest rate would fall because prices would not be able to prevent the money supply from rising.

B) The dollar interest rate would fall because prices would adjust immediately and prevent the money supply from rising.

24) Which of the following statements is the MOST accurate? A) The prices of identical commodity baskets, when converted to a single currency, are the same across countries. B) The prices of identical commodity baskets, when converted to a single currency, differ substantially across countries. C) The prices of identical commodity baskets, when converted to a single currency, do not differ substantially across countries. D) The prices of identical commodity baskets, when converted to a single currency, are often the same across countries. E) The prices of identical commodity baskets, when converted to a single currency, are the same across countries more than 50% of the time.

B) The prices of identical commodity baskets, when converted to a single currency, differ substantially across countries.

20) An increase in the world relative demand for U.S. output causes A) a short-run real depreciation of the dollar against the euro. B) a long-run real appreciation of the dollar against the euro. C) a long-run real depreciation of the dollar against the euro. D) a short-run real appreciation of the euro against the dollar. E) a long-run real appreciation of the euro against the dollar.

B) a long-run real appreciation of the dollar against the euro.

3) A reduction in a country's money supply causes A) its currency to depreciate in the foreign exchange market. B) its currency to appreciate in the foreign exchange market. C) does not affect its currency in the foreign market. D) does affect its currency in the foreign market in an ambiguous manor. E) affects other countries currency in the foreign market.

B) its currency to appreciate in the foreign exchange market.

6) An increase in a country's money supply causes A) its currency to appreciate in the foreign exchange market while a reduction in the money supply causes its currency to depreciate. B) its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to appreciate. C) no effect on the values of it currency in international markets. D) its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to further depreciate. E) its currency to depreciate in the domestic market and appreciate in the foreign market.

B) its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to appreciate.

18) The difference between nominal and real interest rates is that A) nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms. B) nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output. C) nominal interest rates can fluctuate, while real interest rates always remain fixed. D) real interest rates can fluctuate, while nominal interest rates always remain fixed. E) real interest rates are the same in every country, while nominal interest rates are different for every country.

B) nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output.

1) The exchange rate between currencies depends on A) the interest rate that can be earned on deposits of those currencies. B) the interest rate that can be earned on deposits of those currencies and the expected future exchange rate. C) the expected future exchange rate. D) national output. E) the interest rate that can be earned on deposits of those countries and the national output.

B) the interest rate that can be earned on deposits of those currencies and the expected future exchange rate.

15) For main industrial countries such as Japan and the U.S. A) there is much less month-to-month variability of the exchange rate, suggesting that price levels are relatively sticky in the short run. B) there is much more month-to-month variability of the exchange rate, suggesting that price levels are relatively sticky in the short run. C) there is almost the same month-to-month variability of the exchange rate and price levels. D) it is hard to tell whether month-to-month variability of the exchange rate is similar to changes in price levels. E) there is much more month-to-month variability of the exchange rate, suggesting that price levels are relatively sticky in the long run.

B) there is much more month-to-month variability of the exchange rate, suggesting that price levels are relatively sticky in the short run.

23) Which one of the following statements is the MOST accurate? A) Relative price changes could not lead to PPP violations even if trade were free and cost- less. B) Relative price changes could lead to PPP violations only if trade were free and costless. C) Relative price changes could lead to PPP violations even if trade were free and costless. D) Price changes could lead to PPP violations even if trade were free and costless. E) Price changes could not lead to PPP violations even if trade were free and costless.

C) Relative price changes could lead to PPP violations even if trade were free and costless.

19) Which of the following statements is MOST accurate? A) The United States price level will place a relatively light weight on commodities produced and consumed in America, while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. B) The United States price level will place a relatively light weight on commodities produced and consumed in America, and the European price level will place a relatively light weight on commodities produced and consumed in Europe. C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. D) The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America. E) The United States price level will place a relatively light weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe.

