Question 1 assume that the interest parity condition holds

Question

QUESTION 1: 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:

• an increase in the exchange rate expected in the future.
• an increase in the current exchange rate.
• greater appreciation of the domestic currency expected in the future.
• all of the above
• none of the above

QUESTION 2: In an open economy under flexible exchange rates, expansionary monetary policy will always cause:

• a rise in output.
• a drop in the interest rate.
• a fall in the exchange rate, E.
• all of the above
• both a. and b.

QUESTION 3: Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is 4% while the one-year U.K. interest rate is 6%. Given this information, financial markets expect the U.K. pound to:

• depreciate by 2% today.
• depreciate by 2% over the next year.
• appreciate by 2% over the next year.
• appreciate by 2% today.
• be unchanged

QUESTION 4: If the price level in Japan is 3.0, the price level in Australia is 6.0, and it costs 50 Yen to buy one Australian dollar, then the real exchange rate between Australia and Japan (the price of domestic goods in terms of Japanese goods) is ________.

• 0.005
• 0.05
• 0.5
• 50
• 100

QUESTION 5: A change in which of the following variables will have NO direct effect on domestic demand?

• domestic income
• government spending
• taxes
• the interest rate (r)
• none of the above

QUESTION 6: Suppose the domestic and foreign interest rates are i = 4%, i* = 2%, and that the domestic currency is expected to depreciate by 3% during the coming year. Given this information, we know that:

• individuals will only hold domestic bonds.
• individuals will only hold foreign bonds.
• individuals will be indifferent about holding domestic or foreign bonds.
• the interest parity condition holds.

QUESTION 7: Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is greater than the U.K. interest rate. Given this information, we know that investors expect:

• the pound to depreciate.
• the pound to appreciate.
• the dollar-pound exchange rate to remain fixed.
• the U.S. interest rate to fall.
• none of the above

QUESTION 8: 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?

• an increase in exports
• a decrease in imports
• an increase in net exports
• an increase in demand for domestic output
• none of the above

QUESTION 9: An increase in the real exchange rate indicates that:

• foreign goods are now relatively cheaper.
• foreign goods are now relatively more expensive.
• domestic goods are now relatively more expensive.
• both a. and c. are correct

QUESTION 10: A reduction in foreign income will tend to cause in equilibrium:

• a reduction in domestic income and a reduction in imports.
• a reduction in imports and an increase in net exports.
• the net export (NX) line in terms of output to shift up.
• an increase in the demand for domestic goods.

QUESTION 11: An increase in which of the following variables is likely to have NO direct effect on domestic demand?

• domestic income
• the real exchange rate
• taxes
• the interest rate (r)
• none of the above

QUESTION 12: Which of the following events will cause the smallest change in the real exchange rate?

• a 6% nominal depreciation and a 6% increase in the foreign price level, P*
• a 6% increase in the domestic price level, P and a 6% reduction in P*
• a 6% nominal depreciation and a 6% reduction in P*
• a 3% nominal appreciation
• a 2% nominal appreciation and a 2% increase in P

QUESTION 13: In a flexible exchange rate regime, an increase in the expected future exchange rate will cause:

• the interest parity (IP) curve to shift to the left.
• a movement along the IP curve.
• the IP curve to pivot to the right and be flatter.
• neither a shift nor movement along the IP curve.

QUESTION 14: Suppose two countries make a credible commitment to fix their bilateral exchange rate. In such a situation, we know that:

• the uncovered interest parity condition no longer holds.
• the real exchange rate must be constant as well.
• each country can freely allow its interest rate to diverge from that of the other country.
• the interest rate in the two countries must be equal.
• neither country will run a trade deficit.

QUESTION 15: Under fixed exchange rates and perfect capital mobility, which of the following must occur if the policy to peg the currency is credible?

• The domestic and foreign interest rates must be equal.
• The central bank cannot use monetary policy independently to affect domestic output.
• A contractionary fiscal policy will require that the central bank decrease the money supply.
• all of the above
• none of the above

QUESTION 16: In an open economy under flexible exchange rates, a reduction in the interest rate will cause an increase in which of the following?

• investment
• exports
• net exports
• all of the above
• none of the above

QUESTION 17: The existence of the J-curve indicates that which of the following will occur after a depreciation?

• The trade deficit will improve temporarily before it worsens.
• The trade deficit will worsen temporarily before it improves.
• The real exchange rate will fall temporarily before it rises.
• The real exchange rate will rise temporarily before it falls.
• none of the above

QUESTION 18: Suppose there is a real depreciation of the domestic currency. This real depreciation will cause:

• an increase in net exports.
• an increase in imports.
• a reduction in output.
• a decrease in government spending.
• all of the above.

QUESTION 19: Under a fixed exchange rate regime, a tax increase will in the short run:

• cause a reduction in ouput, Y.
• require a reduction in the money supply.
• cause no change in the domestic interest rate.
• all of the above

QUESTION 20: Suppose there are two countries that are identical in every way with the following exception. Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime. Suppose government spending in both countries rises by the same amount. Given this information, we know that:

• the change in output in A will be greater than in B.
• the change in output in B will be greater than in A.
• the change in output will be the same in both countries.
• the relative output effects are ambiguous.

QUESTION 21: Which of the following will increase the steady-state growth rate of capital?

• an increase in the saving rate
• an increase in the population growth rate
• a temporary increase in technological progress
• all of the above
• none of the above

QUESTION 22: In the medium run, lower money growth is associated with:

• lower real interest rates and lower nominal interest rates
• lower real interest rates and higher nominal interest rates
• higher real interest rates and higher nominal interest rates
• higher real interest rates and lower nominal interest rates
• none of the above

QUESTION 23: Assume the central bank implements contractionary monetary policy, which is fully anticipated by financial markets. This contractionary monetary policy will cause which of the following to occur?

• stock prices to rise
• stock prices to remain unchanged
• stock prices to fall
• an ambiguous effect on stock prices