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| 1 | |
If a British citizen buys $50,000 worth of U.S. Treasury bills, the transaction will be recorded as |
| | A) | surplus item in the U.S. current account |
| | B) | a surplus item in the U.S. capital account |
| | C) | an increase in U.S. net exports |
| | D) | a decrease in Great Britain’s GDP |
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| 2 | |
Which of the following items is a surplus item in the balance of payments for the United Sates? |
| | A) | a U.S. car dealer buys 20 BMWs from Germany and sells them at a profit in the U.S. |
| | B) | a U.S. citizen deposits funds in a bank in the Bahamas |
| | C) | a German firm pays to get a license for the use of American technology |
| | D) | Bill Gates buys himself a small island of the coast of Indonesia |
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| 3 | |
A nation's balance of payments can be affected by changes in |
| | A) | foreign income |
| | B) | the differential between domestic and foreign interest rates |
| | C) | the real exchange rate |
| | D) | all of the above |
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| 4 | |
No matter how difficult it may be, a country needs to achieve a balance in its current account if |
| | A) | it has no foreign currency reserves to use up |
| | B) | it has no assets to sell |
| | C) | no other country is willing to loan it funds |
| | D) | all of the above |
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| 5 | |
An exchange rate system in which central banks always are ready to buy and sell their currency at a predetermined price is called |
| | A) | a dirty floating exchange rate system |
| | B) | a fixed exchange rate system |
| | C) | a managed exchange rate system |
| | D) | a flexible exchange rate system |
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| 6 | |
Which of the following statements surrounding the introduction of a single currency in many European countries is FALSE? |
| | A) | although 15 countries signed the Maastricht Treaty, Great Britain, Denmark, and Sweden decided not to convert their currency to the Euro in 2002 |
| | B) | with the adoption of the Euro, European countries gave up the right to determine their own domestic monetary policy |
| | C) | individual nations experiencing unemployment still can lower interest rates to increase domestic aggregate demand |
| | D) | many countries in Europe gave up the exchange rate as a policy tool long before the introduction of the Euro |
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| 7 | |
If the price level of U.S. goods is P = 110, the price level of foreign goods is Pf = 220, and the dollar price of foreign currency is e = 1.20, what is the real exchange rate? |
| | A) | R = 0.50 |
| | B) | R = 0.60 |
| | C) | R = 1.20 |
| | D) | R = 2.40 |
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| 8 | |
If the real exchange rate is R = 0.72, the price level of foreign goods is Pf = 120, and the price level of domestic goods is P = 125, what is the domestic price of foreign currency? |
| | A) | e = 0.14 |
| | B) | e = 0.75 |
| | C) | e = 1.04 |
| | D) | e = 3.60 |
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| 9 | |
If the U.S. real exchange rate is less than 1, we can expect that |
| | A) | the relative demand for U.S. goods will rise |
| | B) | the price level in the U.S. is likely to increase rapidly until we reach purchasing power parity |
| | C) | the real exchange rate has to decrease until we reach purchasing power parity |
| | D) | a market basket of goods in the U.S. is more expensive than the same market basket of goods abroad |
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| 10 | |
The concept of relative purchasing power parity implies that |
| | A) | the real exchange rate adjusts slowly to its long-run average level |
| | B) | the domestic price level will change rapidly until the real exchange rate is equal to 1 |
| | C) | the relative demand for domestic goods will rise if the real exchange rate is below 1 |
| | D) | the long-run relative price level of domestic to foreign goods (P/Pf) is equal to 1 |
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| 11 | |
For a system of fully flexible exchange rates, which of the following statements is FALSE? |
| | A) | if we have perfect capital mobility there is only one interest rate at which we have an external balance |
| | B) | the central bank can set the money supply at will |
| | C) | a current account surplus is always balanced by private capital inflows |
| | D) | the absence of intervention adjustments in the exchange rate ensures that the sum of the current and capital accounts is zero |
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| 12 | |
Expansionary fiscal policy in the U.S. should |
| | A) | lower Japan's GDP due to a depreciation of the yen |
| | B) | increase Japan's GDP due to an appreciation of the yen |
| | C) | increase Japan's GDP due to an appreciation of the U.S. dollar |
| | D) | lead to a capital outflow from the U.S. to Japan |
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| 13 | |
Restrictive monetary policy in the U.S. |
| | A) | lowers the value of the dollar relative to other currencies |
| | B) | increases the value of the dollar relative to other currencies |
| | C) | increases U.S. net exports |
| | D) | should not have any effect on the U.S. trade balance |
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| 14 | |
In a fixed exchange rate system with perfect capital mobility, monetary policy |
| | A) | is more effective than fiscal policy in changing the level of national income |
| | B) | is ineffective in changing the level of national income |
| | C) | is very effective in changing domestic interest rates |
| | D) | can be used to change domestic interest rates but not to change national income |
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| 15 | |
Policy makers who want to stimulate the level of domestic income should realize that under a flexible exchange rate system, |
| | A) | expansionary monetary policy will not only stimulate private domestic investment but also increase net exports |
| | B) | expansionary fiscal policy will crowd out private domestic investment but in return increase net exports |
| | C) | neither monetary nor fiscal policy can be employed to increase the level of consumption |
| | D) | domestic monetary policy cannot affect the level of output and therefore fiscal policy will have to be employed |
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| 16 | |
In a model with flexible exchange rates and perfect capital mobility, restrictive fiscal policy is likely to cause |
| | A) | an appreciation of the domestic currency |
| | B) | a decrease in the current account surplus |
| | C) | an increase in net exports |
| | D) | an inflow of funds |
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| 17 | |
In an IS-LM model with flexible exchange rates and perfect capital mobility, expansionary fiscal policy will ultimately |
| | A) | cause a depreciation of the domestic currency |
| | B) | shift the IS-curve to the right with a subsequent shift of the LM-curve to the right |
| | C) | not change the composition or the level of output |
| | D) | be ineffective in stimulating output because net exports will be crowded out |
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| 18 | |
In an IS-LM model with flexible exchange rates and perfect capital mobility, expansionary monetary policy will |
| | A) | lower domestic interest rates, but only temporarily |
| | B) | shift the LM-curve to the right with a subsequent shift of the IS-curve to the right |
| | C) | depreciate the domestic currency, making domestic goods more competitive on world markets |
| | D) | all of the above |
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| 19 | |
In the aftermath of the German re-unification, the German government employed expansionary fiscal policy which |
| | A) | created a dilemma for some of its European trading partners since they either had to raise their interest rates or devalue their currency |
| | B) | resulted in a deficit in Germany's current account |
| | C) | resulted in an appreciation of the German mark versus the U.S. dollar |
| | D) | all of the above |
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| 20 | |
A country that follows a beggar-thy-neighbor policy |
| | A) | induces an exchange rate depreciation to increase domestic output via monetary policy |
| | B) | uses fiscal policy to increase its competitiveness on world markets |
| | C) | imposes a tariff on imported goods |
| | D) | tries to benefit from an increase in world demand by selling domestic products at higher prices |
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