1. Which of the following is an example of a regional currency arrangement?
A) exchange rate union
B) currency cartel associations
C) free-trade zones
D) most-favored nation status
E) agreement on commercial trade
2. Which one of the following statements is most correct?
A) Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline.
B) Any central bank purchase of assets results in an increase in the domestic money supply, while any central bank sale of assets causes the money supply to decline.
C) Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline.
D) Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to increase.
E) Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets does not necessarily affect the money supply.
3. Under fixed exchange rate, in general
A) the domestic and foreign interest rates are equal, R = R .
B) R = R + (Ee - E)/E.
C) the foreign and domestic interest rates are unequal.
D) the expected rate of domestic currency depreciation is high.
E) the expected rate of currency depreciation is one.
4. Which one of the following statements is the MOST accurate?
A) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply.
B) Under a flexible exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
C) Under a fixed exchange rate, fiscal policy tools are powerless to affect the economy's money supply or its output.
D) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
E) Under a dirty float exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
5. Fiscal expansion under fixed exchange rates will have what temporary effect?
A) the money supply will decrease.
B) output will decrease.
C) the exchange rate will increase.
D) the exchange rate will decrease.
E) there will be no effect.
6. Which one of the following statements is TRUE?
A) Inflation but not deflation can occur even under conditions of full employment.
B) Deflation but not inflation can occur even under conditions of full employment.
C) Inflation or deflation can occur even under conditions of full employment.
D) Inflation can occur even under conditions of full employment only in the long run.
E) Inflation does not coincide with periods of high unemployment levels.
7. A sudden increase in the U.S. price level
A) makes creditors in dollars better off.
B) makes creditors in dollars worse off.
C) do not affect creditors in dollars.
D) makes creditors in DM worse off.
E) makes lenders worse off.
8. Countries where investment is relatively
A) productive should have current account deficits.
B) productive should have current account surpluses.
C) unproductive should have current account surpluses.
D) productive should balanced current account surpluses.
E) productive should have low outputs.
9. Under the price-specie-flow mechanism, what happens when, say, Germany's current account surplus is greater than its non-reserve capital account deficits?
A) German loans will finance all foreign net imports.
B) Automatic drop in German domestic prices and rise in foreign prices.
C) Gold reserves will flow into Germany.
D) Gold reserves will flow out of Germany.
E) Germany will experience a deficit.
10. The view of mercantilists can be summarized as follows
A) to sell less to strangers yearly than we consume of theirs in value.
B) to sell more to strangers yearly than we consume of theirs in value.
C) to consume more of theirs in value than we sell to strangers.
D) to consume the same amount as theirs in value as we sell to strangers.
E) to sell gold and silver to strangers in exchange for services.
11. For the following question assume the following facts:
(1) Balance of Payments = 0 prior to the transactions.
(2) Person A (who lives in the United States) purchases an airplane from British Airways for $150,000.
(3) Person A pays with a check from his account at First Union Bank in the United States.
(4) British airways, since it will need dollars in 1 month, deposits the check at the Bank of England.
(5) Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States.
Due to the transactions above, what are the effects on the balance of payments?
A) -$150,000 due to import of good (current account debit)
B) +$150,000 due to import of good (current account credit)
C) -$150,000 due to deposit of Bank of England (capital account debit)
D) +$150,000 due to deposit of Bank of England (capital account credit)
E) No effect (150,000 current account debit and 150,000 capital account credit)
12. People who are risk averse
A) value a collection of assets only on the basis of its expected returns.
B) value a collection of assets only on the basis of the risk of that return.
C) value a collection of assets not only on the basis of its expected returns but also on the basis of the risk of that return.
D) are less likely to invest in life insurance.
E) are less likely to have a diverse portfolio.
13. Asset trades that deal with debt instruments are best described as
A) share of stock.
B) exchange rate.
C) receipts.
D) factors.
E) bonds or bank deposits.
14. Suppose you are offered a gamble in which you win $1,000 1/3 half the time but lose $800 2/3 half the time. If you are risk lover will you take the gamble? What will your expected payoff be?
The expected payoff be = 1000*1/3 - 800*2/3 = -$200
15. The following simple two-country question illustrates how countries are made better off by trade in assets. Imagine that there are two countries, Home and Foreign, and that residents of each own only one asset, domestic land yielding an annual harvest of kiwi fruit. Assume that the yield on the land is uncertain. Half the time, Home's land yields a harvest of 100 tons of kiwi fruit at the same time as Foreign's land yields a harvest of 50 tons. The other half of the time the outcomes are reversed. The Foreign's harvest is 100 tons, but the Home harvest is only 50.
15.1) Calculate the average, for each country of kiwi harvest.
