Question 1

Explain what the IP curve is and why it is upward sloping.

Accepted Answer

The IP curve represents the combinations of i and E that maintain the interest parity condition.As i falls,foreign bonds will have a higher expected return.The demand for the dollar will fall causing an immediate depreciation.So,the drop in i causes E to fall.E will fall until all of the drop in i is offset by the expected appreciation of the dollar.

Question 2

In order for an individual to be indifferent between holding foreign or domestic bonds,

Accepted Answer

A) the Marshall-Lerner condition must hold. 
B) the foreign and domestic interest rates must be equal. 
C) the expected rate of depreciation of the domestic currency is zero. 
D) the interest parity condition must hold. 
A) the Marshall-Lerner condition must hold. 
B) the foreign and domestic interest rates must be equal. 
C) the expected rate of depreciation of the domestic currency is zero. 
D) the interest parity condition must hold. D

Question 3

Assume the exchange rate is fixed.Using the IS-LM model,graphically illustrate and explain what effect an increase in consumer confidence will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Accepted Answer

An increase in consumer confidence will cause an increase in C and will cause demand to rise and the IS curve to shift to the right.As Y rises,money demand will increase and the domestic interest rate will tend to rise.If i rises,there will be tremendous pressure on the domestic currency to appreciate as demand rises.The central bank cannot let this occur.To prevent this,it must increase the money supply so that i does not rise.We will observe an increase in Y,no change in i,an increase in I (via the increase in I),and a reduction in NX caused by the rise in imports.

Question 4

For this question,assume that there is a simultaneous tax increase and monetary expansion.In a flexible exchange rate regime,we know with certainty that

Accepted Answer

A) the exchange rate and output would both increase. 
B) the exchange rate would increase and output would decrease. 
C) the exchange rate would decrease. 
D) the exchange rate would decrease and output would increase. 
E) none of the above 
A) the exchange rate and output would both increase. 
B) the exchange rate would increase and output would decrease. 
C) the exchange rate would decrease. 
D) the exchange rate would decrease and output would increase. 
E) none of the above

Question 5

Assume that the current exchange rate between U.K.pound and the U.S.dollar is 2 (E = 2.0).If interest parity holds,and the U.S.interest rate is 6% while the U.K.interest rate is 8%,the expected exchange rate in one year is

Accepted Answer

A) 1.98. 
B) 1.99. 
C) 2.01. 
D) 2.02. 
E) 2.04. 
A) 1.98. 
B) 1.99. 
C) 2.01. 
D) 2.02. 
E) 2.04.

Question 6

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that a reduction in stock market wealth causes a decrease in consumption.Which of the following will tend to occur in a fixed exchange rate regime?

Accepted Answer

A) a reduction in Y 
B) a reduction in the money supply 
C) no change in the domestic interest rate 
D) all of the above 
A) a reduction in Y 
B) a reduction in the money supply 
C) no change in the domestic interest rate 
D) all of the above

Question 7

Under a fixed exchange rate regime,expansionary fiscal policy will tend to cause which of the following?

Accepted Answer

A) an increase in imports 
B) an increase in net exports 
C) a reduction in investment 
D) all of the above 
A) an increase in imports 
B) an increase in net exports 
C) a reduction in investment 
D) all of the above

Question 8

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that households decide to decrease consumption because of,for example,a reduction in consumer confidence.Given this information,we would expect which of the following to occur?

Accepted Answer

A) a reduction in the domestic interest rate 
B) an increase in E 
C) a reduction in E 
D) a reduction in investment 
E) none of the above 
A) a reduction in the domestic interest rate 
B) an increase in E 
C) a reduction in E 
D) a reduction in investment 
E) none of the above

Question 9

Expansionary monetary policy in a flexible exchange rate regime will cause

Accepted Answer

A) a shift of the IP curve. 
B) an appreciation of the domestic currency. 
C) a reduction in E. 
D) no change in E. 
A) a shift of the IP curve. 
B) an appreciation of the domestic currency. 
C) a reduction in E. 
D) no change in E.

Question 10

Suppose a country switches from a fixed to a flexible exchange rate.Which of the following will occur as a result of this change?

Accepted Answer

A) monetary policy will become a less effective tool for changing output. 
B) a given change in government spending will now have a greater effect on output. 
C) both fiscal and monetary policy will become more effective in changing GDP. 
D) both fiscal and monetary policy will become completely ineffective in changing GDP. 
E) none of the above 
A) monetary policy will become a less effective tool for changing output. 
B) a given change in government spending will now have a greater effect on output. 
C) both fiscal and monetary policy will become more effective in changing GDP. 
D) both fiscal and monetary policy will become completely ineffective in changing GDP. 
E) none of the above

Question 11

The exchange rate policy of the United States is

Accepted Answer

A) the EMS. 
B) a crawling peg. 
C) a float. 
D) a fixed rate within a band. 
E) none of the above 
A) the EMS. 
B) a crawling peg. 
C) a float. 
D) a fixed rate within a band. 
E) none of the above

Question 12

In an open economy under flexible exchange rates and represented by the IS-LM-IP model,a reduction in government spending will cause a reduction in which of the following?

