Question 1

The current account balance is

Accepted Answer

A)  the supply of a country's exports less the country's own demand for imports. 
B)  the demand for a country's exports plus the country's own demand for imports. 
C)  the country's own demand for imports less the demand for a country's exports. 
D)  the demand for a country's exports less the country's own demand for imports. 
E)  the country's federal reserves minus the national debt. 
A)  the supply of a country's exports less the country's own demand for imports. 
B)  the demand for a country's exports plus the country's own demand for imports. 
C)  the country's own demand for imports less the demand for a country's exports. 
D)  the demand for a country's exports less the country's own demand for imports. 
E)  the country's federal reserves minus the national debt.

Question 2

Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?

Accepted Answer

A)  appreciation and depreciation 
B)  crowding Out effect and producers effect 
C)  volume effect and value effect 
D)  volume effect and inflation 
E)  producers effect and value effect 
A)  appreciation and depreciation 
B)  crowding Out effect and producers effect 
C)  volume effect and value effect 
D)  volume effect and inflation 
E)  producers effect and value effect

Question 3

Monetary expansion causes the current account balance to increase in the short run. Discuss. Is the same the case for fiscal expansion?

Accepted Answer

Am increase in the money supply leads to

Question 4

Which of the following have to be in equilibrium for the economy to be in equilibrium?

Accepted Answer

A)  the money market only 
B)  the goods market only 
C)  the output and assets markets 
D)  the savings and investment markets 
E)  the goods and output markets 
A)  the money market only 
B)  the goods market only 
C)  the output and assets markets 
D)  the savings and investment markets 
E)  the goods and output markets

Question 5

Using the DD-AA framework, which one of the following statements is the most accurate?

Accepted Answer

A)  Only monetary policy can bring the economy to full employment. 
B)  Only fiscal policy can bring the economy to full employment. 
C)  Only both monetary and fiscal policies can bring the economy to full employment. 
D)  Both policies are capable of bringing the economy to full employment and low inflation. 
E)  Monetary policy by itself or fiscal policy by itself can bring the economy to full employment. 
A)  Only monetary policy can bring the economy to full employment. 
B)  Only fiscal policy can bring the economy to full employment. 
C)  Only both monetary and fiscal policies can bring the economy to full employment. 
D)  Both policies are capable of bringing the economy to full employment and low inflation. 
E)  Monetary policy by itself or fiscal policy by itself can bring the economy to full employment.

Question 6

A country's domestic currency's real exchange rate, q, is defined as

Accepted Answer

A)  E. 
B)  E times P. 
C)  E times P 
D)  (E times P)/P. 
E)  P/(E times P). 
A)  E. 
B)  E times P. 
C)  E times P 
D)  (E times P)/P. 
E)  P/(E times P).

Question 7

When an economy is in a liquidity trap,

Accepted Answer

A)  monetary policy cannot be used to influence the exchange rate. 
B)  monetary policy can be used to drive interest rates down, but not to drive them up. 
C)  there is an excess demand for bonds. 
D)  people and institutions avoid holding cash balances. 
E)  it can escape only by introducing a hard, or illiquid, currency. 
A)  monetary policy cannot be used to influence the exchange rate. 
B)  monetary policy can be used to drive interest rates down, but not to drive them up. 
C)  there is an excess demand for bonds. 
D)  people and institutions avoid holding cash balances. 
E)  it can escape only by introducing a hard, or illiquid, currency.

Question 8

Which one of the following statements is the most accurate?

Accepted Answer

A)  A rise in domestic real income raises aggregate demand for home output. 
B)  A rise in domestic real income decreases aggregate demand for home output because of the increase demand for import. 
C)  A rise in domestic real income keeps aggregate demand for home output at the same level. 
D)  It is difficult to tell whether a rise in domestic real income affects positively or negatively aggregate demand for home output. 
E)  A rise in domestic real income decreases aggregate demand for home output because the CA is raised. 
A)  A rise in domestic real income raises aggregate demand for home output. 
B)  A rise in domestic real income decreases aggregate demand for home output because of the increase demand for import. 
C)  A rise in domestic real income keeps aggregate demand for home output at the same level. 
D)  It is difficult to tell whether a rise in domestic real income affects positively or negatively aggregate demand for home output. 
E)  A rise in domestic real income decreases aggregate demand for home output because the CA is raised.

