Deck 16: International Trade in Goods and Assets

Question 1

Data on the real exchange rate for Canada vs.the U.S.indicates that

A) the real exchange rate has fluctuated significantly while the theory predicts it should be constant.
B) the real exchange rate has been constant while the theory predicts it should fluctuate.
C) the real exchange rate has fluctuated little consistent with the theoretical predictions.
D) the real exchange rate has decreased while the theory predicts it should increase.
E) the real exchange rate has increased consistent with the theoretical predictions.

Answer 1

the real exchange rate has fluctuated significantly while the theory predicts it should be constant.

Question 2

A principal reason that purchasing power parity does not hold exactly in practice is

A) that foreign and domestic assets are not perfect substitutes.
B) the existence of non-traded goods.
C) that consumers in different countries have different preferences.
D) costs of production are not the same in all countries.
E) that it is a short run theory.

Answer 2

the existence of non-traded goods.

Question 3

The nominal exchange rate is the

A) domestic currency price of foreign currency.
B) foreign currency price of domestic currency.
C) price of domestic goods in terms of foreign goods.
D) price of foreign goods in terms of domestic goods.
E) domestic currency price of domestic currency.

Answer 3

domestic currency price of foreign currency.

Question 4

If the real exchange rate is high,greater than 1,

A) it is cheaper to buy goods domestically than abroad.
B) foreign goods would be cheaper than domestic goods.
C) the nominal exchange rate is depreciating.
D) the nominal exchange rate is appreciating.
E) the purchasing power of domestic income has diminished.

Question 5

According to purchasing power parity,the relationship among the domestic price (P),the foreign price (P ),and the nominal exchange rate (e),can be written as

A)
B)
C)
D)
E)

Question 6

Under a hard peg,a country

A) has a strict rule of no government intervention to target the nominal exchange rate.
B) only the federal government can alter the nominal exchange rate.
C) a country commits to a fixed nominal exchange rate for an indefinite period of time.
D) only industrialized nations commit to fixed nominal exchange rates.
E) the central bank can alter the value of the exchange rate as required.

Question 7

Purchasing power parity assumes

A) no inflationary pressures.
B) that foreign and domestic assets are perfect substitutes.
C) no transportation costs and no trade barriers.
D) similar prices for inputs.
E) similar real wage rates.

Question 8

A hard peg may be achieved by

A) following the rules of the Bretton Woods Agreement.
B) dollarization.
C) becoming a lender of last resort.
D) revaluation of the exchange rate.
E) buying and selling bonds in the open market.

Question 9

A flexible exchange rate is determined by

A) the central bank in each country.
B) the federal government in each country.
C) both fiscal and monetary policies only.
D) forces of supply and demand for the currency in the foreign exchange market.
E) buying and selling of foreign exchange reserves.

Question 10

A devaluation of the exchange rate is a policy action that

A) increases the real exchange rate.
B) decreases the real exchange rate.
C) increases the nominal exchange rate.
D) decreases the nominal exchange rate.
E) fixes the nominal exchange rate.

Question 11

In an open economy,the law of one price implies that

A) the domestic economy may have a comparative advantage in only half the goods it produces.
B) perfect competition holds in all domestic markets.
C) purchasing power parity should hold.
D) the nominal exchange rate should equal one.
E) the real exchange rate is greater than one.

Question 12

Under purely flexible exchange rates,

A) there is no intervention by the domestic fiscal or monetary authorities to specifically target the nominal exchange rate.
B) there is only occasional intervention by the domestic fiscal or monetary authorities to specifically target the nominal exchange rate.
C) the domestic fiscal and monetary authorities retain considerable flexibility to prevent short-run variability in the nominal exchange rate.
D) the domestic fiscal and monetary authorities retain considerable flexibility to prevent long-run variability in the nominal exchange rate.
E) there is only intervention by monetary authorities to specifically target the nominal exchange rate.

Question 13

Purchasing power parity may not hold in practice due to

A) transportation costs.
B) cross-country differences in environmental regulations.
C) the evolution of free trade agreements.
D) the existence of traded goods.
E) the existence of trade imbalances.

Question 14

Purchasing power parity holds if

A) inflation is low so purchasing power increases.
B) real wage rates adjust so that purchasing power is the same across all countries.
C) prices of all goods in the world economy were equal, corrected for nominal exchange rates.
D) countries are small and underdeveloped.
E) purchases are made in the short run and long run.

Question 15

Over the period from 1989-2002,an examination of purchasing power parity between the United States and Canada shows that

A) purchasing power parity held almost exactly between the two countries.
B) the real exchange rate has fluctuated, but has shown no trend.
C) Canada's real exchange rate vs. that of the United States has increased by approximately 40%.
D) the United States' real exchange rate vs. Canada has increased by approximately 40%.
E) purchasing power parity held in the short run only.

