Deck 13: Exchange Rates,Business Cycles,and Macroeconomic Policy in the Open Economy

Question 1

If the nominal exchange rate rises 5%,domestic inflation is 2%,and foreign inflation is 3%,what is the percent change in the real exchange rate?

A)8%
B)6%
C)4%
D)2%

Answer 1

C

Question 2

When the domestic currency strengthens under a fixed-exchange-rate system,this is called

A)a depreciation.
B)an appreciation.
C)a devaluation.
D)a revaluation.

Answer 2

D

Question 3

The real exchange rate is

A)the price of one currency in terms of another.
B)the price of domestic goods relative to foreign goods.
C)the quantity of gold that can be purchased by one unit of currency.
D)the difference in interest rates between two countries.

Answer 3

B

Question 4

If all countries produce the same good (or the same set of goods)and goods are freely traded among countries,so that the real exchange rate equals one,then the relationship between domestic and foreign prices and the nominal exchange rate is

A)P = PFor / enom.
B)P = enom / PFor.
C)enom = P × PFor.
D)P = PFor.

Question 5

An exchange-rate system in which the nominal exchange rate is set by the government is known as

A)a flexible-exchange-rate system.
B)a floating-exchange-rate system.
C)a fixed-exchange-rate system.
D)an exchange-rate union.

Question 6

Three-wheel cars made in North Edsel are sold for 5000 pounds.Four-wheel cars made in South Edsel are sold for 10,000 marks.The nominal exchange rate between the two countries is three marks per pound.The real exchange rate between the two countries is

A)0)50 three-wheel cars per four-wheel car.
B)0)66 three-wheel cars per four-wheel car.
C)1)50 three-wheel cars per four-wheel car.
D)2)00 three-wheel cars per four-wheel car.

Question 7

For a given real exchange rate,a nominal appreciation of the domestic currency will result from

A)a decline in the terms of trade.
B)an increase in the price of the foreign good.
C)an increase in the price of the domestic good.
D)an increase in the domestic rate of inflation.

Question 8

If the real exchange rate rises 4%,domestic inflation is 2%,and foreign inflation is 0%,what is the percent change in the nominal exchange rate?

A)6%
B)4%
C)2%
D)0%

Question 9

When the nominal exchange rate in terms of dollars per yen rises,

A)the dollar buys more yen and the dollar has depreciated.
B)the dollar buys fewer yen and the dollar has depreciated.
C)the dollar buys more yen and the dollar has appreciated.
D)the dollar buys fewer yen and the dollar has appreciated.

Question 10

The Bretton Woods system relied on

A)a flexible-exchange-rate system.
B)a floating-exchange-rate system.
C)a fixed-exchange-rate system.
D)an exchange-rate union.

Question 11

Three-wheel cars made in North Edsel are sold for 5000 pounds.Four-wheel cars made in South Edsel are sold for 10,000 marks.The real exchange rate between North and South Edsel is four three-wheel cars for three four-wheel cars.The nominal exchange rate between the two countries is

A)0)50 marks/pound.
B)0)66 marks/pound.
C)1)50 marks/pound.
D)2)00 marks/pound.

Question 12

The price of one currency in terms of another is called

A)the exchange rate.
B)purchasing power parity.
C)the terms of trade.
D)a currency band.

Question 13

From 1980 to 2000,the yen/dollar exchange rate fell from 240 yen/dollar to 102 yen/dollar,while the dollar/pound exchange rate fell from 2.22 dollars/pound to 1.62 dollars/pound.As a result,

A)the dollar appreciated relative to the yen,but depreciated relative to the pound.
B)the dollar depreciated relative to the yen,but appreciated relative to the pound.
C)the dollar appreciated relative to both the yen and the pound.
D)the dollar depreciated relative to both the yen and the pound.

Question 14

The idea that similar foreign and domestic goods,or baskets of goods,should have the same price when priced in terms of the same currency is called

A)equity.
B)purchasing power parity.
C)efficiency.
D)the tragedy of the commons.

Question 15

Purchasing power parity means that

A)enom = PFor / P.
B)P = PFor.
C)P = enom / PFor.
D)enom = mc2.

Question 16

A rise in the real exchange rate is called

A)a real depreciation.
B)a real appreciation.
C)a real bargain.
D)a real devaluation.

Question 17

If the real exchange rate rises 2%,domestic inflation is 3%,and foreign inflation is 1%,what is the percent change in the nominal exchange rate?

