Question 1

A hard peg may be achieved by

Accepted Answer

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 2

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

Accepted Answer

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 3

Purchasing power parity may not hold in practice due to

Accepted Answer

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 4

In the New Keynesian open economy model with a flexible exchange rate, an increase in anticipate future total factor productivity

Accepted Answer

A)  has no effects. 
B)  increases aggregate output. 
C)  reduces aggregate consumption. 
D)  causes an exchange rate appreciation. 
E)  causes an exchange rate depreciation.

Question 5

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

Accepted Answer

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 6

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

Accepted Answer

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 7

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

Accepted Answer

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 8

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

Accepted Answer

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 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

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 11

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

Accepted Answer

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 12

The nominal exchange rate is the

Accepted Answer

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 13

In the New Keynesian open economy model, suppose the exchange rate is flexible and there is a decline in total factor productivity

Accepted Answer

A)  expansionary fiscal policy is necessary. 
B)  contractionary monetary policy is necessary. 
C)  expansionary monetary policy is necessary. 
D)  no policy intervention is necessary. 
E)  the central bank should reduce the real interest rate.

Question 14

In the New Keynesian open economy model with a fixed exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response to keep the output gap at zero?

Accepted Answer

A)  Increase the money supply. 
B)  Reduce government spending. 
C)  Increase government spending. 
D)  Reduce the money supply. 
E)  Nothing.

Question 15

The real exchange rate is the

Accepted Answer

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 16

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

Accepted Answer

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.

Question 17

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

Accepted Answer

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 18

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

Accepted Answer

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

Question 19

In the New Keynesian open economy model

Accepted Answer

A)  the nominal exchange rate is always fixed. 
B)  prices are flexible. 
C)  net exports depends on the relative price of foreign goods to domestic goods. 
D)  the nominal exchange rate is always flexible. 
E)  the real interest rate is determined by the central bank.

Question 20

In the New Keynesian open economy model with a flexible exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response to keep the output gap at zero?

Accepted Answer

A)  Reduce the money supply. 
B)  Increase government spending. 
C)  Reduce government spending. 
D)  Increase the money supply. 
E)  Nothing.

Exam 17: Money in the Open Economy