Question 16

Which of the following was specifically instituted to ensure a successful hard peg?

A) the Bretton Woods Agreement
B) the European Monetary System
C) the European Monetary Union
D) the International Monetary Fund
E) the U.S. Federal Reserve

Question 17

Dollarization is a policy action that

A) tries to stabilize the value of the local currency vs. the U.S. dollar.
B) adopts the currency of another country as the national medium of exchange.
C) mimics policy actions taken by the Bank of Canada.
D) outlaws the holding of foreign currencies other than the U.S. dollar.
E) buys and sells foreign exchange reserves in the foreign exchange market.

Question 18

A revaluation of the exchange rate is a policy action that

A) increases the real exchange rate.
B) decreases the real exchange rate.
C) increases the nominal exchange rate.
D) decreases the nominal exchange rate.
E) fixes the nominal exchange rate.

Question 19

A hard peg may be achieved by

A) establishment of a currency board.
B) following the rules of the Bretton Woods Agreement.
C) becoming a lender of last resort.
D) revaluation of the exchange rate.
E) government's printing currency.

Question 20

The real exchange rate is the

A) domestic currency price of foreign currency.
B) foreign currency price of domestic currency.
C) price of domestic goods in terms of foreign goods.
D) price of foreign goods in terms of domestic goods.
E) domestic currency price of domestic currency.

Question 21

In the monetary small open-economy model with a flexible exchange rate,an increase in the foreign price level decreases

A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.
B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.
C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.
D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.
E) domestic output and the price level, but has no effect on the nominal exchange rate.

Question 22

Under a flexible exchange rate,an increase in the domestic money supply leads to

A) a devaluation of the domestic currency.
B) a revaluation of the domestic currency.
C) a depreciation of the domestic currency.
D) an appreciation of the domestic currency.
E) the real interest rate increasing.

Question 23

In the monetary small open-economy model with a fixed exchange rate,the domestic

A) government loses control over the level of domestic government spending.
B) government loses control over the level of domestic taxes.
C) government loses control over the level of domestic government spending and domestic taxes.
D) central bank loses control over the domestic stock of money.
E) central bank loses control over the price level.

Question 24

In the monetary small open-economy model with a flexible exchange rate,an increase in the domestic money supply causes

A) the nominal exchange rate to increase in proportion with the money supply.
B) the nomial exchange rate to equal the real interest rate.
C) the nominal exchange rate to decrease.
D) the nominal exchange rate to remain unchanged.
E) the nominal exchange rate to increase faster than the money supply.

Question 25

Which of the following institutions plays the role of an international lender of last resort?

A) the World Bank
B) the International Monetary Fund
C) the European Monetary System
D) the U.S. Federal Reserve System
E) the World Trade Organization

Question 26

During the 2008-2009 financial crises,the U.S.exchange rate

A) appreciated.
B) remained constant.
C) depreciated.
D) followed the law of purchasing power parity.
E) was an example of a hard peg.

Question 27

In the monetary small open-economy model with a flexible exchange rate,an increase in the domestic money supply increases

A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.
B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.
C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.
D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.
E) the domestic price level and domestic output, but has no effect on the nominal exchange rate.

Question 28

During a financial crises a country typically experiences an exchange rate depreciation.The U.S.experience from 2008-2009 was

A) consistent with this prediction.
B) a constant exchange rate.
C) a move from flexible to fixed exchange rates.
D) an appreciation in the exchange rate.
E) a move from fixed to flexible exchange rates.

Question 29

In the monetary small open-economy model with a fixed exchange rate,an increase in the foreign price level

A) shifts the money demand curve to the right.
B) shifts the money demand curve to the left.
C) shifts the money supply curve to the right.
D) shifts aggregate demand to the right.
E) shifts aggregate demand to the left.

Question 30

The large exchange rate depreciations which preceded the Asian Crisis was likely the result of

A) decreased domestic demand for money.
B) decrease in GDP growth.
C) large decrease in foreign investors' demand for Asian currencies..
D) rapid growth of the money supply.
E) high rates of inflation.

Question 31

A key international institution that plays an important role in exchange rate determination is the

A) U.S. Currency Board.
B) European Central Bank.
C) World Bank.
D) International Monetary Fund.
E) United Nations.

Question 32

The Bretton Woods arrangement

A) fixed the value of the U.S. dollar relative to gold.
B) fixed the value of the U.S. dollar relative to the Euro.
C) required foreign central banks to hold certain minimum amounts of gold as foreign exchange reserves.
D) required that member nations, other than the United States, to disband their central banks.
E) required that conditions specifying permissible policy actions be placed on member countries.

