Question 1

Purchasing power parity assumes

Accepted Answer

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 2

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

Accepted Answer

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 3

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)  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 4

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

Accepted Answer

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 5

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

Accepted Answer

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

Question 6

A revaluation of the exchange rate is a policy action that

Accepted Answer

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 7

In the New Keynesian open economy model, if the exchange rate is fixed

Accepted Answer

A)  fiscal policy and monetary policy are powerless. 
B)  fiscal policy is an effective stabilization tool. 
C)  a change in current total factor productivity increases output. 
D)  monetary policy is an effective stabilization tool. 
E)  the real interest rate is an effective tool that can be changed by the central bank.

Question 8

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

Accepted Answer

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 9

Under a hard peg,

Accepted Answer

A)  a country 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 10

Adoption of a currency board

Accepted Answer

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 11

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

Accepted Answer

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 12

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

Accepted Answer

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 13

The acquisition of a new physical 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 14

The adoption of capital controls makes

Accepted Answer

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 15

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

Accepted Answer

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 16

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

Accepted Answer

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 17

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

Accepted Answer

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 18

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 and flexible prices.

Accepted Answer

The answer of Determine the impact of an increase in...

Question 19

A devaluation of the exchange rate is a policy action that

Accepted Answer