Question 9

A permanent increase in the domestic money supply

Accepted Answer

A)  must ultimately lead to a proportional decrease in E, and, therefore, the expected future exchange rate must rise proportionally. 
B)  must ultimately lead to a proportional decrease in E, and, therefore, the expected future exchange rate must decrease proportionally. 
C)  must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise proportionally. 
D)  must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise more than proportionally. 
E)  must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise less than proportionally. 
A)  must ultimately lead to a proportional decrease in E, and, therefore, the expected future exchange rate must rise proportionally. 
B)  must ultimately lead to a proportional decrease in E, and, therefore, the expected future exchange rate must decrease proportionally. 
C)  must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise proportionally. 
D)  must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise more than proportionally. 
E)  must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise less than proportionally.

Question 10

Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD and where both the output and asset markets are out of equilibrium. Explain what will happen next?

Accepted Answer

Since the asset market adjusts very quic

Question 11

If a country's nominal interest rate is 5% and its inflation rate is also 5%, then

Accepted Answer

A)  the country's economy is in a liquidity trap. 
B)  exchange rates with other countries are likely to decline. 
C)  exchange rates with other countries are likely to increase. 
D)  monetary policy is likely to be very effective in stimulating the economy. 
E)  the country's economy has achieved monetary equilibrium. 
A)  the country's economy is in a liquidity trap. 
B)  exchange rates with other countries are likely to decline. 
C)  exchange rates with other countries are likely to increase. 
D)  monetary policy is likely to be very effective in stimulating the economy. 
E)  the country's economy has achieved monetary equilibrium.

Question 12

Unconventional monetary policies by a central bank involve

Accepted Answer

A)  the purchase of long-term government bonds with new money. 
B)  the sale of long-term government bonds for foreign exchange. 
C)  the purchase of long-term government bonds using foreign exchange. 
D)  raising reserve requirements by commercial banks. 
E)  selling gold reserves. 
A)  the purchase of long-term government bonds with new money. 
B)  the sale of long-term government bonds for foreign exchange. 
C)  the purchase of long-term government bonds using foreign exchange. 
D)  raising reserve requirements by commercial banks. 
E)  selling gold reserves.

Question 13

An intertemporal budget constraint

Accepted Answer

A)  requires the present value of consumption to be equal to the present value of production. 
B)  requires total spending in each period to be equal to total consumption in each period. 
C)  does not take into account the ability to borrow or loan goods domestically. 
D)  categorizes income into permanent and temporary income. 
E)  limits consumption to the amount produced in each time period. 
A)  requires the present value of consumption to be equal to the present value of production. 
B)  requires total spending in each period to be equal to total consumption in each period. 
C)  does not take into account the ability to borrow or loan goods domestically. 
D)  categorizes income into permanent and temporary income. 
E)  limits consumption to the amount produced in each time period.

Question 14

In the short run, a permanent increase in the domestic money supply

Accepted Answer

A)  has stronger effects on the exchange rate and output than an equal temporary increase. 
B)  has stronger effects only on the exchange rate but not on output than an equal temporary increase. 
C)  has weaker effects on the exchange rate and output than an equal temporary increase. 
D)  has stronger effects on output, but lower effect the exchange rate than an equal temporary increase. 
E)  has weaker effects only on the exchange rate than an equal temporary increase. 
A)  has stronger effects on the exchange rate and output than an equal temporary increase. 
B)  has stronger effects only on the exchange rate but not on output than an equal temporary increase. 
C)  has weaker effects on the exchange rate and output than an equal temporary increase. 
D)  has stronger effects on output, but lower effect the exchange rate than an equal temporary increase. 
E)  has weaker effects only on the exchange rate than an equal temporary increase.

Question 15

In the short-run, any rise in the real exchange rate, EP/P, will cause

Accepted Answer

A)  an upward shift in the aggregate demand function and a reduction in output 
B)  an upward shift in the aggregate demand function and an expansion of output 
C)  a downward shift in the aggregate demand function and an expansion of output 
D)  an downward shift in the aggregate demand function and a reduction in output 
E)  an upward shift in the aggregate demand function but leaves output intact 
A)  an upward shift in the aggregate demand function and a reduction in output 
B)  an upward shift in the aggregate demand function and an expansion of output 
C)  a downward shift in the aggregate demand function and an expansion of output 
D)  an downward shift in the aggregate demand function and a reduction in output 
E)  an upward shift in the aggregate demand function but leaves output intact

