Deck 10: Exchange Rates, business Cycles, and Macroeconomic Policy

Question 1

If all countries produce the same good (or the same set of goods)and goods are freely traded among countries,so that the real exchange rate equals one,then the relationship between domestic and foreign prices and the nominal exchange rate is

A)P = PFₒᵣ / enₒm.
B)P = enₒm × PFₒᵣ.
C)enₒm = P × PFₒᵣ.
D)P = PFₒᵣ.

Answer 1

P = PFₒᵣ / enₒm.

Question 2

An index that shows the nominal exchange rate for the Canadian dollar against the currencies of Canada's trading partners is called

A)real exchange rate.
B)purchasing power parity.
C)effective exchange rate.
D)nominal exchange rate.

Answer 2

effective exchange rate.

Question 3

The real exchange rate is

A)the price of one currency in terms of another.
B)the price of domestic goods relative to foreign goods.
C)the quantity of gold that can be purchased by one unit of currency.
D)the difference in interest rates between two countries.

Answer 3

the price of domestic goods relative to foreign goods.

Question 4

When the nominal exchange rate rises

A)the domestic currency buys more units of foreign currency,and the domestic currency has depreciated.
B)the domestic currency buys fewer units of foreign currency,and the domestic currency has depreciated.
C)the domestic currency buys more units of foreign currency,and the domestic currency has appreciated.
D)the domestic currency buys fewer units of foreign currency,and the domestic currency has appreciated.

Question 5

When the domestic currency strengthens under a fixed-exchange rate system,this is called

A)a depreciation.
B)an appreciation.
C)a devaluation.
D)a revaluation.

Question 6

The nominal exchange rate between the Canadian dollar and the Japanese yen is 80.It means that

A)a dollar can buy 80 yen in the foreign exchange market.
B)a yen can buy 80 cents in the foreign exchange market.
C)a dollar cay buy about 0.012 yen in the foreign exchange market.
D)a yen can buy 0.20 cents in the foreign exchange market.

Question 7

The exchange rate is

A)the price of one currency in terms of another.
B)the price of domestic goods relative to foreign goods.
C)the quantity of gold that can be purchased by one unit of currency.
D)the difference in interest rates between two countries.

Question 8

From January 1989 to January 1991,the yen/dollar exchange rate rose from 111 yen/dollar to 115 yen/dollar,while the dollar/pound exchange rate rose from 2.09 dollars/pound to 2.24 dollars/pound.As a result

A)the dollar appreciated relative to the yen,but depreciated relative to the pound.
B)the dollar depreciated relative to the yen,but appreciated relative to the pound.
C)the dollar appreciated relative to both the yen and the pound.
D)the dollar depreciated relative to both the yen and the pound.

Question 9

The European Monetary System is an example of

A)a flexible-exchange-rate system.
B)a floating-exchange-rate system.
C)a fixed-exchange-rate system.
D)an exchange-rate union.

Question 10

The Bretton Woods system relied on

A)a flexible-exchange-rate system.
B)a floating-exchange-rate system.
C)a fixed-exchange-rate system.
D)an exchange-rate union.

Question 11

When the nominal exchange rate falls

A)the domestic currency buys more units of foreign currency,and the domestic currency has depreciated.
B)the domestic currency buys fewer units of foreign currency,and the domestic currency has depreciated.
C)the domestic currency buys more units of foreign currency,and the domestic currency has appreciated.
D)the domestic currency buys fewer units of foreign currency,and the domestic currency has appreciated.

Question 12

The Canada-U.S.nominal exchange and Canadian-dollar effective exchange rate are expected to move together because

A)most of Canada's trade is with the U.S.
B)the trade deficit between the U.S.and Canada is not significant.
C)the U.S.dollar and Canadian dollar are closely related to each other.
D)the trade deficits between Canada and its trading partners are not significant.

Question 13

The real exchange rate is

A)the number of foreign goods that can be obtained in exchange for one unit of the domestic good.
B)the nominal exchange rate minus the rate of inflation.
C)the amount of foreign currency.
D)the amount of domestic currency that can be obtained in exchange for one unit of the foreign currency.

Question 14

The idea that similar foreign and domestic goods,or baskets of goods,should have the same price when priced in terms of the same currency is called

A)equity.
B)purchasing power parity.
C)efficiency.
D)the tragedy of the commons.

