Question 1

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____.

Accepted Answer

A)  inflation rate; unemployment rate 
B)  exchange rate; real interest rate 
C)  growth of domestic real GDP; growth of foreign real GDP 
D)  real interest rate; exchange rate

Question 2

Tight monetary policy _____ interest rates which _____ the demand for a currency and _____ the fundamental value of the exchange rate.

Accepted Answer

A)  increases; increases; increases 
B)  decreases; decreases; decreases 
C)  increases; increases; decreases 
D)  increases; decreases; increases

Question 3

Suppose the government of New Country has fixed the value of its currency, the New Peso, at $1 per New Peso, but the market equilibrium value of the New Peso is $0.50 per New Peso. In order to maintain the official value of the New Peso the Central Bank of New Country must either _____ domestic interest rates, or ________the supply of international reserves by purchasing New Pesos

Accepted Answer

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

Question 4

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is $25 per barrel in the United States, the price of oil is ______ pesos per barrel in Mexico.

Accepted Answer

A)  3.125 
B)  96 
C)  200 
D)  250

Question 5

Holding all else constant, an increase in the real interest rate on Mexican assets will ______ the supply for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 6

Based on this figure, if the krone exchange rate is fixed at $0.09 dollars per krone, the krone is ______.

Accepted Answer

A)  devalued 
B)  revalued 
C)  overvalued 
D)  undervalued

Question 7

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

Accepted Answer

A)  it no longer has a central bank. 
B)  monetary policy must be used to keep the exchange rate's market equilibrium value at its official value. 
C)  banks will begin to hold 100% of their deposits in reserves. 
D)  it must eliminate its currency from circulation and replace it with the foreign currency.

Question 8

A country will have a balance-of- payments surplus when its exchange rate:

Accepted Answer

A)  equals the market equilibrium value. 
B)  is flexible. 
C)  is overvalued. 
D)  is undervalued.

Question 9

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

Accepted Answer

A)  is no longer available to stabilize the domestic economy. 
B)  will be unable to stabilize the market equilibrium value of the exchange rate. 
C)  will simultaneously stabilize the domestic economy. 
D)  will increase the rate of growth in the economy.

Question 10

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar.

Accepted Answer

A)  0.712 
B)  0.045 
C)  0.025 
D)  5.618

Question 11

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

Accepted Answer

A)  decrease by 2,000 dollars per period. 
B)  decrease by 4,000 dollars per period. 
C)  increase by 4,000 dollars per period. 
D)  increase by 2,000 dollars per period.

Question 12

U.S. firms wishing to purchase European goods and services are ______ the foreign exchange market.

Accepted Answer

A)  suppliers of U.S. dollars in 
B)  suppliers of Euros in 
C)  supplied Euros by the Fed for use in 
D)  demanders of U.S. dollars in

Question 13

Holding all else constant, if the U.S. government restricts capital outflows, then the equilibrium value of the U.S. dollar will:

Accepted Answer

A)  appreciate 
B)  depreciate. 
C)  remain fixed. 
D)  be determined by the Federal Reserve.

Question 14

A currency depreciation is a(n):

Accepted Answer

A)  increase in the value of a currency relative to other currencies. 
B)  decrease in the value of a currency relative to other currencies. 
C)  reduction in the official value of a currency in a fixed-exchange-rate system. 
D)  increase in the official value of a currency in a fixed-exchange-rate system.

Question 15

The gold standard is an example of a ______ exchange rate system.

Accepted Answer

A)  fixed 
B)  flexible 
C)  nominal 
D)  dollarized

Question 16

A decrease in the value of a currency relative to other currencies is called a(n):

Accepted Answer

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

Question 17

A decrease in the real exchange rate will tend to ______ exports and to ______ imports.

Accepted Answer

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

Question 18

The net decline in a country's stock of international reserves over a year is called a(n):

Accepted Answer

A)  balance-of-payments deficit. 
B)  balance-of-payments surplus. 
C)  trade deficit. 
D)  trade surplus.

Question 19

Based on this figure, in order to maintain an exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend (in dollars)_____ worth of international reserves per period.

Accepted Answer

A)  $300 
B)  $2,000 
C)  $825 
D)  $5,500

Question 20

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is ____ and the international reserves of Norway will ______ krone per period.

Accepted Answer

A)  undervalued; increase by 2,000 
B)  overvalued; decrease by 5,500 
C)  undervalued; increase by 5,500 
D)  overvalued; decrease by 2,000

Exam 13: Exchange Rates and the Open Economy

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the __ and affects net exports by changing the _.

Tight monetary policy ___ interest rates which _ the demand for a currency and ___ the fundamental value of the exchange rate.

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is $25 per barrel in the United States, the price of oil is ______ pesos per barrel in Mexico.

Holding all else constant, an increase in the real interest rate on Mexican assets will the supply for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Based on this figure, if the krone exchange rate is fixed at $0.09 dollars per krone, the krone is ______.

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

A country will have a balance-of- payments surplus when its exchange rate:

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar.

U.S. firms wishing to purchase European goods and services are ______ the foreign exchange market.

Holding all else constant, if the U.S. government restricts capital outflows, then the equilibrium value of the U.S. dollar will:

A currency depreciation is a(n) :

The gold standard is an example of a ______ exchange rate system.

A decrease in the value of a currency relative to other currencies is called a(n) :

A decrease in the real exchange rate will tend to exports and to imports.

The net decline in a country's stock of international reserves over a year is called a(n) :

Based on this figure, in order to maintain an exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend (in dollars) _____ worth of international reserves per period.

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is and the international reserves of Norway will __ krone per period.