Deck 14: Economic Interdependence

Question 1

Which of the following statements is true?

A)A shock affects all countries to the same extent.
B)Some shocks are positive and some are negative.
C)Some shocks benefit one country and harm others.
D)​The same shock cannot affect more than one country at once.

Answer 1

C

Question 2

Shocks are transmitted internationally by all of the following mechanisms EXCEPT by

A)trade effects.
B)interest-rate effects.
C)exchange-rate effects.
D)expected-inflation effects.

Answer 2

D

Question 3

From 1970 to 2000, the U.S.dollar

A)appreciated against the U.K.pound and depreciated against the Canadian dollar.
B)depreciated against the U.K.pound and appreciated against the Canadian dollar.
C)appreciated against both the U.K.pound and the Canadian dollar.
D)depreciated against both the U.K.pound and the Canadian dollar.

Answer 3

C

Question 4

When a country's currency appreciates,

A)the prices of its exports and imports both rise.
B)the price of its exports rise, and the price of its imports fall.
C)the prices of its exports and imports both fall.
D)the price of its exports fall and the price of its imports rise.

Question 5

Suppose, that participants in the underground economy in Europe suddenly decide to switch from using dollars to using euros.Thus, they supply a huge volume of dollars to the market in exchange for euros.As a result,

A)the dollar appreciates and the euro depreciates.
B)the dollar and the euro both appreciate.
C)the dollar depreciates and the euro appreciates.
D)the dollar and the euro both depreciate.

Question 6

Suppose, the cost of production of a widget in Mexico is 5 pesos.Assume that initially the exchange rate between the peso and the dollar is 2 pesos per dollar.Later, the exchange rate changes to 2.5 pesos per dollar.In the initial situation, a widget sold in the U.S.would be priced at_____; after the change in the exchange rate, the widget would be priced at______ .

A)$2.50; $2.00
B)$2.50; $3.12
C)$0.50; $0.40
D)$0.40; $0.50

Question 7

If one country is hit with a shock that increases the value of its currency and causes its net exports to decline and the net exports and income of other countries to rise, then the business cycle is being transmitted internationally through _____effect.

A)a trade
B)an interest-rate
C)an exchange-rate
D)an expected-inflation

Question 8

If the nominal exchange rate is 5 French francs per U.S.dollar, then the exchange rate can also be written as

A)5 dollars per franc.
B)0.5 dollars per franc.
C)0.25 dollars per franc.
D)0.2 dollars per franc.

Question 9

An unexpected change in an exogenous variable is known as

A)a shock.
B)a fluctuation.
C)an anachronism.
D)a calibration.

Question 10

In the late 1980s and the 1990s, the correlation between output growth in the

A)United States and Europe rose while the correlation between output growth between the United States and Japan fell.
B)United States and Europe fell while the correlation between output growth between the United States and Japan rose.
C)United States and Europe and the United States and Japan, both fell.
D)United States and Europe and the United States and Japan, both rose.

Question 11

When a country's currency depreciates,

A)the prices of its exports and imports both rise.
B)the prices of its exports rise and the prices of its imports fall.
C)the prices of its exports and imports both fall.
D)the prices of its exports fall and the prices of its imports rise.

Question 12

If one country is hit with a shock that increases its income and its demands for imported goods and services from other countries, thus increasing aggregate demand in those countries, then the business cycle is being transmitted internationally through______ effect.

A)a trade
B)an interest-rate
C)an exchange-rate
D)an expected-inflation

Question 13

A correlation of_____between output growth in two regions would mean that output in the two regions are inversely related.

A)0
B)1
C)100
D)less than 0 between output growth in two regions would mean that output in the two regions are

Question 14

In 1990, exchange rates were: 1.61 U.S.dollars per U.K.pound and 144 Japanese yen per U.S.dollar.In 2000, the exchange rates were: 1.62 U.S.dollars per U.K.pound and 102 Japanese yen per U.S.dollar.Based on the data,

A)the U.S.dollar appreciated versus the U.K.pound and the U.S.dollar depreciated versus the Japanese yen.
B)the U.S.dollar appreciated versus both the U.K.pound and the Japanese yen.
C)the U.S.dollar depreciated versus the U.K.pound and the U.S.dollar appreciated versus the Japanese yen.
D)the U.S.dollar depreciated versus both the U.K.pound and the Japanese yen.

Question 15

Suppose the only good traded between Mexico, the U.S., and Brazil is beef, which is produced by all three countries. If the cost of producing a pound of beef is 5 pesos in Mexico, 2 dollars in the U.S., and 1 real in Brazil, the exchange rates based on the law of one price would be______ pesos per dollar and_____ dollars per real.