A)6%
B)4%
C)2%
D)0%

Question 18

When the domestic currency buys fewer units of foreign currency,the

A)nominal exchange rate rises.
B)nominal exchange rate falls.
C)real exchange rate rises.
D)real exchange rate falls.

Question 19

Empirical evidence shows that in the short run,purchasing power parity ________,and in the long run,purchasing power parity ________.

A)holds; does not hold
B)holds; holds
C)does not hold; holds
D)does not hold; does not hold

Question 20

When the nominal exchange rate falls,

A)the domestic currency buys more units of foreign currency and the domestic currency has depreciated.
B)the domestic currency buys fewer units of foreign currency and the domestic currency has depreciated.
C)the domestic currency buys more units of foreign currency and the domestic currency has appreciated.
D)the domestic currency buys fewer units of foreign currency and the domestic currency has appreciated.

Question 21

Suppose the Swiss franc rises against the British pound but falls against the Japanese yen.What happens to the prices of goods imported into Switzerland?

A)Both British and Japanese goods fall in price.
B)Both British and Japanese goods rise in price.
C)British goods rise in price while Japanese goods fall in price.
D)British goods fall in price while Japanese goods rise in price.

Question 22

Suppose purchasing power parity holds.If the price level in the United States is 100 dollars per good and the price level in Japan is 250 yen per good,then the nominal exchange rate is ________ yen per dollar.

A)0)25
B)0)4
C)2)5
D)4)0

Question 23

A depreciation of the dollar causes

A)a decrease in U.S.exports.
B)an increase in U.S.imports.
C)an increase in the prices of U.S.imports.
D)an increase in the prices of U.S.exports.

Question 24

There's been a real depreciation of the dollar over the past month.In the long run,you would expect the quantity of

A)American imports to fall and the quantity of American exports to fall.
B)American imports to rise and the quantity of American exports to rise.
C)American imports to fall and the quantity of American exports to rise.
D)American imports to rise and the quantity of American exports to fall.

Question 25

Suppose the real exchange rate is 10,the domestic price level is 8,and the foreign price level is 4.
(a)What is the nominal exchange rate?
(b)Suppose the real exchange rate rises by 10%,the inflation rate in the domestic country is 6%,and the inflation rate in the foreign country is 4%.By what percentage does the nominal exchange rate change?
(c)Suppose the nominal exchange rate rises by 5%,the real exchange rate rises by 8%,and domestic inflation is 3%.What is the foreign inflation rate?

Question 26

Purchasing power parity does not hold in the short to medium run because

A)exports don't equal imports.
B)exchange rates fluctuate too much.
C)some goods aren't internationally traded.
D)most business cycles are caused by shocks to aggregate demand.

Question 27

Suppose the euro/yen exchange rate falls while the dollar/yen exchange rate rises.What happens to the price of goods imported into Japan?

A)European goods become more expensive while U.S.goods become cheaper.
B)European goods become cheaper while U.S.goods become more expensive.
C)Both European and U.S.goods become more expensive.
D)Both European and U.S.goods become cheaper.

Question 28

When the dollar rises relative to other currencies,

A)foreign goods are more expensive in terms of dollars.
B)foreign currency is more expensive in terms of dollars.
C)U)S.goods become more expensive to foreigners.
D)foreign currency is more expensive in the United States,but foreign goods are cheaper.

Question 29

According to the J curve,the rapid depreciation in the dollar from 1985 to 1987 caused net exports to

A)rise in the short run and fall in the long run.
B)rise in the short run and rise further in the long run.
C)fall in the short run and rise in the long run.
D)fall in the short run and fall further in the long run.

Question 30

The J curve implies that a real depreciation will cause

A)the nominal exchange rate to appreciate in the short run and depreciate in the long run.
B)the nominal exchange rate to depreciate in the short run and appreciate in the long run.
C)net exports to fall in the short run and rise in the long run.
D)net exports to rise in the short run and fall in the long run.

Question 31

When the British pound rises in value relative to other currencies,then

A)goods imported into Britain rise in price.
B)British exports rise in price.
C)neither British exports nor imports rise in price.
D)both British exports and imports rise in price.

Question 32

The rapid depreciation in the dollar from 1985 to 1987 caused net exports during this period

A)to rise as the J curve would have predicted,but with a short lag (less than one year).
B)to rise as the J curve would have predicted,but with a long lag (more than one year).
C)to fall as the J curve would have predicted,but with a short lag (less than one year).
D)to fall as the J curve would have predicted,but with a long lag (more than one year).

