Question 1

Under fixed exchange rates with perfect capital mobility the most effective aggregate demand management policy is:

Accepted Answer

A)   monetary policy.
B)   devaluation.
C)   fiscal policy.
D)   industrial subsidy. C

Question 2

Under the ERM, each country fixed ____________ against each other ERM participant. Collectively the
Group _________ against the rest of the world.

Accepted Answer

A)   a nominal exchange rate, floated
B)   a real exchange rate, pegged
C)   a purchasing power parity, pegged
D)   a real exchange rate, floated A

Question 3

If Canada, with flexible exchange rates, has lower inflation than the US, we would expect the Canadian dollar to __________ .

Accepted Answer

A)   be in short supply
B)   appreciate
C)   depreciate
D)   revalue B

Question 4

-Refer to Figure 12.1. In terms of the diagram an increase in US interest rates would:

Accepted Answer

A)   shift D0 out and S0 in, causing a rise in the exchange rate.
B)   shift D0 out and S0 out, causing a fall in the exchange rate.
C)   shift D0 in and S0 in, leaving the exchange rate unchanged.
D)   shift D0 in and S0 out, having no effect on the exchange rate.

Question 5

A balance of payments deficit will always occur if:

Accepted Answer

A)   both the current and capital accounts are positive.
B)   the official transaction account is negative.
C)   the current account is negative.
D)   the current and capital (excluding official reserve transactions)  are negative.

Question 6

Under fixed exchange rates and a _________ on the balance of payments, central bank intervention
Makes the domestic money ________ than it would otherwise have been.

Accepted Answer

A)   deficit, higher
B)   surplus, lower
C)   surplus, higher
D)   deficit, not changed

Question 7

Sterilized intervention to defend a fixed exchange rate only works when there is perfect capital mobility.

Accepted Answer

A) True 
 B)False

Question 8

Under a fixed exchange rate regime:

Accepted Answer

A)   the central bank allows supply and demand in the foreign exchange market to determine the exchange rate.
B)   central banks in other countries determine our exchange rate.
C)   the central bank buys or sells any quantity of foreign exchange at the fixed exchange rate.
D)   all of the above.

Question 9

Other things remaining the same, US recession will lead to:

Accepted Answer

A)   higher value of Canadian dollar.
B)   lower value of US dollar.
C)   higher value of US dollar.
D)   higher demand for Canadian dollars.

Question 10

The price of imported goods and services compared to domestic goods and services is:

Accepted Answer

A)   the real exchange rate.
B)   the consumer price index.
C)   the import price deflator.
D)   the nominal exchange rate.

Question 11

If interest rates in Canada fall relative to interest rates in the US, net capital flows into Canada will
________, causing the supply of US dollars on the Canadian foreign exchange market to ________ and the demand for US dollars to _______.

Accepted Answer

A)   increase, decrease, rise
B)   decrease, increase, fall
C)   decrease, decrease, rise
D)   increase, decrease, fall

Question 12

Under a fixed exchange rate, if demand for foreign currency exceeds supply at the official rate:

Accepted Answer

A)   the central bank buys foreign exchange with domestic currency.
B)   the central bank sells foreign exchange for domestic currency.
C)   the central bank allows the market to establish a new equilibrium exchange rate.
D)   the central bank announces a new inflation target.

Question 13

An increase in US real GDP will:

Accepted Answer

A)   have no effect on Canada's current account balance.
B)   reduce the current account balance in the US and increase it in Canada.
C)   increase the current account balance in the US and reduce it in Canada.
D)   improve the current account balances in both countries.

Question 14

In an open economy, with a fixed nominal exchange rate and high capital mobility, any ____ in interest
Rates will generate ______________ .

Accepted Answer

A)   fall, a capital outflow
B)   fall, a capital inflow
C)   rise, a capital outflow
D)   rise, no change

Question 15

Under a fixed exchange rate and perfect capital mobility the effect of an internal shock from a change in investment:

Accepted Answer

A)   is moderated by a change in the exchange rate.
B)   has no effect on domestic AD because net exports move in an offsetting way.
C)   causes a change in the domestic inflation rate and the real exchange rate.
D)   changes domestic interest rates.

Question 16

The adoption of a fixed exchange rate precludes the pursuit of a money supply or an inflation target.

Accepted Answer

A) True 
 B)False

Question 17

A freely floating exchange rate system requires that the governments of all countries stay out of the foreign exchange markets.

Accepted Answer

A) True 
 B)False

Question 18

If there is a time when interest rate parity does not exist:

Accepted Answer

A)   capital will flow to the country offering the highest expected return.
B)   there will be no international capital flows.
C)   trade in goods and services will not be possible.
D)   no changes in exchange rates are expected.