Question 15

A fall in the real exchange rate is called

A)a real depreciation.
B)a real appreciation.
C)a real revaluation.
D)a real devaluation.

Question 16

Which of the following statements is false?

A)The Bretton Woods system is the most recent example of a fixed exchange rate system.
B)Under the gold standard system,each country agreed to buy or sell gold in exchange for currency at a fixed exchange rate.
C)Under the Bretton Woods system,the values of various currencies were fixed in terms of the U.S.dollar,which was set at $35 per ounce of gold.
D)The recession in the U.S.economy was the main reason for the breakdown of the Bretton Woods system in the early 1970s.

Question 17

An exchange-rate system in which the nominal exchange rate is set by the government is known as

A)a flexible-exchange-rate system.
B)a floating-exchange-rate system.
C)a fixed-exchange-rate system.
D)an exchange-rate union.

Question 18

Purchasing power parity means that

A)ᵉnom= PFₒᵣ / P.
B)P = PFₒᵣ.
C)P = ᵉnom / PFₒᵣ.
D)ᵉnom = mc².

Question 19

Three-wheel cars made in North Edsel are sold for 5000 pounds.Four-wheel cars made in South Edsel are sold for 10,000 marks.The real exchange rate between North and South Edsel is four three-wheel cars for three four-wheel cars.The nominal exchange rate between the two countries is

A)0.50 marks/pound.
B)0.66 marks/pound.
C)1.50 marks/pound
D)2.00 marks/pound.

Question 20

Three-wheel cars made in North Edsel are sold for 5000 pounds.Four-wheel cars made in South Edsel are sold for 10,000 marks.The nominal exchange rate between the two countries is three marks per pound.The real exchange rate is

A)0.50 three-wheel cars per four-wheel car.
B)0.66 three-wheel cars per four-wheel car.
C)1.50 three-wheel cars per four-wheel car.
D)2.00 three-wheel cars per four-wheel car.

Question 21

A decline in domestic output would cause a ________ in net exports and a ________ in the exchange rate.

A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Question 22

Which of the following statements best describes the movement of the Canadian dollar during the 1970s?

A)The dollar rose steadily.
B)The dollar was stable.
C)The dollar was stable until 1976 and fell thereafter.
D)The dollar fell until 1976 and rose thereafter.

Question 23

Suppose the dollar/franc exchange rate rises.Then

A)French firms will import more from the United States into France.
B)Canadian firms will export less to France.
C)the dollar is more valuable relative to the franc.
D)the franc is less valuable relative to the dollar.

Question 24

If the nominal exchange rate rises 2%,domestic inflation is 3%,and foreign inflation is 4%,what is the percent change in the real exchange rate?

A)5%
B)3%
C)1%
D)-1%

Question 25

Purchasing power parity does NOT hold in the short to medium run because

A)exports don't equal imports.
B)exchange rates fluctuate too much.
C)most business cycles are caused by shocks to aggregate demand.
D)countries produce different goods.

Question 26

Under a flexible-exchange-rate system,an increase in the demand for Japanese yen would cause the Canadian dollar/Japanese yen exchange rate to

A)fall.
B)rise.
C)remain unchanged because supply also increases.
D)remain unchanged because the exchange rate is set by the Central Bank.

Question 27

When the rate of appreciation of the nominal exchange rate equals the foreign inflation rate minus the domestic inflation rate,we say there is

A)relative purchasing power parity.
B)purchasing power parity.
C)a Phillips curve.
D)an aggregate supply shock.

Question 28

When the British pound rises in value relative to other currencies,then

A)goods imported into Britain rise in price.
B)British exports rise in price.
C)neither British exports nor imports rise in price.
D)both British exports and imports rise in price.

Question 29

According to the "beachhead effect," in order to undo the effects of a strong-dollar period,the real value of the dollar

A)must fall to at least half of its value before appreciation of the dollar began.
B)must fall to the value it had before appreciation of the dollar began.
C)must fall to a much lower level than it had before appreciation of the dollar began.
D)must actually appreciate before it depreciates to undo the effects of a strong-dollar period.

Question 30

Suppose the French franc rises against the British pound but falls against the German mark.What happens to the prices of goods imported into France?

A)Both British and German goods fall in price.
B)Both British and German goods rise in price.
C)British goods rise in price while German goods fall in price.
D)British goods fall in price while German goods rise in price.

