Question 1

Suppose two countries make a credible commitment to fix their bilateral exchange rate. In such a situation, we know that:

Accepted Answer

A)  the interest rate in the two countries must be equal. 
B)  the uncovered interest parity condition no longer holds. 
C)  the real exchange rate must be constant as well. 
D)  neither country will run a trade deficit. 
E)  each country can freely allow its interest rate to diverge from that of the other country. 
A)  the interest rate in the two countries must be equal. 
B)  the uncovered interest parity condition no longer holds. 
C)  the real exchange rate must be constant as well. 
D)  neither country will run a trade deficit. 
E)  each country can freely allow its interest rate to diverge from that of the other country. A

Question 2

Assume that the domestic interest rate is 7% and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to depreciate by 4% during the coming year. Given this information, we know that:

Accepted Answer

A)  individuals will only hold domestic bonds. 
B)  individuals will only hold foreign bonds. 
C)  individuals will be indifferent about holding domestic or foreign bonds. 
D)  the interest parity condition holds. 
E)  the purchasing power parity holds. 
A)  individuals will only hold domestic bonds. 
B)  individuals will only hold foreign bonds. 
C)  individuals will be indifferent about holding domestic or foreign bonds. 
D)  the interest parity condition holds. 
E)  the purchasing power parity holds. B

Question 3

In 2000- 2011, which of the following countries had the highest ratio of exports to GDP?

Accepted Answer

A)  China. 
B)  United Kingdom. 
C)  United States. 
D)  Germany. 
E)  Japan. 
A)  China. 
B)  United Kingdom. 
C)  United States. 
D)  Germany. 
E)  Japan. D

Question 4

Suppose that over the past decade, Australian inflation is less than that in the UK. Further assume that during this same period, the Australian dollar depreciates relative to the British pound. Given this information:

Accepted Answer

A)  the real exchange rate can increase or remain the same, but not decrease. 
B)  the real exchange rate must increase. 
C)  the real exchange rate must decrease. 
D)  the real exchange rate can decrease or remain the same, but not increase. 
E)  the real exchange rate remains unchanged. 
A)  the real exchange rate can increase or remain the same, but not decrease. 
B)  the real exchange rate must increase. 
C)  the real exchange rate must decrease. 
D)  the real exchange rate can decrease or remain the same, but not increase. 
E)  the real exchange rate remains unchanged.

Question 5

A nominal appreciation of the Japanese yen against all currencies indicates that:

Accepted Answer

A)  the yen price of the U.K. pound has decreased. 
B)  the yen price of the Australian dollar has decreased. 
C)  the number of units of foreign currency that one can obtain with one yen has increased. 
D)  the yen price of the U.S. dollar has decreased. 
E)  All of the above. 
A)  the yen price of the U.K. pound has decreased. 
B)  the yen price of the Australian dollar has decreased. 
C)  the number of units of foreign currency that one can obtain with one yen has increased. 
D)  the yen price of the U.S. dollar has decreased. 
E)  All of the above.

Question 6

The ratio of a country's exports to its GDP must:

Accepted Answer

A)  be larger than the ratio of imports to GDP. 
B)  be less than one. 
C)  equal the ratio of imports to GDP. 
D)  be greater than one. 
E)  None of the above. 
A)  be larger than the ratio of imports to GDP. 
B)  be less than one. 
C)  equal the ratio of imports to GDP. 
D)  be greater than one. 
E)  None of the above.

Question 7

The difference between the capital account and the current account is called the:

Accepted Answer

A)  missing number. 
B)  statistical discrepancy. 
C)  international error. 
D)  current account discrepancy. 
E)  capital account discrepancy. 
A)  missing number. 
B)  statistical discrepancy. 
C)  international error. 
D)  current account discrepancy. 
E)  capital account discrepancy.

Question 8

Discuss what factors could cause a real depreciation.

Accepted Answer

Since the real exchange rate is represen

Question 9

When the Australian dollar appreciates, we know that:

Accepted Answer

A)  the dollar is less expensive to foreigners. 
B)  Australian goods are less expensive to foreigners. 
C)  foreign currency is more expensive to Australians. 
D)  foreign goods are more expensive to Australians. 
E)  foreign goods are less expensive to Australians. 
A)  the dollar is less expensive to foreigners. 
B)  Australian goods are less expensive to foreigners. 
C)  foreign currency is more expensive to Australians. 
D)  foreign goods are more expensive to Australians. 
E)  foreign goods are less expensive to Australians.

Question 10

If the exchange rate between the Australian dollar and the British pound (the price of the Australian dollar in terms of the pound) is currently 1.50, and is expected to be 1.80 in one year, then the expected rate of:

Accepted Answer

A)  appreciation of the Australian dollar is 15%. 
B)  appreciation of the Australian dollar is 20%. 
C)  depreciation of the Australian dollar is 15%. 
D)  appreciation of the Australian dollar is 18%. 
E)  depreciation of the Australian dollar is 20%. 
A)  appreciation of the Australian dollar is 15%. 
B)  appreciation of the Australian dollar is 20%. 
C)  depreciation of the Australian dollar is 15%. 
D)  appreciation of the Australian dollar is 18%. 
E)  depreciation of the Australian dollar is 20%.

Question 11

The differences in the ratios of exports to GDP across countries are believed to be caused primarily by:

Accepted Answer

A)  geography and size. 
B)  fiscal policy. 
C)  monetary policy. 
D)  trade barriers. 
E)  the inflation differential between countries. 
A)  geography and size. 
B)  fiscal policy. 
C)  monetary policy. 
D)  trade barriers. 
E)  the inflation differential between countries.