A)2.5; 2
B)2.5; 0.5
C)0.4; 0.5
D)0.4; 2

Question 16

In 1990, exchange rates were: 1.61 U.S.dollars per U.K.pound and 144 Japanese yen per U.S.dollar.In 1980, the exchange rates were: 2.22 U.S.dollars per U.K.pound and 240 Japanese yen per U.S.dollar.Based on these data, from 1980 to 1990 the U.S.dollar

A)depreciated versus the U.K.pound and appreciated versus the Japanese yen.
B)appreciated versus the U.K.pound and depreciated versus the Japanese yen.
C)depreciated versus both the U.K.pound and the Japanese yen.
D)appreciated versus both the U.K.pound and the Japanese yen.

Question 17

If 1 euro is equal to 1.20 dollars,

A)​$1 would trade for 0.83 euros.
B)​$1 would trade for 2.20 euros.
C)​$1 would trade for 0.20 euros
D)$1 would trade for 0.33 euros.

Question 18

A correlation of _____between output growth in two regions would mean that output growth in both regionschanged at exactly the same time and by the same proportionate amount.

A)0
B)less than 0
C)1.0
D)?100

Question 19

A country engages in a contractionary monetary policy that causes its income to decline and its interest rate to rise. This causes investors from other countries to increase their financial investments in that country, causing the interest rate in the investors' countries to rise.In this case, the business cycle is being transmitted internationally through ____ effect.

A)a trade
B)an interest-rate
C)an exchange-rate
D)an expected-inflation

Question 20

From 1970 to 2000, the U.S.dollar_____ against the Japanese yen and _____against the German mark.

A)depreciated against both the Japanese yen and the German mark.
B)appreciated against both the Japanese yen and the German mark.
C)depreciated against the Japanese yen and appreciated against the German mark.
D)appreciated against the Japanese yen and depreciated against the German mark.

Question 21

Under relative purchasing-power parity,

A)the exchange rate equals the ratio of price indexes in two countries.
B)interest-rate parity holds.
C)absolute purchasing-power parity also holds.
D)a currency depreciates relative to another currency by the amount by which the inflation rate is higher in the first country than in the second country.

Question 22

The sum of net exports of goods and services plus net income from abroad plus net unilateral current transfers equals

A)the trade balance.
B)the balance on current account.
C)the capital account balance.
D)the capital and financial account balance.

Question 23

A measure of the flow of goods and services out of a country into other countries or other items that cause payments to flow into the country is

A)the national savings account balance.
B)the balance on current account.
C)the capital account balance.
D)the capital and financial account balance.

Question 24

Suppose the inflation rate in Canada is 1 percent and the inflation rate in Mexico is 3 percent.If the nominal exchange rate in terms of Mexican pesos per Canadian dollar falls by 4 percent, by how much will the real exchange rate (in terms of Mexican goods per Canadian good) change?

A)+6 percent
B)+2 percent
C)−2 percent
D)−6 percent

Question 25

During the 2008-2009 financial crisis, the dollar______in real terms. After the crisis ended, the dollar______ in real terms.

A)appreciated slightly; appreciated
B)depreciated slightly; depreciated
C)appreciated sharply; depreciated
D)depreciated sharply; appreciated

Question 26

The real exchange rate between the domestic currency of a country and the foreign currency increases by 2 percent.If the domestic price level increases by 4 percent while the foreign price level increases by 3 percent, the nominal exchange rate will​

A)​increase by 1 percent.
B)​decrease by 3 percent
C)​increase by 2.5 percent
D)​decrease by 3 percent

Question 27

Suppose the interest rate in Japan is 2 percent and the yen per euro exchange rate is expected to appreciate by 1 percent.If interest-rate parity holds, then the interest rate in France is

A)3 percent.
B)1 percent.
C)−1 percent.
D)−3 percent.

Question 28

During the 2008 financial crisis, the dollar _______ in nominal terms.

A)appreciated sharply
B)appreciated slightly
C)depreciated slightly
D)depreciated sharply

Question 29

Under absolute purchasing-power parity,

A)the exchange rate equals 1 if both the countries have equal price indices.
B)interest-rate parity holds.
C)relative purchasing-power parity cannot hold.
D)a currency depreciates relative to another currency by the amount by which the inflation rate is lower in the first country than in the second country.

Question 30

An investor bought a one-year government bond of Country X with a nominal interest rate of 6 percent.If the current exchange rate between the U.S.dollar and Country X's currency is 50 units per dollar and the expected exchange rate after a year is 48 units per dollar, what is the expected dollar return of investing in Country X's bond?