9) The long run effects of money supply change A) ambiguous effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the opposite direction. B) proportional effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction. C) no effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction. D) no effect on the long-run values of the interest rate or real output, no change in the price level's long-run value. E) ambiguous effect on the long-run values of the interest rate or real output, A disproportional change in the price level's long-run value in the same direction.

C) no effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.

17) The expected rate of change in the nominal dollar/euro exchange rate is best described as A) the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference. B) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. C) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference. D) the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference. E) the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation.

C) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference.

8) Given P$ and Y$ A) An increase in the European money supply causes the euro to appreciate against the dollar, but it does not disturb the U.S. money market equilibrium. B) An increase in the European money supply causes the euro to appreciate against the dollar, and it creates excess demand for dollars in the U.S. money market. C) An increase in the European money supply causes the euro to depreciate against the dollar, and it creates excess demand for dollars in the U.S. money market. D) An increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium. E) An increase in the European money supply causes the euro to depreciate against the dollar, and disturbing the U.S. money market equilibrium.

D) An increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium.

29) Which of the following statements is the MOST accurate? A) In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. B) In the long run, national price levels play a key role only in determining interest rates. C) In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. D) In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. E) In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded.

D) In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded.

7) Which one of the following statements is the MOST accurate? A) Given P$, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro. B) Given Y$, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro. C) Given P$ and Y$, when the money supply decreases, the dollar interest rate declines and the dollar depreciates against the euro. D) Given P$ and Y$, when the money supply rises, the dollar interest rate declines and the dollar appreciates against the euro. E) Given P$ and Y$, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

E) Given P$ and Y$, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

25) Under the monetary approach to the exchange rate A) a reduction in the money supply will cause immediate currency depreciation. B) a rise in the money supply will cause currency depreciation. C) a rise in the money supply will cause immediate currency appreciation. D) a rise in the money supply will cause depreciation. E) a rise in the money supply will cause immediate currency depreciation.

E) a rise in the money supply will cause immediate currency depreciation.

16) Interest rate differences between countries depend on A) differences in expected inflation, but not on expected changes in the real exchange rate. B) differences in expected changes in the real exchange rate, but not on expected inflation. C) neither differences in expected inflation, nor on expected changes in the real exchange rate. D) differences in expected inflation and nothing else. E) differences in expected inflation, and on expected changes in the real exchange rate.

E) differences in expected inflation, and on expected changes in the real exchange rate.

11) A change in the level of the supply of money A) increases the long-run values of the interest rate and real output. B) decreases the long-run values of the interest rate and real output. C) has no effect on the long-run values of the interest rate, but may affect real output. D) has no effect on the long-run values of real output, but may affect the interest rate. E) has no effect on the long-run values of the interest rate and real output.

E) has no effect on the long-run values of the interest rate and real output.

22) The PPP theory fails in reality for all of the following reasons EXCEPT A) transport costs. B) monopolistic or oligopolistic practices in goods markets. C) the inflation data reported in different countries are based on different commodity baskets. D) restrictions on trade. E) inflation rates are unrelated to money supply growth.

E) inflation rates are unrelated to money supply growth.

5) For a given level of A) nominal GNP, changes in interest rates cause movements along the L(R,Y) schedule. B) real GNP, changes in interest rates cause a decrease of the L(R,Y) schedule. C) real GNP, changes in interest rates cause an increase of the L(R,Y) schedule. D) nominal GNP, changes in interest rates cause an increase in the L(R,Y) schedule. E) real GNP, changes in interest rates cause movements along the L(R,Y) schedule.

E) real GNP, changes in interest rates cause movements along the L(R,Y) schedule.

2) An increase in A) nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply. B) real output decreases the interest rate while a fall in real output increases the interest rate, given the price level. C) real output raises the interest rate while a fall in real output lowers the interest rate, given the money supply. D) nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level. E) real output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.

E) real output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.

27) Under a flexible-price monetary approach to the exchange rate A) when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. B) when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate. C) when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. D) when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. E) when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

E) when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.