Accepted Answer

A) net exports 
B) the exchange rate,E 
C) exports 
D) all of the above 
E) none of the above 
A) net exports 
B) the exchange rate,E 
C) exports 
D) all of the above 
E) none of the above

Question 13

A real appreciation will tend to cause

Accepted Answer

A) an increase in exports. 
B) a reduction in imports. 
C) an increase in net exports. 
D) a reduction in demand for domestic goods. 
E) none of the above 
A) an increase in exports. 
B) a reduction in imports. 
C) an increase in net exports. 
D) a reduction in demand for domestic goods. 
E) none of the above

Question 14

Assume that the price levels in two countries are constant.In this situation,we know that

Accepted Answer

A) neither the real nor the nominal exchange rate can change. 
B) the real exchange rate can change,while the nominal exchange rate is constant 
C) the nominal exchange rate can change,while the real exchange rate is constant. 
D) the real and nominal exchange rate must move together,changing by the same percentage. 
E) the nominal exchange rate will fluctuate more widely than the real exchange rate. 
A) neither the real nor the nominal exchange rate can change. 
B) the real exchange rate can change,while the nominal exchange rate is constant 
C) the nominal exchange rate can change,while the real exchange rate is constant. 
D) the real and nominal exchange rate must move together,changing by the same percentage. 
E) the nominal exchange rate will fluctuate more widely than the real exchange rate.

Question 15

In the early 1990s,European unemployment rose largely because of

Accepted Answer

A) reductions in stock prices. 
B) undervalued currencies. 
C) overvalued currencies. 
D) high inflation 
E) none of the above 
A) reductions in stock prices. 
B) undervalued currencies. 
C) overvalued currencies. 
D) high inflation 
E) none of the above

Question 16

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect monetary expansion will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Accepted Answer

An increase in M will cause the LM curve

Question 17

In an economy operating under flexible exchange rates,explain why the IS curve is downward sloping.

Accepted Answer

A reduction in i (assume zero inflation)

Question 18

Under a fixed exchange rate regime,suppose there is an increase in housing wealth that causes an increase in consumption.This wealth-induced increase in consumption will cause

Accepted Answer

A) an increase in investment. 
B) a reduction in net exports. 
C) an increase in imports. 
D) all of the above 
E) none of the above 
A) an increase in investment. 
B) a reduction in net exports. 
C) an increase in imports. 
D) all of the above 
E) none of the above

Question 19

Contractionary monetary policy in a flexible exchange rate regime will cause

Accepted Answer

A) a shift of the IP curve. 
B) a depreciation of the domestic currency. 
C) an increase in E. 
D) no change in E. 
A) a shift of the IP curve. 
B) a depreciation of the domestic currency. 
C) an increase in E. 
D) no change in E.

Question 20

In an open economy,we know that individuals must choose between which of the following?

Accepted Answer

A) domestic bonds and foreign currency 
B) foreign goods and domestic currency 
C) domestic and foreign bonds 
D) domestic goods and foreign currency 
E) none of the above 
A) domestic bonds and foreign currency 
B) foreign goods and domestic currency 
C) domestic and foreign bonds 
D) domestic goods and foreign currency 
E) none of the above

Exam 20: Output,the Interest Rate,and the Exchange Rate

Explain what the IP curve is and why it is upward sloping.

In order for an individual to be indifferent between holding foreign or domestic bonds,

Assume the exchange rate is fixed.Using the IS-LM model,graphically illustrate and explain what effect an increase in consumer confidence will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

For this question,assume that there is a simultaneous tax increase and monetary expansion.In a flexible exchange rate regime,we know with certainty that

Assume that the current exchange rate between U.K.pound and the U.S.dollar is 2 (E = 2.0).If interest parity holds,and the U.S.interest rate is 6% while the U.K.interest rate is 8%,the expected exchange rate in one year is

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that a reduction in stock market wealth causes a decrease in consumption.Which of the following will tend to occur in a fixed exchange rate regime?

Under a fixed exchange rate regime,expansionary fiscal policy will tend to cause which of the following?

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that households decide to decrease consumption because of,for example,a reduction in consumer confidence.Given this information,we would expect which of the following to occur?

Expansionary monetary policy in a flexible exchange rate regime will cause

Suppose a country switches from a fixed to a flexible exchange rate.Which of the following will occur as a result of this change?

The exchange rate policy of the United States is

In an open economy under flexible exchange rates and represented by the IS-LM-IP model,a reduction in government spending will cause a reduction in which of the following?

A real appreciation will tend to cause

Assume that the price levels in two countries are constant.In this situation,we know that

In the early 1990s,European unemployment rose largely because of

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect monetary expansion will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

In an economy operating under flexible exchange rates,explain why the IS curve is downward sloping.

Under a fixed exchange rate regime,suppose there is an increase in housing wealth that causes an increase in consumption.This wealth-induced increase in consumption will cause

Contractionary monetary policy in a flexible exchange rate regime will cause

In an open economy,we know that individuals must choose between which of the following?

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Marketsthe Is-Lm Model

The Labor Market

Putting All Markets Togetherthe As-Ad 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

Openness in Goods and Financial Markets

The Goods Market in an Open Economy

Exchange Rate Regimes

Should Policy Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

an Introduction to National Income and Product Accounts

an Introduction to Econometrics

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