A)​4 percent
B)​3 percent
C)​8 percent
D)​12 percent

Question 31

If the ratio of the price level in the U.S.to the price level in Canada is 1.3 and the nominal exchange rate is 0.75 Canadian dollars per U.S.dollar, then the real exchange rate is

A)1.30.​
B)1.75.
C)0.975.
D)0.25.

Question 32

In broad nominal terms, the dollar

A)depreciated against other currencies from 1988 to 2001 and from 2001 to 2008.
B)depreciated against other currencies from 1988 to 2001 and appreciated against those currencies from 2001 to 2008.
C)appreciated against other currencies from 1988 to 2001 and from 2001 to 2008.
D)appreciated against other currencies from 1988 to 2001 and depreciated against those currencies from 2001 to 2008.

Question 33

If the exchange rate equals the ratio of price indexes in two countries, there is said to be

A)one price fits all.
B)absolute purchasing-power parity.
C)relative purchasing-power parity.
D)interest-rate parity.

Question 34

A bushel of rice costs 500 yen in Japan and 100 pesos in Mexico.If someone could sell a bushel of rice in Japan for yen, take those yen and exchange them for pesos, then buy a bushel of rice in Mexico, the nominal exchange rate would be___-__ and the real exchange rate would be_______ .

A)5 pesos per yen; 6 pesos per yen.
B)1 peso per yen; 4 pesos per yen.
C)1 peso per yen; 2 pesos per yen.
D)5 pesos per yen; 1 peso per yen.

Question 35

If inflation in Country X is 2 percent and 3 percent in the United States, the dollar would______ power parity holds.?

A)?depreciate by 1 percent
B)?depreciate by 5 percent
C)?appreciate by 1 percent
D)?appreciate by 5 percent

Question 36

If only one good is traded between two countries and the price of the good is the same in both countries when expressed in units of the same currency, then

A)people have rational expectations.
B)both countries have the same monetary policy.
C)there is interest-rate parity.
D)the law of one price holds.

Question 37

If the annual inflation rate is 3 percent in France and 5 percent in Italy, by how much will the real exchange rate change over a year? Assume that both countries use the euro so their nominal exchange rate cannot change.

A)2 percent
B)3/5 percent
C)−3/5 percent
D)−2 percent

Question 38

If the supply of dollars in exchange for euro increases,

A)​the dollar depreciates against the euro.
B)​the dollar appreciates against the euro.
C)the exports of U.S.to Europe becomes costlier.
D)​the demand for European goods increase in the U.S.

Question 39

If interest-rate parity holds and the interest rate in Japan is 3 percent while in France it is 5 percent, then we would expect the yen per euro exchange rate to ______ percent.

A)appreciate by 8
B)appreciate by 2
C)depreciate by 2
D)depreciate by 8

Question 40

If three bushels of rice produced in Japan trade for 2 bushels of rice produced in Guatemala, the _____is equal to 1.5.

A)inflation rate
B)interest rate
C)nominal exchange rate
D)real exchange rate

Question 41

U.S.citizens invested $10 billion in foreign securities during a certain year and $21 billion in acquiring capital goods in foreign countries while foreigners invested only $27.5 billion in U.S.during that year.The net foreign investment of U.S.during that year was .

A)-$3.5 billion.
B)-$58.5 billion.
C)$1.2 billion.
D)$3.5 billion.

Question 42

In economic expansions, the dollar usually

A)appreciates.
B)depreciates.
C)remains unaffected.
D)follows no consistent pattern.

Question 43

In recessions, the dollar usually

A)appreciates.
B)depreciates.
C)remains unaffected.
D)follows no consistent pattern.

Question 44

Suppose, the U.S.has domestic savings of $10 billion, a government budget deficit of $250 billion, net exports of ?$400 billion, and net income from abroad and net unilateral transfers of $0.Based on these figures, the amount of net foreign investment is $ _____billion.

A)260
B)?140
C)?260
D)?400

Question 45

The amount foreign citizens, firms, and governments invest in a country minus the amount that the country's citizens, firms, and governments invest abroad is

A)the trade balance.
B)the balance on current account.
C)the capital-account balance.
D)the balance on capital and financial account.

Question 46

Investment in foreign countries that occurs by installing capital goods and using them to produce output is referred to as

A)directed capital.
B)direct investment.
C)capital investiture.
D)portfolio investment.

Question 47

In which region of the world did a financial crisis occur in 1997, characterized by a reduced confidence of foreign investors who began to withdraw their investments from the region?

A)Asia
B)North America
C)Africa
D)Europe

Question 48

Suppose, the U.S.has domestic savings of $10 billion, domestic investment of $160 billion, and a government budget deficit of $250 billion.Based on these figures, the amount of net foreign investment is $ ____billion.

