Question 1

If a real exchange rate appreciation occurs, which of the following results?

Accepted Answer

A)  It takes more home goods to purchase the same quantity of foreign goods. 
B)  It takes fewer home goods to purchase the same quantity of foreign goods. 
C)  The nominal exchange rate has risen as well. 
D)  The nominal exchange rate has fallen.

Question 2

If there is an increase in the money supply in the United States, using the monetary model of the exchange rate, one would predict that the U.S. dollar would:

Accepted Answer

A)  become stronger. 
B)  appreciate in the short run, but not in the long run. 
C)  depreciate. 
D)  depreciate in the short run, but not in the long run.

Question 3

If the Fisher effect holds, keeping the ____ fixed would force nations to keep inflation stable.

Accepted Answer

A)  world real interest rate 
B)  nominal interest rate 
C)  exchange rate 
D)  real interest rate

Question 4

Which of the following nations has NOT suffered bouts of extreme hyperinflation?

Accepted Answer

A)  Germany 
B)  Japan 
C)  Zimbabwe 
D)  Argentina

Question 5

If the prices of goods in Europe increase, while the nominal exchange rate between the euro and the U.S. dollar remains the same, we say that the U.S. dollar has experienced a:

Accepted Answer

A)  nominal appreciation. 
B)  nominal depreciation. 
C)  real appreciation. 
D)  real depreciation.

Question 6

Assume nominal GDP = PY, and    = the proportion of nominal income that the nation holds (demands) as money to cover its transactions. Because nominal money supply equals nominal money demand, then:

Accepted Answer

A)  increases in nominal income cause an increase in the money supply. 
B)  decreases in nominal income cause an increase in the money supply. 
C)  price increases cause an increase in the money supply. 
D)  an increase in the money supply causes a proportional increase in nominal income.

Question 7

Currency reform refers to:

Accepted Answer

A)  setting new rules, so currency is more efficient to use. 
B)  replacing paper money and coins with electronic deposits. 
C)  more oversight for banks and other institutions handling large quantities of currency. 
D)  replacing currency whose value has fallen with new units of higher value.

Question 8

If a real exchange rate depreciation occurs, which of the following results?

Accepted Answer

A)  It takes more home goods to purchase the same quantity of foreign goods. 
B)  It takes fewer home goods to purchase the same quantity of foreign goods. 
C)  The nominal exchange rate has risen as well. 
D)  The nominal exchange rate has fallen.

Question 9

Money's function as a medium of exchange is important because:

Accepted Answer

A)  if there were no money, there would be no common unit of account. 
B)  if there were no money, society's wealth would be zero. 
C)  it eliminates the need for inefficient barter. 
D)  if there were no money, exchanges would be impossible.

Question 10

A basket of goods sold in the Eurozone is priced and weighted as shown in the following table:  And the same basket for the United States is priced and weighted as shown in the following table:  The exchange rate for $/€ is 1.25.
Is it preferable for an arbitrageur to purchase goods in the United States or in the Eurozone? To which of them should the arbitrager resell these goods?

Accepted Answer

The answer of A basket of goods sold in the...

Question 11

Have nominal anchors used by various nations been effective in the real world?

Accepted Answer

A)  Yes, for the most part. Central banks have become more independent, and inflation rates have fallen on average. 
B)  There has been very little progress toward reducing inflation using these artificial criteria. 
C)  Not at all. This highlights the inevitable conclusion that much more needs to be learned about the effectiveness of economic policy. 
D)  Energy and natural resource prices have risen and, unfortunately, offset any efforts to reduce inflation worldwide.

Question 12

Data indicate that the Fisher effect:

Accepted Answer

A)  holds in the short run. 
B)  holds in the long run. 
C)  holds in the long run and the short run. 
D)  doesn't hold in the short run but holds in the long run.

Question 13

In general, monetary economic theory states that the demand for money is proportional to:

Accepted Answer

A)  nominal income. 
B)  the unemployment rate. 
C)  the population. 
D)  the exchange rate.

Question 14

Currency is a part of which measure of money?

Accepted Answer

A)  M0 only 
B)  M1 only 
C)  M2 only 
D)  M0, M1, and M2

Question 15

More realistically, the liquidity function is not ______ but a(n) ______ function of the demand for real balances based on changes in the ______.

Accepted Answer

A)  constant; decreasing; nominal rate of interest 
B)  increasing; constant; real rate of interest 
C)  decreasing; increasing; level of real income 
D)  constant; increasing; real rate of interest

Question 16

Under the monetary approach to exchange rates, if the exchange rate has appreciated, this suggests that:

Accepted Answer

A)  the home country's money supply has risen. 
B)  the foreign country's money supply has risen. 
C)  the home country's income has fallen. 
D)  the foreign country's money supply has fallen.

Question 17

An increase in money supply by 15%, ceteris paribus,, in the United States would cause the exchange rate to:

Accepted Answer

A)  appreciate by 15%. 
B)  appreciate by 7.5%. 
C)  depreciate by 15%. 
D)  stay the same.

Question 18

When the Chinese yuan is appreciating against the U.S. dollar, if relative PPP holds, then this suggests that the U.S. inflation rate:

Accepted Answer

A)  exceeds the Chinese inflation rate. 
B)  equals the Chinese inflation rate. 
C)  exceeds the Chinese interest rate. 
D)  equals the Chinese interest rate.

Question 19

Better communication technology has made it easier to conduct ____ in international markets, thus ____ exchange rate adjustments to economic conditions and inflation.

Accepted Answer

A)  open market operations; eliminating 
B)  arbitrage; speeding up 
C)  sales and purchases of currency; slowing down 
D)  portfolio investment; fundamentally changing

Question 20

Money can be defined:

Accepted Answer

A)  only as a unit of account. 
B)  only as a store of value. 
C)  only as a medium of exchange. 
D)  as a unit of account, a store of value, and a medium of exchange.

Exam 14: Exchange Rates I: the Monetary Approach in the Long Run