Question 33

In the monetary small open-economy model with a fixed exchange rate,the supply of money

A) can be determined by the Bank of Canada within specific ranges.
B) can be determined in conjunction with controlling the price level.
C) cannot be determined independently by the central bank.
D) can be determined by the financial markets.
E) can be determined by the demand for money.

Question 34

For a country with a fixed exchange rate,foreign exchange reserves are

A) an asset of the domestic government.
B) a liability of the domestic government.
C) held by private banks.
D) are unnecessary.
E) dictated by the trade balance.

Question 35

In the European Monetary Union,the supply of Euros

A) is managed by the individual central banks of the member countries.
B) is managed by the European Central Bank.
C) is determined by market forces.
D) automatically varied in response to short-run fluctuations in the exchange rates of the member nations.
E) is managed by the International Monetary Fund.

Question 36

Adoption of a currency board

A) is one method for achieving a soft peg policy.
B) places responsibility for exchange rate management in the hands of an agency that is independent of political influences.
C) mandates the use of currency in all domestic transactions.
D) requires that a centralized institution holds interest-bearing assets denominated in the currency against which the nominal exchange rate is being fixed.
E) mandates how the seigniorage revenue from the printing of money is to be distributed.

Question 37

In the monetary small open-economy model with a flexible exchange rate,an increase in the world real interest rate

A) shifts aggregate demand to the right, increasing output and the real interest rate.
B) shifts aggregate demand to the left, increasing output and the real interest rate.
C) has no real effects.
D) shifts aggregate supply to the right, increasing output and decreasing the real interest rate.
E) shifts aggregate demand to the left, decreasing output and the real interest rate.

Question 38

In the monetary small open-economy model with a flexible exchange rate,an increase in the world real interest rate

A) increases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
B) increases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
C) decreases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
D) decreases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
E) increases domestic output and the nominal exchange rate as long as real money demand is much less responsive to real income than the real interest rate.

Question 39

The International Monetary Fund plays the key role of

A) providing deposit insurance for banks in its member nations.
B) acting as lender of last resort for its member countries' central banks.
C) providing loans to member countries to help finance development projects.
D) enforcing international monetary agreements.
E) ensuring that exchange rates remain fixed to the value of the U.S. dollar.

Question 40

In the monetary small open-economy model with a fixed exchange rate,an increase in the foreign price level

A) increases the domestic money supply and increases the domestic price level.
B) increases the domestic money supply and decreases the domestic price level.
C) decreases the domestic money supply and increases the domestic price level.
D) decreases the domestic money supply and decreases the domestic price level.
E) the domestic price level decreases in proportion to the increase in the foreign price level.

Question 41

In response to a temporary change in total factor productivity,the adoption of capital controls under a fixed exchange rate

A) amplifies the effect of this disturbance on both domestic output and the domestic nominal money supply.
B) amplifies the effect of this disturbance on domestic output and dampens the effect on the domestic nominal money supply.
C) dampens the effect of this disturbance on domestic output and amplifies the effect on domestic nominal money supply.
D) dampens the effect of this disturbance on both domestic output and the domestic nominal money supply.
E) dampens the effect of this disturbance on both domestic output and the real exchange rate.

Question 42

In the monetary small open-economy model with a fixed exchange rate,a temporary decrease in domestic total factor productivity in the absence of any other shocks

A) increases the current account surplus and increases the domestic money supply.
B) increases the current account surplus and decreases the domestic money supply.
C) increases the domestic money supply and decreases the current account surplus.
D) decreases the domestic money supply and decreases the current account surplus.
E) decreases the current account surplus and increases the price level.

Question 43

In the monetary small open-economy model,a fixed exchange rate insulates the domestic price level from

A) both real and nominal shocks from abroad.
B) real shocks from abroad, but not nominal shocks from abroad.
C) nominal shocks from abroad, but not from real shocks from abroad.
D) neither real nor nominal shocks from abroad.
E) increases in foreign price levels, but not from increases in foreign interest rates.

Question 44

In the monetary small open-economy model with a fixed exchange rate,an increase in the world real interest rate

A) increases domestic output and has no effect on the domestic price level.
B) decreases domestic output and has no effect on the domestic price level.
C) increases the domestic price level and has no effect on domestic output.
D) decreases the domestic price level and has no effect on domestic output.
E) decreases the money supply and has no effect on domestic output.

Question 45

An agreement among countries to adopt a common currency is called a

A) central bank consolidation.
B) currency union.
C) monetary compact.
D) common banking treaty.
E) common monetary union.

Question 46

If a country's central bank seeks to stabalize the price level and if real shocks from abroad are important,than

A) a flexible exchange rate is preferable to a fixed exchange rate.
B) flexible and fixed exchange rates are equivalent.
C) the central bank will not be able to realize its goal.
D) a fixed exchange rate is preferable to a flexible exchange rate.
E) the central bank should devalue under flexible exchange rates.