Question 31

Suppose the dollar/franc exchange rate falls.Then

A)French firms will import more from Canada into France.
B)Canadian firms will export more to France.
C)the dollar is more valuable relative to the franc.
D)the franc is more valuable relative to the dollar.

Question 32

Suppose the Big Macs are more expensive in Canada than in China,when measured by U.S.dollar.According to the purchasing power parity theorem,

A)the Canadian dollar will appreciate against the Chinese yuan.
B)the Chinese yuan will appreciate against the Canadian dollar.
C)the Chinese yuan will depreciate against the Canadian dollar.
D)both Canadian dollar and the Chinese yuan will depreciate against the U.S.dollar.

Question 33

Relative purchasing power parity occurs when

A)purchasing power parity holds between two countries.
B)purchasing power parity only holds in recessions.
C)the nominal exchange rate is constant.
D)the real exchange rate is constant.

Question 34

Purchasing power parity does NOT hold in the short to medium run because

A)exports don't equal imports.
B)exchange rates aren't internationally traded.
C)some goods aren't internationally traded.
D)most business cycles are caused by shocks to aggregate demand.

Question 35

In a flexible-exchange-rate system,the value of a currency is determined by

A)the government.
B)the intersection of the IS and LM curves.
C)the demand and supply for the currency in the foreign exchange market.
D)Swiss gnomes.

Question 36

Which of the following statements best describes the movement of the Canadian dollar against the U.S.dollar in the period 2002-2008?

A)The Canadian dollar appreciated because demand for natural resources such as oil increased.
B)The Canadian dollar depreciated because demand for commodity decreased.
C)The Canadian dollar appreciated because the U.S.exports to Canada increased.
D)The Canadian dollar depreciated because the interest rate in Canada was lower than U.S.

Question 37

An appreciation of the dollar causes

A)an increase in Canadian exports.
B)a reduction in Canadian exports.
C)an increase in the prices of Canadian imports.
D)an increase in the prices of Canadian exports.

Question 38

If the real exchange rate rises 2%,domestic inflation is 3%,and foreign inflation is 4%,what is the percent change in the nominal exchange rate?

A)5%
B)3%
C)1%
D)-1%

Question 39

Empirical evidence shows that in the short run,purchasing power parity ________,and in the long run,purchasing power parity ________.

A)holds;does not hold
B)holds;holds
C)does not hold;holds
D)does not hold;does not hold

Question 40

There's been a real depreciation of the dollar over the past month.In the long run,you would expect the quantity of Canadian imports to ________ and the quantity of Canadian exports to ________.

A)fall;fall
B)rise;rise
C)fall;rise
D)rise;fall

Question 41

Which of the following statements is true?

A)The open-economy IS curve is derived in the same way that the closed-economy IS curve is derived.
B)The closed-economy IS curve is downward sloping,but the open-economy IS curve is upward sloping.
C)Some factors that shift the IS curve in the closed economy in one direction will shift the IS curve in the open economy in the opposite direction.
D)Factors that raise a country's current net exports,given domestic output and the domestic real interest rate,shift the open-economy IS curve up.

Question 42

Which of the following changes would cause Canadian net exports to decrease?

A)a decrease in the real value of the dollar
B)a decrease in Canadian income
C)an increase in foreign income
D)a shift in demand by Canadian consumers away from domestically produced goods

Question 43

A decrease in the foreign real interest rate would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.

A)rise;shift up
B)rise;shift down
C)fall;shift up
D)fall;shift down

Question 44

Under a fixed exchange rate system,if the nominal interest parity condition holds,

A)the nominal interest rates in domestic and foreign economies must be the same.
B)the inflation rates in domestic and foreign economy must be the same.
C)the real exchange rates in domestic and foreign economies must be the same.
D)the net exports in domestic and foreign economies must be the same.

Question 45

An increase in the Canadian money supply would cause the value of the dollar to ________ and net Canadian exports to ________ in the short run using a Keynesian model.

A)rise;rise
B)fall;rise
C)rise;fall
D)fall;fall

Question 46

A temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.

A)lower;increase
B)lower;decrease
C)raise;increase
D)raise;decrease

Question 47

Which of the following is NOT a reason for why domestic and foreign interest rates might differ?

