Deck 18: Openness in Goods and Financial Markets

Question 1

Suppose that the domestic interest rate is 5% and that the foreign interest rate is 8%. Also assume that the domestic currency is expected to depreciate by 4% during the coming year. Given this information, we know that:

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.

Answer 1

individuals will only hold foreign bonds.

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:

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.

Answer 2

individuals will only hold foreign bonds.

Question 3

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

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.

Answer 3

All of the above.

Question 4

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

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

Question 5

The average ratio of exports to GDP for Australia during 2000- 2011 is equal to:

A) 21%.
B) 11%.
C) 20%.
D) 5%.
E) 25%.

Question 6

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 appreciate by 4% during the coming year. Given this information, we know that:

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.

Question 7

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

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

Question 8

Which of the following, all else fixed, will cause the real exchange rate to increase?

A) A nominal depreciation.
B) An increase in the foreign price level.
C) A decrease in the domestic price level.
D) An increase in domestic stock prices.
E) A nominal appreciation.

Question 9

Suppose E decreases by 3%. Which of the following will have occurred as a result of this decrease in E?

A) Real appreciation if P decreases by 3%.
B) Nominal depreciation by 3%.
C) Effective depreciation by 3%.
D) Nominal appreciation by 3%.
E) Real depreciation if P increases by 3%.

Question 10

Assume that the interest rate in a foreign country is 6% and that the foreign currency is expected to depreciate by 2% during the year. For each dollar that an Australian resident invests in foreign bonds, he/she can expect to get back a total of:

A) $0.94.
B) $1.24.
C) $1.14.
D) $1.04.
E) $0.84.

Question 11

The Smoot- Hawley Act:

A) decreased tariffs on U.S. imports, which led to a contraction of world trade.
B) increased tariffs on U.S. imports, which led to a contraction of world trade.
C) increased competition in global markets, which led to a contraction of world trade.
D) decreased tariffs on U.S. imports, which led to an expansion of world trade.
E) increased competition in global markets, which led to an expansion of world trade.

Question 12

Another name for "current account transactions" is

A) "net transfers received."
B) "transactions above the line."
C) "everyday account transactions."
D) "investment income."
E) "capital account transactions."

Question 13

Assume that the nominal exchange rate decreases by 6%. If both domestic and foreign prices do not change, we know that:

A) foreign goods are now relatively more expensive.
B) foreign goods are now relatively cheaper.
C) domestic goods are now relatively more expensive.
D) Both A and C.
E) Both B and C.

Question 14

When the Australian dollar depreciates relative to the euro, the euro price of the Australian dollar:

A) decreases.
B) changes in the next period.
C) does not change.
D) increases.
E) increases or decreases, depending on the amount of the depreciation.

Question 15

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:

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

Question 16

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

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.

Question 17

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:

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 18

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

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 19

The nominal exchange rate (E) is defined as:

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 20

Which of the following will cause a real depreciation?

A) An increase in P*.
B) A decrease in E.
C) A decrease in P.
D) All of the above.
E) Both A and B.

Question 21

In a country like Kuwait, which earns substantial income from holding the stocks and bonds of other countries, we would expect:

A) GNP to be larger than GDP.
B) GDP to be larger than GNP.
C) a current account surplus larger than GDP.
D) a current account surplus larger than GNP.
E) a current account deficit.

Question 22

An increase in the real exchange rate indicates that:

A) domestic goods are now relatively more expensive.
B) domestic goods are now relatively cheaper.
C) foreign goods are now relatively cheaper.
D) Both A and C.
E) Both B and C.

Question 23

Which of the following has occurred for Australia since 1960?

A) The ratio of exports to GDP and the ratio of imports to GDP have stayed relatively constant.
B) The ratio of exports to GDP has increased while the ratio of imports to GDP has decreased.
C) The ratio of exports to GDP has decreased and the ratio of imports to GDP has decreased.
D) The ratio of exports to GDP has decreased and the ratio of imports to GDP has increased.
E) The ratio of exports to GDP and the ratio of imports to GDP have both increased.

Question 24

Suppose you have one Australian dollar. Which of the following expressions represents the amount of foreign currency you can obtain with that one Australian dollar?

A) t 1+ st.
B) 1/ E e
C) E e .
D) st/ s e .
E) Et.

Question 25

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

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 26

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

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 27

Which of the following events will cause the smallest change in the real exchange rate (s)?

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

Question 28

A tariff is

A) a restriction on the quantity of imported goods allowed into the country.
B) a foreign bond.
C) a barter arrangement between importers and exporters.
D) a tax on imported goods.
E) an order for foreign goods that have not yet been delivered.

Question 29

Estimates are that tradable goods in Australia in 1997 account for approximately what share of GDP in Australia?

A) 25%.
B) 35%.
C) 20%.
D) 10%.
E) 15%.

Question 30

Suppose there is a real appreciation in favour of Australia. Which of the following must have occurred?

A) Foreign currency has become more expensive in Australian dollars.
B) The foreign price level has increased relative to the Australian price level.
C) Foreign goods have become more expensive to Australians.
D) Foreign goods have become less expensive to Australians.
E) Foreign currency has become less expensive in Australian dollars.

Question 31

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

A) United Kingdom.
B) China.
C) New Zealand.
D) Hong Kong.
E) Singapore.

Question 32

Assume that the nominal exchange rate decreases by 3%. If both domestic and foreign prices do not change, we know that:

A) foreign goods are now relatively cheaper.
B) domestic goods are now relatively more expensive.
C) domestic goods are now relatively cheaper.
D) Both A and C.
E) Both B and C.