Question 47

In the monetary small open-economy model with a fixed exchange rate,a temporary decrease in domestic total factor productivity in the absence of any other shocks

A) decreases output and the current account surplus.
B) increases output and the current account surplus.
C) increases output and decreases the current account surplus.
D) decreases output and increases the current account surplus.
E) leaves output unchanged and decreases the current account surplus.

Question 48

The adoption of capital controls makes

A) everyone in the domestic economy better off.
B) some domestic residents better off and some worse off, although on average welfare increases.
C) some domestic residents better off and some worse off, although on average welfare decreases.
D) everyone in the domestic economy worse off.
E) the economy suffer a loss in economic efficiency.

Question 49

A natural region over which a single currency dominates as a medium of exchange is called

A) sovereign nation.
B) monetary union area.
C) common currency area.
D) currency union.
E) national sovereignty.

Question 50

In response to a temporary change in total factor productivity,the adoption of capital controls under a flexible exchange rate

A) amplifies the effect of this disturbance on both domestic output and the nominal exchange rate.
B) amplifies the effect of this disturbance on domestic output and dampens the effect on the nominal exchange rate.
C) dampens the effect of this disturbance on domestic output and amplifies the effect on the nominal exchange rate.
D) dampens the effect of this disturbance on both domestic output and the nominal exchange rate.
E) dampens the effect of this disturbance on both domestic output and the real exchange rate.

Question 51

In the monetary small open-economy model with a fixed exchange rate,a devaluation of the domestic currency in the absence of any other shocks

A) increases the current account surplus and has no effect on the domestic money supply.
B) decreases the current account surplus and has no effect on the domestic money supply.
C) increases the domestic money supply and has no effect on the current account surplus.
D) decreases the domestic money supply and has no effect on the current account surplus.
E) decreases the current account surplus and increases the price level.

Question 52

A capital inflow occurs when a

A) domestic resident purchases a domestic asset.
B) domestic resident purchases a foreign asset.
C) foreign resident purchases a domestic asset.
D) foreign resident purchases a foreign asset.
E) imports exceed exports.

Question 53

Research on capital controls in Chile show that

A) capital controls incur relative small welfare costs but are largely ineffective.
B) capital controls incur large welfare costs and are generally effective.
C) capital controls are generally effective and should be implemented in certain countries.
D) capital controls were effective in Chile but are unlikely to be so in other parts of the world.
E) capital controls should remain in place in Chile.

Question 54

In the monetary small open-economy model,a flexible exchange rate insulates the domestic price level from

A) both real and nominal shocks from abroad.
B) real shocks from abroad, but not from nominal shocks from abroad.
C) nominal shocks from abroad, but not from real shocks from abroad.
D) neither real nor nominal shocks from abroad.
E) increases in foreign interest rates, but not from increases in foreign price levels.

Question 55

The acquisition of a new physical asset by a foreign resident is called

A) foreign direct investment.
B) foreign capital investment.
C) a portfolio inflow.
D) a portfolio outflow.
E) capital outflow.

Question 56

A capital outflow occurs when a

A) domestic resident purchases a domestic asset.
B) domestic resident purchases a foreign asset.
C) foreign resident purchases a domestic asset.
D) foreign resident purchases a foreign asset.
E) exports exceed imports.

Question 57

The acquisition of a domestic financial asset by a foreign resident is called

A) foreign direct investment.
B) foreign capital investment.
C) a portfolio inflow.
D) a portfolio outflow.
E) capital outflow.

Question 58

Capital controls refer to

A) controls placed on central banks to maintain fixed exchange rates.
B) barriers to trade and investment.
C) government restrictions on the trade of assets across international borders.
D) increased movements in the nominal exchange rate.
E) increased fluctuations in foreign exchange reserves under a fixed exchange rate regime.

Question 59

If a country's central bank seeks to stabalize the price level and if nominal shocks from abroad are important,than

A) a flexible exchange rate is preferable to a fixed exchange rate.
B) flexible and fixed exchange rates are equivalent.
C) the central bank will not be able to realize its goal.
D) a fixed exchange rate is preferable to a flexible exchange rate.
E) the central bank should devalue under fixed exchange rates.

Question 60

The balance of payments is zero

A) because each transaction has equal and opposite entries in the accounts.
B) because market forces ensure that this is so.
C) only if the current account balance is zero.
D) only if the capital account balance is zero.
E) if the capital inflows equal capital outflows.

Question 61

Determine the impact of an increase in total factor productivity on domestic aggregate output,absorption,the current account surplus,the nominal exchange rate,and the price level.Assume a flexible exchange rate.