1. Suppose policy makers want to increase output (Y) and keep net exports (NX) constant. Which of the following policies would most likely achieve this?
a. an increase in government spending
b. a real depreciation
c. an increase in government spending and a decrease in the real exchange rate
d. an increase in the real exchange rate
2. For an open economy, which of the following expressions represents private saving (S)?
a. investment plus tax revenues less government expenditure plus net exports, I + T - G + NX
b. I + T - G - NX
c. I + G + NX
d. G - T + NX - I
e. none of the above
3. Which of the following will cause a real depreciation?
a. a reduction in the exchange rate of foreign currency for domestic currency, E
b. an increase in the foreign price of goods, P*
c. a decrease in the domestic price of goods, P
d. all of the above
e. none of the above
4. Suppose two countries are engaged in a fixed exchange rate regime. Also assume that financial market participants believe this policy is credible. Given this information, we know that:
a. the exchange rate of foreign for domestic currency, E = 1.
b. E > 1.
c. domestic and foreign interest rates are equal, i = i*.
d. individuals will only hold domestic bonds.
5. Assume the interest parity condition holds and that initially domestic and foreign interest rates are equal, i.e., i = i*. A reduction in the domestic interest rate will cause:
a. an increase in the demand for the domestic currency.
b. an immediate increase in the current domestic exchange rate, E.
c. an expected appreciation of the domestic currency over time.
d. all of the above
6. For this question, assume that all price levels are fixed. If there is an appreciation of the domestic currency, which of the following will occur?
a. an increase in exports
b. a decrease in imports
c. an increase in net exports
d. an increase in demand for domestic output
e. none of the above
7. As the economy moves up and to the left along the IS curve, which of the following will occur when exchange rates are flexible?
a. investment spending decreases.
b. consumption decreases.
c. the domestic currency appreciates.
d. all of the above
e. none of the above
8. When the interest parity condition holds, we know that the domestic interest rate must be approximately equal to:
a. the foreign interest rate.
b. the expected rate of depreciation of the domestic currency.
c. the expected rate of appreciation of the domestic currency.
d. the foreign interest rate minus the expected rate of appreciation of the domestic currency.
e. the foreign interest rate plus the expected rate of appreciation of the domestic currency.
9. Under fixed exchange rates and perfect capital mobility, which of the following must occur if the policy to peg the currency is credible?
a. The domestic and foreign interest rates must be equal.
b. The central bank cannot use monetary policy independently to affect domestic output.
c. A contractionary fiscal policy will require that the central bank decrease the money supply.
d. all of the above
e. none of the above
10. Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant. Given this information, an increase in the domestic interest rate will cause:
a. an increase in the exchange rate expected in the future.
b. an increase in the current exchange rate.
c. greater appreciation of the domestic currency expected in the future.
d. all of the above
e. none of the above
11. A reduction in foreign income will tend to cause in equilibrium:
a. a reduction in domestic income and a reduction in imports.
b. a reduction in imports and an increase in net exports.
c. the net export (NX) line in terms of output to shift up.
d. an increase in the demand for domestic goods.
12. An increase in the real exchange rate indicates that:
a. foreign goods are now relatively cheaper.
b. foreign goods are now relatively more expensive.
c. domestic goods are now relatively more expensive.
d. both a. and c. are correct