Question 33

Purchasing power parity does not hold in the short to medium run because

A)exports don't equal imports.
B)exchange rates fluctuate too much.
C)most business cycles are caused by shocks to aggregate demand.
D)countries produce different goods.

Question 34

When the rate of appreciation of the nominal exchange rate equals the foreign inflation rate minus the domestic inflation rate,we say there is

A)relative purchasing power parity.
B)purchasing power parity.
C)a Phillips curve.
D)an aggregate supply shock.

Question 35

According to the "beachhead effect," in order to undo the effects of a strong-dollar period,the real value of the dollar

A)must fall to at least half of its value before appreciation of the dollar began.
B)must fall to the value it had before appreciation of the dollar began.
C)must fall to a much lower level than it had before appreciation of the dollar began.
D)must actually appreciate before it depreciates to undo the effects of a strong-dollar period.

Question 36

When the euro falls in value relative to other currencies,then

A)goods imported into Europe rise in price.
B)European exports rise in price.
C)neither European exports nor imports rise in price.
D)both European exports and imports rise in price.

Question 37

Suppose purchasing power parity holds.If in 1997 the price level in the United States is 100,the price level in Japan is 10,000,and the nominal exchange rate is 100 yen per dollar,while in 1998 the price level in Japan rises to 10,500 and the nominal exchange rate rises to 105,then the price level in the United States in 1998 must be

A)95.
B)100.
C)105.
D)110.25.

Question 38

The nominal exchange rate is 15 crowns per florin,the domestic price level is 6 florins/bottle,and the foreign price level is 2 crowns/bushel.
(a)What is the real exchange rate?
(b)What is the real exchange rate in the foreign country?
(c)If the domestic price level rises to 8 florins/bottle,what must the nominal exchange rate become if the real exchange rate remains unchanged?

Question 39

Relative purchasing power parity occurs when

A)purchasing power parity holds between every two countries.
B)purchasing power parity only holds in recessions.
C)the nominal exchange rate is constant.
D)the real exchange rate is constant.

Question 40

Suppose the dollar/euro exchange rate falls.Then

A)French firms will import more from the United States into France.
B)U)S.firms will export less to France.
C)the dollar is less valuable relative to the euro.
D)the euro is more valuable relative to the dollar.

Question 41

The Japanese real interest rate declines relative to the German real interest rate.German net exports ________ and the German exchange rate ________.

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

Question 42

A decline in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate.

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

Question 43

An increase in foreign output would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.

A)rise; shift up
B)rise; shift down
C)fall; shift up
D)fall; shift down

Question 44

What is purchasing power parity? Why might it not hold?

Question 45

An increase in domestic output would cause a ________ in net exports and a ________ in the exchange rate.

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

Question 46

An improvement in the quality of U.S.goods would lead to a ________ in the demand for dollars and a ________ in the exchange rate.

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

Question 47

Under a flexible-exchange-rate system,an increase in the demand for Japanese yen would cause the U.S.dollar/Japanese yen exchange rate to

A)fall.
B)rise.
C)remain unchanged,because supply also increases.
D)remain unchanged,because the exchange rate is set by the central bank.

Question 48

Which of the following changes would cause American net exports to decrease?

A)A decrease in the real value of the dollar
B)A decrease in American income
C)An increase in foreign income
D)A shift in demand by American consumers away from domestically produced goods

Question 49

A decrease in foreign output would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.

A)rise; shift up
B)rise; shift down
C)fall; shift up
D)fall; shift down

Question 50

Identify changes in two variables that would shift the supply curve of dollars to the right.Identify changes in two variables that would shift the demand curve for dollars to the right.

Question 51

In an open economy,a decrease in net exports because of reduced demand for domestic products by foreigners should cause the domestic real interest rate to ________ and should cause desired saving minus desired investment to ________.

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

Question 52

Goods market equilibrium in the open economy occurs when

A)desired saving equals desired investment.
B)output equals desired consumption plus desired investment plus government spending.
C)desired consumption equals desired investment.
D)desired saving minus desired investment equals net exports.

Question 53

What happens in the short run in the Keynesian model to the exchange rate and net exports in each of the following cases?
(a)The foreign real interest rate falls.
(b)Foreign output rises.
(c)Foreign demand for domestic goods rises.
(d)Domestic output rises.
(e)The domestic real interest rate falls.

Question 54

A decline in domestic output would cause a ________ in net exports and a ________ in the exchange rate.

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

Question 55

Which of the following changes would cause American net exports to increase?