Question 16

In the short run:

Accepted Answer

A)  monetary expansion causes the CA increase & fiscal expansion causes the CA to decrease. 
B)  monetary expansion causes the CA to decrease & fiscal expansion causes the CA to decrease. 
C)  monetary expansion causes the CA to increase & fiscal expansion causes the CA to increase. 
D)  monetary expansion causes the CA to decrease & fiscal expansion causes the CA to increase. 
E)  monetary expansion causes the CA to increase & the effects of fiscal expansion are ambiguous. 
A)  monetary expansion causes the CA increase & fiscal expansion causes the CA to decrease. 
B)  monetary expansion causes the CA to decrease & fiscal expansion causes the CA to decrease. 
C)  monetary expansion causes the CA to increase & fiscal expansion causes the CA to increase. 
D)  monetary expansion causes the CA to decrease & fiscal expansion causes the CA to increase. 
E)  monetary expansion causes the CA to increase & the effects of fiscal expansion are ambiguous.

Question 17

What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?

Accepted Answer

The AA-curve is the specific levels of E

Question 18

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 100 euros and the representative U.S. basket costs $125, and the dollar/euro exchange rate is $0.75 per euro, then the price of the European basket in terms of U.S. basket is:

Accepted Answer

[(0.75 $/euro) (100 euro per a

Question 19

The real exchange rate is:

Accepted Answer

A)  how much of a foreign currency you can buy with the domestic currency. 
B)  foreign CPI divided by the domestic CPI. 
C)  the price of foreign goods in terms of domestic goods. 
D)  the price of foreign goods in dollars. 
E)  the domestic currency divided by the price level. 
A)  how much of a foreign currency you can buy with the domestic currency. 
B)  foreign CPI divided by the domestic CPI. 
C)  the price of foreign goods in terms of domestic goods. 
D)  the price of foreign goods in dollars. 
E)  the domestic currency divided by the price level.

Question 20

Which of the following would not cause the real exchange rate to rise?

Accepted Answer

A)  a rise in the exchange rate, E 
B)  depreciation of the home currency 
C)  a right shift of the aggregate demand curve 
D)  a rise in foreign prices, P 
E)  a fall in domestic prices, P 
A)  a rise in the exchange rate, E 
B)  depreciation of the home currency 
C)  a right shift of the aggregate demand curve 
D)  a rise in foreign prices, P 
E)  a fall in domestic prices, P

Exam 17: Output and the Exchange Rate in the Short Run

The current account balance is

Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?

Monetary expansion causes the current account balance to increase in the short run. Discuss. Is the same the case for fiscal expansion?

Which of the following have to be in equilibrium for the economy to be in equilibrium?

Using the DD-AA framework, which one of the following statements is the most accurate?

A country's domestic currency's real exchange rate, q, is defined as

When an economy is in a liquidity trap,

Which one of the following statements is the most accurate?

A permanent increase in the domestic money supply

Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD and where both the output and asset markets are out of equilibrium. Explain what will happen next?

If a country's nominal interest rate is 5% and its inflation rate is also 5%, then

Unconventional monetary policies by a central bank involve

An intertemporal budget constraint

In the short run, a permanent increase in the domestic money supply

In the short-run, any rise in the real exchange rate, EP/P, will cause

In the short run:

What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 100 euros and the representative U.S. basket costs $125, and the dollar/euro exchange rate is $0.75 per euro, then the price of the European basket in terms of U.S. basket is:

The real exchange rate is:

Which of the following would not cause the real exchange rate to rise?

Introduction

World Trade: An Overview

Labor Productivity and Comparative Advantage: The Ricardian Model

Specific Factors and Income Distribution

Resources and Trade: The Heckscher-Ohlin Model

The Standard Trade Model

External Economies of Scale and the International Location of Production

Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

The Instruments of Trade Policy

The Political Economy of Trade Policy

Trade Policy in Developing Countries

Controversies in Trade Policy

National Income Accounting and the Balance of Payments

Exchange Rates and the Foreign Exchange Market: An Asset Approach

Money, Interest Rates, and Exchange Rates

Price Levels and the Exchange Rate in the Long Run

Fixed Exchange Rates and Foreign Exchange Intervention

International Monetary Systems: An Historical Overview

Optimum Currency Areas and the European Experience

Financial Globalization: Opportunity and Crisis

Developing Countries: Growth, Crisis, and Reform

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