Question 1

Easy monetary policy will ______ net exports as a result of a ______ currency.

Accepted Answer

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

Question 2

Large economies, like the United States should ______ employ a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy _____.

Accepted Answer

A)  almost never; makes little sense 
B)  almost never; is of little consequence 
C)  nearly always; makes little sense 
D)  nearly always; is of little consequence

Question 3

Easy monetary policy reduces 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; decreases

Question 4

Holding all else constant, a decrease in the real interest rate on Mexican assets 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 5

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 6

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ______ the demand 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 7

The nominal exchange rate, e, is defined as the number of units of:

Accepted Answer

A)  domestic goods relative to the number of units foreign goods. 
B)  foreign goods relative to the number of units of domestic goods. 
C)  the foreign currency that one unit of domestic currency will buy. 
D)  the domestic currency that one unit of foreign currency will buy.

Question 8

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.

Accepted Answer

A)  rises; rise 
B)  rises; fall 
C)  falls; rise 
D)  falls; fall

Question 9

In an open economy, an increase in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant.

Accepted Answer

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

Question 10

From the point of view of a particular country, capital outflows are:

Accepted Answer

A)  purchases of domestic goods or services by foreigners. 
B)  purchases of domestic assets by foreigners. 
C)  purchases of foreign goods or services by domestic households or firms. 
D)  purchases of foreign assets by domestic households or firms.

Question 11

Which of the following events will decrease 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)  An increase in the perceived riskiness of investing in the domestic economy. 
D)  An decrease in net capital inflow.

Question 12

Holding constant risk and the real returns available abroad, lower domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Accepted Answer

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

Question 13

All else equal, relative to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

Accepted Answer

A)  more; fixed 
B)  more; flexible 
C)  less; fixed 
D)  less; flexible

Question 14

The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market is called the ______ exchange rate.

Accepted Answer

A)  real 
B)  market equilibrium value of the 
C)  target 
D)  fixed

Question 15

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 16

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

Accepted Answer

A)  an inability of U.S. companies to compete in the international market. 
B)  a decline in private saving that resulted from an upsurge in consumption. 
C)  a decline in national saving caused largely by rapidly rising government budget deficits. 
D)  a worldwide recession that made it difficult for American companies to sell their products abroad.

Question 17

The theory that nominal exchange rates are determined so that the law of one price holds is called:

Accepted Answer

A)  the fixed-exchange-rate rule. 
B)  the equilibrium principle. 
C)  the law of supply and demand. 
D)  purchasing power parity.

Question 18

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

Accepted Answer

A)  increases 
B)  decreases 
C)  may either increase or decrease 
D)  offsets any change in

Question 19

From the point of view of a particular country, capital inflows are:

Accepted Answer

A)  purchases of domestic goods or services by foreigners. 
B)  purchases of domestic assets by foreigners. 
C)  purchases of foreign goods or services by domestic households or firms. 
D)  purchases of foreign assets by domestic households or firms.

Question 20

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

Exam 15: Aggregate Demand, Aggregate Supply, and Inflation

Easy monetary policy will net exports as a result of a currency.

Large economies, like the United States should __ employ a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy _.

Easy monetary policy reduces the real interest rate, which the demand for dollars, the supply of dollars, and __ the equilibrium value of the dollar.

Holding all else constant, a decrease in the real interest rate on Mexican assets will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar 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 preferences by Mexicans for U.S. goods will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

The nominal exchange rate, e, is defined as the number of units of:

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _, causing net exports and GDP to __.

In an open economy, an increase in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

From the point of view of a particular country, capital outflows are:

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

Holding constant risk and the real returns available abroad, lower domestic real interest rates capital inflows, capital outflows, and __ net capital inflows.

All else equal, relative to the case of a closed economy, monetary policy is effective in an open economy with a exchange rate.

The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market is called the ______ exchange rate.

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

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

The theory that nominal exchange rates are determined so that the law of one price holds is called:

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

From the point of view of a particular country, capital inflows are:

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.