A)differences in transaction costs
B)differences in default risk
C)expected changes in exchange rate
D)differences in the bonds interest rate

Question 48

In a small open economy with flexible exchange rates,a fiscal contraction would

A)increase domestic output.
B)decrease domestic output.
C)have no effect on domestic output.
D)cause an exchange rate appreciation.

Question 49

In the short run in the Keynesian model,an increase in the domestic money supply would cause domestic output to ________ and the domestic real interest rate to ________.

A)rise;rise
B)fall;rise
C)rise;fall
D)fall;fall

Question 50

The Canadian real interest rate rises relative to the British real interest rate.British net exports ________ and the British exchange rate ________.

A)increase;rises
B)increase;falls
C)decrease;rises
D)decrease;falls

Question 51

The Canadian interest rate is 4 percent and the U.S.interest rate is 6 percent.If the interest parity condition holds,we expect

A)the Canadian dollar to appreciate by 2 percent.
B)the Canadian dollar to depreciate by 6 percent.
C)the U.S.dollar to depreciate 2 percent.
D)the U.S.dollar to appreciate by 2 percent.

Question 52

A decline in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate.

A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Question 53

In a Keynesian model,a temporary decrease in government purchases would cause output to ________ and the domestic real interest rate to ________.

A)not change;increase
B)not change;decrease
C)decrease;increase
D)decrease;decrease

Question 54

In an open economy,an increase in net exports because of increased demand for domestic products by foreigners should cause the domestic real interest rate to ________ and should cause desired saving minus desired investment to ________.

A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Question 55

The net export crowding out effect refers to a situation in which

A)a fiscal expansion causes the local currency to appreciate,reducing the net exports.
B)a fiscal contraction causes the local currency to depreciate,reducing the net exports.
C)a monetary expansion causes the local currency to appreciate,reducing the net exports.
D)a monetary expansion causes the local currency to depreciate,increasing the net exports.

Question 56

All else being equal in a classical model,a temporary decrease in government expenditures in the United States would cause the Canadian real interest rate to ________ and the Canadian price level to ________.

A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Question 57

Which of the following statements describes the interest parity condition?

A)In the equilibrium,all the prices must be the same in the international market.
B)In the equilibrium,the inflation rates must be the same in the international market.
C)In the long run,the exchange rates must be the same in the international market.
D)In the equilibrium,the rates of return on assets of comparable risk and liquidity must be the same in the international market.

Question 58

Goods market equilibrium in the open economy occurs when

A)desired saving equals desired investment.
B)output equals desired consumption plus desired investment plus government spending.
C)desired consumption equals desired investment.
D)desired saving minus desired investment equals net exports.

Question 59

A decrease in foreign output would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.

A)rise;shift up
B)rise;shift down
C)fall;shift up
D)fall;shift down

Question 60

Which of the following changes would cause Canadian net exports to increase?

A)an increase in the real value of the dollar
B)an increase in Canadian income
C)an increase in foreign income
D)a shift in demand by Canadian consumers away from domestically produced goods

Question 61

Compared to a system of flexible exchange rates,currency unions have the disadvantage of

A)requiring all its members to share a common monetary policy.
B)allowing exchange rates to float.
C)requiring every country to share a common fiscal policy.
D)decreasing the sacrifice ratio.

Question 62

In a small open economy with flexible exchange rates,a contractionary monetary policy would

A)cause an exchange rate depreciation in the short run.
B)increase domestic output in the short run.
C)decrease domestic output in the short run.
D)decrease domestic output in the long run.

Question 63

Compared to a system of fixed exchange rates,currency unions are beneficial because they

A)allow exchange rates to float.
B)allow every country to have an independent monetary policy.
C)reduce the costs of trading goods and assets.
D)restrict what countries can do with fiscal policy.

Question 64

According to the classical model,an increase in the Canadian nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.

A)depreciate;appreciate
B)appreciate;depreciate
C)depreciate;not change
D)appreciate;not change

Question 65

The Intertemporal external balance curve will be shifted down if

A)foreign income rises.
B)domestic income rises.
C)the money supply expands.
D)there is a shift in demand away from home goods.

Question 66

Under a system of fixed exchange rates,what happens if a country's currency is overvalued?

A)The Central Bank loses official reserve assets.
B)The Central Bank gains official reserve assets.
C)The currency appreciates.
D)The exchange rate rises.