A)An increase in the real value of the dollar
B)An increase in American income
C)An increase in foreign income
D)A shift in demand by American consumers away from domestically produced goods

Question 56

A decline in the exchange rate could have been caused by which of these factors?

A)A decline in domestic output (income)
B)An increase in the domestic real interest rate
C)A decline in the world demand for domestic goods
D)An increase in foreign output (income)

Question 57

Describe the effects of a rise in the domestic real interest rate on the exchange rate and on both domestic and foreign net exports.

Question 58

In a flexible-exchange-rate system,the value of a currency is determined by

A)the government.
B)the intersection of the IS and LM curves.
C)the demand and supply for the currency in the foreign exchange market.
D)Swiss gnomes.

Question 59

The U.S.real interest rate rises relative to the British real interest rate.British net exports ________ and the British exchange rate ________.

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

Question 60

A rise in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate.

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

Question 61

You have just noticed that the dollar appreciated and you suspect that the American government was behind this change.Which would you choose as the most likely cause of this appreciation in the real exchange rate?

A)An increase in the money supply
B)A decrease in the money supply
C)A temporary increase in government purchases
D)A temporary decrease in taxes

Question 62

In the short run in the Keynesian model,an increase in the domestic money supply would cause domestic output to ________ and the domestic real interest rate to ________.

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

Question 63

Describe the effects of contractionary fiscal policy by the domestic government on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model.

Question 64

In the Keynesian model of an open economy,a temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.

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

Question 65

An increase in the U.S.money supply would cause the value of the dollar to ________ and U.S.net exports to ________ in the short run using a Keynesian model.

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

Question 66

Assume the United States is currently running a current account deficit.The most effective way of eliminating this current account deficit would be to temporarily ________ government purchases and ________ the domestic money supply.

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

Question 67

Describe the effects of contractionary monetary policy by the domestic central bank on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model in the short run.What happens in the long run? Show a diagram to illustrate the short-run and long-run effects in both countries.

Question 68

Suppose Japan is currently running a current account surplus.The most effective way of eliminating this current account surplus would be to temporarily ________ government purchases and ________ the domestic money supply.

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

Question 69

A decrease in the foreign real interest rate would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.

A)rise; shift up
B)rise; shift down
C)fall; shift up
D)fall; shift down

Question 70

For this question,use the Keynesian IS-LM model with flexible exchange rates.
Eastland's main trading partner is Westland.Suppose Westland undertakes an expansionary monetary policy.
(a)What is the effect of Westland's expansionary monetary policy on Eastland's real exchange rate in the short run,assuming no change in Eastland's policies?
(b)What is the effect of Westland's expansionary monetary policy on Eastland's real exchange rate in the long run,assuming no change in Eastland's policies?
(c)What is the effect of Westland's expansionary monetary policy on Eastland's nominal exchange rate in the short run and in the long run?

Question 71

A temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.

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

Question 72

In an open economy,an increase in foreign output would cause the IS curve to shift ________ and a decrease in the foreign real interest rate would cause the IS curve to shift ________.

A)down; down
B)down; up
C)up; down
D)up; up

Question 73

A shift in demand toward the home country's goods would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.

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

Question 74

In an open economy,a shift down and to the left of the IS curve could have been caused by

A)a decline in the foreign real interest rate.
B)an increase in the demand for domestic goods relative to foreign goods.
C)an increase in foreign output.
D)a decline in domestic output.

Question 75

To encourage more investment,Mexico has lowered its tax rates to reduce the user cost of capital.Argentina is unable to pay back its foreign debts,causing its expected future marginal product of capital to fall.Mexico's real exchange rate will ________ and its net exports will ________.

A)depreciate; fall
B)appreciate; rise
C)depreciate; rise
D)appreciate; fall

Question 76

A temporary increase in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.

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

Question 77

In a Keynesian model,what are the short-run effects on output,the real interest rate,and the real exchange rate,for both the domestic economy and a foreign economy,of a decline in investment?

Question 78

The Federal Reserve has just purchased bonds in the market,carrying out open market operations.In the short run in the Keynesian model,this would cause the foreign real interest rate to ________ and foreign output to ________.

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

Question 79

In a Keynesian model,a temporary increase in government purchases would cause output to ________ and the domestic real interest rate to ________,in the short run.

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

Question 80

According to the classical model,an increase in the American nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.

A)depreciate; appreciate
B)appreciate; depreciate
C)depreciate; remain unchanged
D)appreciate; remain unchanged