Question 19

Lower transport costs that result in lower prices for Chinese manufactures in the Canadian economy:

Accepted Answer

A)   reduce Chinese domestic consumption of manufactured goods.
B)   reduce Canadian imports of Chinese manufactures and increase the Canadian current account balance.
C)   reduce Canadian exports of fuels and commodities to China and reduce the Canadian current account balance.
D)   increase Canadian imports of Chinese manufactures and reduce the Canadian current account balance.

Question 20

Under a system of flexible exchange rates, if the price of the US dollar in Canadian dollars falls from $1.20 to $1.15, then:

Accepted Answer

A)   the Canadian dollar has appreciated against the US dollar.
B)   the Canadian dollar has depreciated against the US dollar.
C)   the Canadian dollar has been devalued.
D)   US goods become more expensive in Canada.

Exam 12: An AD As Model of the Inflation Rate and Real GDP

Under fixed exchange rates with perfect capital mobility the most effective aggregate demand management policy is:

Under the ERM, each country fixed ____ against each other ERM participant. Collectively the Group _ against the rest of the world.

If Canada, with flexible exchange rates, has lower inflation than the US, we would expect the Canadian dollar to __________ .

-Refer to Figure 12.1. In terms of the diagram an increase in US interest rates would:

A balance of payments deficit will always occur if:

Under fixed exchange rates and a _ on the balance of payments, central bank intervention Makes the domestic money than it would otherwise have been.

Sterilized intervention to defend a fixed exchange rate only works when there is perfect capital mobility.

Under a fixed exchange rate regime:

Other things remaining the same, US recession will lead to:

The price of imported goods and services compared to domestic goods and services is:

If interest rates in Canada fall relative to interest rates in the US, net capital flows into Canada will __, causing the supply of US dollars on the Canadian foreign exchange market to and the demand for US dollars to _.

Under a fixed exchange rate, if demand for foreign currency exceeds supply at the official rate:

An increase in US real GDP will:

In an open economy, with a fixed nominal exchange rate and high capital mobility, any in interest Rates will generate __________ .

Under a fixed exchange rate and perfect capital mobility the effect of an internal shock from a change in investment:

The adoption of a fixed exchange rate precludes the pursuit of a money supply or an inflation target.

A freely floating exchange rate system requires that the governments of all countries stay out of the foreign exchange markets.

If there is a time when interest rate parity does not exist:

Lower transport costs that result in lower prices for Chinese manufactures in the Canadian economy:

Under a system of flexible exchange rates, if the price of the US dollar in Canadian dollars falls from $1.20 to $1.15, then:

Exam 12: An AD As Model of the Inflation Rate and Real GDP

Under fixed exchange rates with perfect capital mobility the most effective aggregate demand management policy is:

Under the ERM, each country fixed ____________ against each other ERM participant. Collectively the Group _________ against the rest of the world.

If Canada, with flexible exchange rates, has lower inflation than the US, we would expect the Canadian dollar to __________ .

-Refer to Figure 12.1. In terms of the diagram an increase in US interest rates would:

A balance of payments deficit will always occur if:

Under fixed exchange rates and a _________ on the balance of payments, central bank intervention Makes the domestic money ________ than it would otherwise have been.

Sterilized intervention to defend a fixed exchange rate only works when there is perfect capital mobility.

Under a fixed exchange rate regime:

Other things remaining the same, US recession will lead to:

The price of imported goods and services compared to domestic goods and services is:

If interest rates in Canada fall relative to interest rates in the US, net capital flows into Canada will ________, causing the supply of US dollars on the Canadian foreign exchange market to ________ and the demand for US dollars to _______.

Under a fixed exchange rate, if demand for foreign currency exceeds supply at the official rate:

An increase in US real GDP will:

In an open economy, with a fixed nominal exchange rate and high capital mobility, any ____ in interest Rates will generate ______________ .

Under a fixed exchange rate and perfect capital mobility the effect of an internal shock from a change in investment:

The adoption of a fixed exchange rate precludes the pursuit of a money supply or an inflation target.

A freely floating exchange rate system requires that the governments of all countries stay out of the foreign exchange markets.

If there is a time when interest rate parity does not exist:

Lower transport costs that result in lower prices for Chinese manufactures in the Canadian economy:

Under a system of flexible exchange rates, if the price of the US dollar in Canadian dollars falls from $1.20 to $1.15, then:

Under the ERM, each country fixed ____ against each other ERM participant. Collectively the Group _ against the rest of the world.

Under fixed exchange rates and a _ on the balance of payments, central bank intervention Makes the domestic money than it would otherwise have been.

If interest rates in Canada fall relative to interest rates in the US, net capital flows into Canada will __, causing the supply of US dollars on the Canadian foreign exchange market to and the demand for US dollars to _.

In an open economy, with a fixed nominal exchange rate and high capital mobility, any in interest Rates will generate __________ .