Question 33

Assume that the interest parity condition holds. If the domestic interest rate is 12% and the foreign interest rate is 9% then given this information, we would expect that:

A) the foreign currency is expected to depreciate by 3%.
B) the domestic currency is expected to depreciate by 3%.
C) individuals will only hold foreign bonds.
D) individuals will only hold domestic bonds.
E) the domestic currency is expected to appreciate by 3%.

Question 34

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

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

Question 35

Suppose you have one Australian dollar with which you wish to purchase U.K. (one- year) bonds in period t. Which of the following expressions represents the amount of British pounds you will receive in period t+1 from purchasing U.K. bonds in period t?

A)
B)
C)
D)
E)

Question 36

If the price level in the UK is 8.0, the price level in Australia is 6.0, and it costs 0.65 pound to buy one Australian dollar, then the real exchange rate between Australia and the UK (the price of Australian goods in terms of British goods) is:

A) 1.49.
B) 0.49.
C) 1.19.
D) 0.79.
E) 0.29.

Question 37

During 2000- 2011, which of the following countries had the lowest ratio of exports to GDP?

A) India.
B) Japan.
C) The U.S.
D) Australia.
E) China.

Question 38

When the Australian dollar appreciates, we know that:

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 39

In 2012, Australia's largest trading partner was:

A) New Zealand.
B) European Union.
C) China.
D) Japan.
E) the U.S.

Question 40

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

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

Question 41

Assume that the interest parity condition holds. If the domestic interest rate is 4% and the foreign interest rate is 8% then given this information, we would expect that:

A) individuals will only hold domestic bonds.
B) the domestic currency is expected to appreciate by 4%.
C) the foreign currency is expected to appreciate by 4%.
D) the domestic currency is expected to depreciate by 4%.
E) individuals will only hold foreign bonds.

Question 42

A decrease in the real exchange rate indicates that:

A) foreign goods are now relatively cheaper.
B) domestic goods are now relatively more expensive.
C) foreign goods are now relatively more expensive.
D) Both A and C.
E) Both B and C.

Question 43

Which of the following best defines the real exchange rate?

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

Question 44

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:

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 45

Explain the three distinct notions of openness.

Question 46

In 2011, exports or imports as a percentage of GDP for Australia are approximately:

A) between 15% and 20%.
B) between 5% and 10%.
C) between 1% and 5%.
D) between 20% and 25%.
E) between 10% and 15%.

Question 47

Which of the following will cause a real appreciation?

A) A decrease in P*.
B) A decrease in P.
C) A decrease in E.
D) Both A and C.
E) Both B and C.

Question 48

Assuming that the interest parity condition holds, what type of information is contained in interest rate differentials between domestic and foreign bonds? Explain.

Question 49

When Australia has a current account deficit, we know that it is also:

A) running a capital account deficit.
B) running a balanced trade account.
C) lending to the rest of the world.
D) borrowing from the rest of the world.
E) suffering from positive investment income.

Question 50

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

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.

Question 51

Assume that the uncovered interest parity condition holds. Also assume that the Australian interest rate is greater than the Japanese interest rate. Given this information, we know that investors expect:

A) the Australian interest rate to fall.
B) the yen to depreciate.
C) the Australian dollar- pound exchange rate to remain fixed.
D) the Australian dollar to appreciate.
E) the yen to appreciate.

Question 52

Because Australia traditionally gives more foreign aid than it receives, Australia traditionally has a negative value for:

A) the trade balance.
B) the current account balance.
C) the capital account balance.
D) net transfers received.
E) investment income.

Question 53

Which of the following expressions represents the real exchange rate (s)?

A) EP*/P.
B) EP.
C) EP*.
D) EP/P*.
E) E.

Question 54

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) 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 55

Which of the following expressions represents the Australian dollar price of foreign currency?

A) 1/E.
B) EP*/P.
C) EP*.
D) EP.
E) EP/P*.

Question 56

In Australia, over the past fifty years:

A) exports as a percentage of GDP have decreased, while imports as a percentage of GDP have increased.
B) exports as a percentage of GDP have increased, while imports as a percentage of GDP have decreased.
C) both exports and imports as a percentage of GDP have increased.
D) both exports and imports as a percentage of GDP have decreased.
E) both exports and imports as a percentage of GDP have remained constant.

Question 57

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

A) trade barriers.
B) each country's size.
C) geography.
D) Both A and B.
E) Both B and C.

Question 58

A nominal depreciation of the Italian lira against all currencies indicates that:

A) the lira price of foreign currency has decreased.
B) the Italian real exchange rate will not change if the price level in Italy falls.
C) the Italian real exchange rate will rise if the price level in Italy falls.
D) the number of units of foreign currency that one can obtain with one lira has increased.
E) the lira price of foreign currency has increased.

Question 59

Suppose you have one Australian dollar with which you wish to purchase European (one- year) bonds in period t. Which of the following expressions represents the amount of Australian dollars you will receive in period t+1 from purchasing European bonds in period t?

A)
B)
C)
D)
E)

Question 60

Suppose that the domestic interest rate is 2% and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to appreciate by 3% during the coming year. Given this information, we know that:

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.

Question 61

First, write out the expression/equation for the real exchange rate. Second, explain all factors that determine the real exchange rate.

Question 62

What are the differences between the real exchange rate and nominal exchange rate? Explain.

Question 63

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

Question 64

Discuss what factors could cause a real depreciation.

Question 65

Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate. What does this imply about the current versus future expected exchange rate? Explain.

Question 66

Explain the difference between gross domestic product and gross national product.

Question 67

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.

Question 68

Explain why a comparison between the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.

Question 69

Suppose the interest parity condition holds. Also assume that the one- year interest rate in Australia (home country) is 5.5% and that the one- year interest rate in Canada (foreign country) is 5.5%. What does this imply about the current versus future expected exchange rate (for the Australian and Canadian dollars)? Explain.