Question 67

International businesses like a fixed-exchange-rate system because

A)they like large swings in currency values when devaluation or revaluation occur.
B)they profit by speculating on devaluation or revaluation.
C)they can plan better if they know what the exchange rate will be.
D)fixed exchange rates are economically efficient.

Question 68

Under a system of fixed exchange rates,what happens if a country's currency is undervalued?

A)The Central Bank loses official reserve assets.
B)The Central Bank gains official reserve assets.
C)The currency depreciates.
D)The exchange rate falls.

Question 69

When a group of countries agree to share a common currency,they are said to have formed a

A)currency union.
B)welfare state.
C)monetary alliance.
D)monetary cartel.

Question 70

Currency unions are rare because

A)they're to no one's advantage.
B)countries are reluctant to give up having their own currencies.
C)having flexible exchange rates has the same benefits and none of the costs.
D)speculative attacks are likely to occur.

Question 71

An overvalued currency arises when

A)the demand for the currency exceeds the supply.
B)the Central Bank gains reserves while maintaining the exchange rate.
C)the Central Bank keeps the official rate above the fundamental value.
D)the Central Bank keeps the official rate below the fundamental value.

Question 72

An increase in the Canadian money supply would cause Canadian output to ________ and the Canadian net exports to ________ in the short run using a Keynesian model.

A)rise;rise
B)fall;rise
C)rise;fall
D)fall;fall

Question 73

If investors are to hold both Canadian and foreign bonds,the interest rate on Canadian bonds

A)must equal that of foreign bonds.
B)must always exceed that on foreign bonds.
C)must equal that on foreign bonds plus the expected rate of depreciation.
D)must equal that on foreign bonds,on average.

Question 74

You have just noticed that the dollar depreciated and you suspect that the Canadian government was behind this change.Which would you choose as the most likely cause of this depreciation in the real exchange rate?

A)an increase in the money supply
B)a decrease in the money supply
C)a temporary increase in government purchases
D)a temporary decrease in taxes

Question 75

The equilibrium real exchange rate will rise

A)if there is a rise in domestic income.
B)if there is a rise in foreign interest rates.
C)if there is a rise in foreign income.
D)if there is a shift in demand away from the home good.

Question 76

Which of the following statements about the effectiveness of the fiscal and the monetary policies in response to a recession in a small open economy is true?

A)In recession,fiscal policy is ineffective,but monetary policy is effective.
B)In recession,fiscal policy is effective,but monetary policy is ineffective.
C)In recession,both fiscal and monetary policies are effective.
D)In recession,both fiscal and monetary policies are ineffective.

Question 77

The reason that fiscal policy is ineffective during a recession is that

A)an expansionary fiscal policy will lead to higher interest rates,appreciation of exchange rate,and a reduction in net exports.
B)an expansionary fiscal policy will lead to lower interest rates,depreciation of exchange rate,and an increase in net exports.
C)an expansionary fiscal policy will lead to lower interest rates,appreciation of exchange rate,and a reduction in net exports.
D)an expansionary fiscal policy will lead to higher interest rates,appreciation of exchange rate,and an increase in net exports.

Question 78

Despite the fact that fiscal policy is not effective when dealing with recession,Canadian government conducted an expansionary fiscal policy in response to the 2008-2009 financial crisis and recession.What might explain best the rationale for this policy?

A)Since the U.S.did not conduct an expansionary fiscal policy,Canada had to do it.
B)Canada had a budget surplus and could afford to conduct an aggressive expansionary policy.
C)The muted response proved politically unpopular,and it was increasingly apparent that the recession was worldwide in scope,requiring a coordinated response internationally.
D)No other countries conducted an expansionary fiscal policy,so Canada had to do it.

Question 79

Compared to a system of fixed exchange rates,currency unions are beneficial because they

A)restrict what countries can do with fiscal policy.
B)allow exchange rates to float.
C)allow every country to have an independent monetary policy.
D)eliminate the possibility of speculative attacks.

Question 80

Which of the following best represents Canada's fiscal and monetary policies in response to the 2008-2009 financial crisis and recession?

A)Government followed a contractionary fiscal policy,but Bank of Canada followed an expansionary monetary policy.
B)Government followed an expansionary fiscal policy,but Bank of Canada followed a contractionary monetary policy.
C)Both government and Bank of Canada followed an expansionary policy.
D)Both government and Bank of Canada followed a contractionary policy.