A)400
B)80
C)?80
D)?400

Question 49

To prop up a currency, a country must

A)reduce its interest rates.
B)limit the movement of capital.
C)use its reserves to purchase its own currency in the foreign-exchange market.
D)sell its gold stock.

Question 50

Suppose, the U.S.has domestic savings of $100 billion, domestic investment of $60 billion, and a government budget surplus of $30 billion.Based on these figures, the amount of net foreign investment is $_____ billion.

A)10
B)70
C)130
D)190

Question 51

Answer the questions below.
a.Suppose the Federal Reserve raises the federal funds rate in the United States but people believe that the inflation rate will rise by more than the Fed raised the federal funds rate.
What do you expect to happen to the exchange rate? Explain why.

b.As the exchange rate changes in the direction you determined in part a, what happens to the prices of imports and exports in the United States and in other countries? Explain.

c.What happens to net exports in the United States and in other countries that trade with the
United States in the short run? In the long run? Explain.

Question 52

Foreign investment is composed of______ investment plus______ investment.

A)inventory; financial
B)portfolio; direct
C)portfolio; indirect
D)inventory; physical capital

Question 53

The balance on the current account plus the balance on the capital and financial account equals

A)0.
B)1 .
C)-1.
D)100.

Question 54

Suppose the exchange rate adjusts so that interest-rate parity holds.Also assume that the interest rate on a one-year Canadian bond is 3 percent and the interest rate on a one-year U.S.bond is 5 percent.

a.If the exchange rate today is 1.40 Canadian dollars per U.S.dollar, what do you expect the exchange rate to be one year from now?
b.Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected to be 1 percent over the next year.What is the expected inflation rate in the United States?

Question 55

Suppose you are an investor who is considering buying a one-year British government bond that has a 4 percent interest rate or a one-year French government bond with a 7 percent interest rate.The exchange rate today is 2.00 euros per pound and you expect the exchange rate to be 2.10 euros per pound one year from now.
a.Which bond would you purchase? Why? Show your calculations.
b.Suppose you expect the exchange rate to be 2.05 euros per pound in one year, instead of 2.10 euros per pound.Would you change your decision about which bond to buy? Explain and
show your calculations.

Question 56

If the volume of domestic investment is $32 billion​, net exports is $10 billion, and budget deficit is $5 billion, what is the volume of domestic savings?

A)​$47 billion
B)​$38 billion
C)​$29 billion
D)​$16 billion

Question 57

International investors believe that when a country gets into financial trouble, the IMF will rescue the country, thus reducing the investors' risk.As a result, investors take greater risks than they would otherwise.This is an example of

A)a risk premium.
B)a lender of last resort.
C)adverse selection.
D)moral hazard.

Question 58

Investment in foreign countries that occurs by purchasing financial securities is referred to as

A)directed capital.
B)direct investment.
C)capital investiture.
D)portfolio investment.

Question 59

Explain why the correlation of output growth between the U.S.and Europe declined in the late 1980s and 1990s, even though the countries became more economically interdependent.What do you expect will happen to the correlation in the future?

Question 60

Explain how a shock in one country can be transmitted to other countries.List three ways this can happen and give an example of each.

Question 61

Assume that the only good traded between Mexico, the U.S., and Canada is chicken, which is produced by all three countries.If the cost of producing a pound of chicken is 5 pesos in Mexico, 1 U.S.dollar in the U.S., and 2 Canadian dollars in Canada, and if the law of one price holds, what are each of the exchange rates between the three countries?

Question 62

How should a country respond when foreign investors withdraw investments from that country?

Question 63

What are the two major drawbacks of the International Monetary Fund that prevents it from bailing out countries in
crises?​

Question 64

Suppose the U.S.has domestic savings of $50 billion, domestic investment of $120 billion, and a government budget deficit of $150 billion.Japan has domestic savings of 25 trillion yen, domestic investment of 10 trillion yen, and a government budget deficit of 8 trillion yen.Calculate the amounts of net foreign investment by the U.S.and by Japan.

Question 65

Assume that relative purchasing-power parity holds.In 2004, the price level in Japan is 120 and the price level in the U.S.is 145.In 2005, the price level in Japan is 121 and the price level in the U.S.is 149.The exchange rate in 2004 is 112 yen per dollar.Calculate the exchange rate in 2005.

Question 66

In 2005, exchange rates were 1.74 U.S.dollars per British pound, 112 Japanese yen per U.S.dollar, and 1.20 dollars per euro.In 2000, the exchange rates were 1.62 U.S.dollars per British pound, 102 Japanese yen per U.S.dollar, and 0.94 dollars per euro.For each currency, explain whether it appreciated or depreciated from 2000 to 2005
versus the other two currencies.