The average of each country of Kiwi harvest = 0.50 * 100 + 0.5*50 =75 tons
15.2) Suppose the two countries can trade shares in the ownership of their perspective assets. Further, assume that a Home owner of a 10 percent share in Foreign land. He will receive 10 percent share in Foreign land, and thus receives 10 percent of the annual Foreign kiwi fruit harvest. Further assume that a Foreign owner of a 10 percent share in Home land is permitted. In this case, a Foreigner is entitled to 10 percent of the Home harvest. Calculate the expected value of kiwi fruit for each investor.
When farmer has good years at home he will get 90 tons from home and 5 tons from foreign.
When farmer has bad years at home he will get 45 tons from home and 10 tons from foreign.
Expected return = 95*0.50 + 55*0.50 = 75 tons
16. As a country begins to liberalize its capital account, what would you expect to happen to the difference between the interest rates for similar assets in this country and another country with open capital markets?
A) get larger
B) get smaller
C) stay the same
D) it depends on the existing exchange rate.
E) exponential divergence
17. Under a gold standard, countries control
A) its flexible exchange rate.
B) monetary policy oriented toward domestic goals.
C) international capital movements.
D) foreign inflationary policies.
E) and avoid risks in international trade.
18. Which of the following is TRUE?
A) All European countries are part of the EMU.
B) All Western European countries are part of the EMU.
C) Originally, 20 countries joined the EMU on January 1999.
D) No Western European countries are part of the EMU.
E) Not all Western European countries are part of the EMU.
19. The credibility theory of the EMS implies in effect that the political costs of violating international exchange rate agreements
A) cannot restrain governments from depreciating their currency.
B) can restrain governments from depreciating their currency.
C) cannot restrain governments from depreciating their currency in the short run.
D) cannot restrain governments from depreciating their currency in the long run.
E) can control the political policies of member nations.
20. Under ERM 2 rules, the national central bank of an EU member with its own currency can suspend euro intervention operations
A) if there is a civil war.
B) if they result in money supply changes that threaten to destabilize the domestic price level.
C) if there is a current account deficit.
D) if there is a current account surplus.
E) if they result in a weakened current account.
21. Which one of the following statements is TRUE?
A) The less extensive are cross-border trade and factor movements, the greater is the gain from a fixed cross-border exchange rate.
B) The more extensive are cross-border trade and factor movements, the greater is the loss from a fixed cross-border exchange rate.
C) The more extensive are cross-border trade and factor movements, the greater is the gain from a fixed cross-border exchange rate.
D) The more extensive are cross-border trade, the greater is the loss from a fixed cross-border exchange rate.
E) The more extensive are factor movements, the greater is the loss from a fixed cross-border exchange rate.
22. The ability of factors to migrate abroad
A) reduces the severity of unemployment and the fall in the rate of return available to investors.
B) increases the severity of unemployment and the fall in the rate of return available to investors.
C) reduces the severity of unemployment but increases the fall in the rate of return available to investors.
D) cannot change the severity of unemployment and the constant rate of return available to investors.
E) reduces the migration of highly-skilled workers.
23. Discuss the benefits and costs of joining a fixed-exchange area.
Benefits:
a) Gains from stability
b) Reduction in uncertainty
c) Simplification of economic calculations
d) More predicable basis for decisions that involve international transactions
Costs:
a) Given up monetary policy for stabilizing employment and output
b) Disturbed economy has floating exchange rate advantage over fixed one
c) Stabilization is more difficult with fixed rates
24. Compared with industrialized economies, most developing countries are poor in the factors of production essential to modern industry: These factors are
A) capital and skilled labor.
B) capital and unskilled labor.
C) fertile land and unskilled labor.
D) fertile land and skilled labor.
E) water and capital.
25. How would you define convergence?
A) tendency for gaps between industrial countries' per-capital incomes to narrow
B) tendency for gaps between all countries' per-capital incomes to narrow
C) the theory that a crisis in a low-income country will spread to all countries, regardless of debt structure
D) the theory that a crisis in a low-income country will spread to only those countries which had lent money to the original country
E) tendency for the world distribution of income to be persistently unequal
26. While many developing countries have reformed their economies in order to imitate the success of the successful industrial economies, the process remains incomplete and most developing countries tend to be characterized by all of the following EXCEPT
A) seigniorage.
B) control of capital movements by limiting foreign exchange transactions connected with trade in assets.
C) use of natural resources or agricultural commodities as an important share of exports.
D) a worse job of directing savings toward their most efficient investment uses.
E) reduced corruption and poverty due to limited underground markets.
27. Which of the following is NOT a common characteristic of a developing country?
A) extensive direct government control of the economy
B) history of low inflation
C) many weak credit institutions
D) "pegged" exchange rates
E) Agricultural commodities make up a large share of its exports.
28. A trend that has been reinforced by many developing countries is privatization. Privatization refers to
A) purchasing large companies and turning them into state-owned enterprises.
B) investing government money in large, privately-owned companies.
C) exchanging bonds for shares in state-owned enterprises.
D) selling large state-owned enterprises to private owners in the financial sector.
E) selling large state-owned enterprises to private owners in key areas such as electricity, telecommunications, or petroleum.