Question 1

The law of one price states that if transportation costs are relatively small, then the:

Accepted Answer

A)  nominal exchange rates for every countries' currency must be equal. 
B)  nominal exchange rate for a currency must equal the real exchange rate for that currency. 
C)  price of an internationally traded commodity must be the same in all locations. 
D)  producer with the lowest opportunity cost should be the only producer any commodity.

Question 2

In an open economy, domestic investment equals:

Accepted Answer

A)  net capital inflows. 
B)  domestic saving plus net capital outflows. 
C)  domestic saving. 
D)  domestic saving plus net capital inflows.

Question 3

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

Accepted Answer

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

Question 4

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

Accepted Answer

A)  appreciated 
B)  depreciated 
C)  become overvalued 
D)  become undervalued

Question 5

The real exchange rate is the:

Accepted Answer

A)  price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. 
B)  quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
C)  rate at which two currencies can be traded for each other. 
D)  nominal exchange rate adjusted for domestic inflation.

Question 6

Proponents of fixed exchange rates, who argue that fixed exchange rates eliminate uncertainty and therefore promote international trade, sometimes fail to recognize:

Accepted Answer

A)  that fixed exchange rates may not remain fixed forever. 
B)  that fixed exchange rates are more volatile than flexible exchange rates. 
C)  that exchange rates do not matter to businesses, so the uncertainty has no impact. 
D)  that international trade is bad for the economy and should not be promoted.

Question 7

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ______ the supply of 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 8

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

Accepted Answer

A)  is less expensive in Mexico. 
B)  is more expensive in the United States. 
C)  is less expensive in the United States. 
D)  costs the same in Mexico and the United States.

Question 9

Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy.

Accepted Answer

A)  no longer; monetary 
B)  no longer; fiscal 
C)  increasingly; monetary 
D)  increasingly; fiscal

Question 10

The principal demanders of U.S. dollars in the foreign exchange market are:

Accepted Answer

A)  foreigners wishing to purchase U.S. goods or assets. 
B)  the Federal Reserve. 
C)  U.S. households or firms wishing to purchase U.S. goods or assets. 
D)  U.S. households or firms wishing to purchase foreign goods or assets.

Question 11

If the United States has a $300 billion trade deficit, then there must be:

Accepted Answer

A)  net capital inflows of $300 billion. 
B)  net capital inflows of -$300 billion. 
C)  no capital inflows or capital outflows. 
D)  net capital outflows of $300 billion.

Question 12

An increase 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 13

The U.S. trade deficit has been mainly caused by:

Accepted Answer

A)  production of inferior goods in the U.S. 
B)  unfair trade restrictions imposed by other countries on imports. 
C)  a low rate of national saving. 
D)  cheap labor in other countries.

Question 14

Tight monetary policy raises the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

Accepted Answer

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

Question 15

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ______ and the U.S. dollar has _____.

Accepted Answer

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

Question 16

Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:

Accepted Answer

A)  an increased preference for foreign-made goods. 
B)  an increase in U.S. real GDP. 
C)  an increase in the real interest rate on foreign assets. 
D)  an appreciation of the U.S. dollar relative to other currencies.

Question 17

Which of the following events will increase the domestic real interest rate in an open economy?

Accepted Answer

A)  An increase in domestic saving. 
B)  A decrease in the domestic saving. 
C)  A decrease in the perceived riskiness of investing in the domestic economy. 
D)  An increase in net capital inflow.

Question 18

When the Fed eases U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively less attractive to foreign investors, and ______ the equilibrium exchange rate.

Accepted Answer

A)  rise; increasing 
B)  fall; increasing 
C)  fall; decreasing 
D)  rise; decreasing

Question 19

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

Accepted Answer

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

Question 20

Which of the following equations is equivalent to the equation S - NX = I?

Accepted Answer

A)  S + KI = I 
B)  S - I = KI 
C)  S - KI = NX 
D)  S + I = NX - KI

Exam 15: Aggregate Demand, Aggregate Supply, and Inflation