Question 12

The nominal exchange rate (E) is defined as:

Accepted Answer

A)  the number of units of foreign currency you can obtain with one unit of domestic currency. 
B)  the number of units of domestic goods you can obtain with one unit of foreign goods. 
C)  the price of domestic currency in terms of foreign currency. 
D)  Both A and B. 
E)  Both A and C. 
A)  the number of units of foreign currency you can obtain with one unit of domestic currency. 
B)  the number of units of domestic goods you can obtain with one unit of foreign goods. 
C)  the price of domestic currency in terms of foreign currency. 
D)  Both A and B. 
E)  Both A and C.

Question 13

Explain what factors determine the expected return on a foreign bond.

Accepted Answer

The current exchange rate, the

Question 14

Which of the following conditions will occur when two countries are engaged in a credible, fixed exchange rate regime?

Accepted Answer

A) E > 1. B) i > i*. C) i = i*. D) i < i*. E) E < 1. A) E > 1. B) i > i*. C) i = i*. D) i < i*. E) E < 1.

Question 15

Suppose E increases by 5%. Which of the following will have occurred as a result of this increase in E?

Accepted Answer

A)  Nominal appreciation by 5%. 
B)  Real depreciation if P increases by 5%. 
C)  Real appreciation if P decreases by 5%. 
D)  Effective appreciation by 5%. 
E)  Nominal depreciation by 5%. 
A)  Nominal appreciation by 5%. 
B)  Real depreciation if P increases by 5%. 
C)  Real appreciation if P decreases by 5%. 
D)  Effective appreciation by 5%. 
E)  Nominal depreciation by 5%.

Question 16

Suppose Australia's one- year interest rate is 4% per year, while a foreign country has a one- year interest rate of 6% per year. Ignoring risk and transaction costs, an Australian investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is:

Accepted Answer

A)  greater than 5%. 
B)  less than 2%. 
C)  less than 1%. 
D)  greater than 2%. 
E)  less than 5%. 
A)  greater than 5%. 
B)  less than 2%. 
C)  less than 1%. 
D)  greater than 2%. 
E)  less than 5%.

Question 17

Assume that the interest parity condition holds and that individuals expect the Australian dollar to appreciate by 5% during the coming year. Given this information, we know that:

Accepted Answer

A) i > i*. B) the interest rate differential between the two countries is less than 5%. C) i < i*. D) individuals will only hold foreign bonds. E) i = i*. A) i > i*. B) the interest rate differential between the two countries is less than 5%. C) i < i*. D) individuals will only hold foreign bonds. E) i = i*.

Question 18

Suppose you are considering the purchase of a bond issued in another country. What calculations must you do to calculate the expected return on a foreign bond? Explain.

Accepted Answer

You must first determine the amount of f

Question 19

Year- to- year movements in real exchange rates between industrialised countries like the U.S. and Australia are caused mostly by:

Accepted Answer

A)  changes in relative rates of inflation. 
B)  changes in nominal exchange rates. 
C)  changes in quotas or tariffs. 
D)  changes in relative growth rates of output. 
E)  changes in capital controls. 
A)  changes in relative rates of inflation. 
B)  changes in nominal exchange rates. 
C)  changes in quotas or tariffs. 
D)  changes in relative growth rates of output. 
E)  changes in capital controls.

Question 20

Which of the following events will cause the largest real depreciation for the domestic economy?

Accepted Answer

A)  A 7% decrease in E and a 7% decrease in P*. 
B)  A 3% increase in E and a 3% increase in P. 
C)  A 7% increase in P and a 7% decrease in P*. 
D)  A 7% decrease in E and a 7% increase in P*. 
E)  A 4% increase in E. 
A)  A 7% decrease in E and a 7% decrease in P*. 
B)  A 3% increase in E and a 3% increase in P. 
C)  A 7% increase in P and a 7% decrease in P*. 
D)  A 7% decrease in E and a 7% increase in P*. 
E)  A 4% increase in E.

Exam 18: Openness in Goods and Financial Markets

Suppose two countries make a credible commitment to fix their bilateral exchange rate. In such a situation, we know that:

Assume that the domestic interest rate is 7% and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to depreciate by 4% during the coming year. Given this information, we know that:

In 2000- 2011, which of the following countries had the highest ratio of exports to GDP?

Suppose that over the past decade, Australian inflation is less than that in the UK. Further assume that during this same period, the Australian dollar depreciates relative to the British pound. Given this information:

A nominal appreciation of the Japanese yen against all currencies indicates that:

The ratio of a country's exports to its GDP must:

The difference between the capital account and the current account is called the:

Discuss what factors could cause a real depreciation.

When the Australian dollar appreciates, we know that:

If the exchange rate between the Australian dollar and the British pound (the price of the Australian dollar in terms of the pound) is currently 1.50, and is expected to be 1.80 in one year, then the expected rate of:

The differences in the ratios of exports to GDP across countries are believed to be caused primarily by:

The nominal exchange rate (E) is defined as:

Explain what factors determine the expected return on a foreign bond.

Which of the following conditions will occur when two countries are engaged in a credible, fixed exchange rate regime?

Suppose E increases by 5%. Which of the following will have occurred as a result of this increase in E?

Assume that the interest parity condition holds and that individuals expect the Australian dollar to appreciate by 5% during the coming year. Given this information, we know that:

Suppose you are considering the purchase of a bond issued in another country. What calculations must you do to calculate the expected return on a foreign bond? Explain.

Year- to- year movements in real exchange rates between industrialised countries like the U.S. and Australia are caused mostly by:

Which of the following events will cause the largest real depreciation for the domestic economy?

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Consumption and Investment

Expectations, Output and Policy

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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