Deck 16: International Trade in Goods and Assets

Question 1

In the monetary small open-economy model with a flexible exchange rate, an increase in the domestic money supply increases

A)domestic output, but has no effect on the domestic price level or the nominal exchange rate.
B)the nominal exchange rate, but has no effect on domestic output or the domestic price level.
C)the domestic price level, but has no effect on domestic output or the nominal exchange rate.
D)the domestic price level and the nominal exchange rate, but has no effect on domestic output.
E)the domestic price level and domestic output, but has no effect on the nominal exchange rate.

Answer 1

D

Question 2

In the New Keynesian open economy model, an increase in the tariff imposed by the rest of the world on the exports of the SOE causes

A)the demand for imports to rise.
B)the demand for imports to fall.
C)the demand for exports to rise.
D)the demand for net exports to rise.
E)the demand for exports to fall.

Answer 2

E

Question 3

If the real exchange rate is high, greater than 1

A)the purchasing power of domestic income has diminished.
B)the nominal exchange rate is appreciating.
C)foreign goods would be cheaper than domestic goods.
D)the nominal exchange rate is depreciating.
E)it is cheaper to buy goods domestically than abroad.

Answer 3

E

Question 4

Adoption of a currency board

A)is one method for achieving a soft peg policy.
B)requires that a centralized institution holds interest-bearing assets denominated in the currency against which the nominal exchange rate is being fixed.
C)mandates how the seigniorage revenue from the printing of money is to be distributed.
D)mandates the use of currency in all domestic transactions.
E)places responsibility for exchange rate management in the hands of an agency that is independent of political influences.

Question 5

In the New Keynesian open economy model with a flexible exchange rate, a decrease in tariffs imposed by the domestic government on imports causes

A)no change in output.
B)an increase in aggregate output.
C)a reduction in aggregate output.
D)an exchange rate depreciation.
E)an increase in investment.

Question 6

In the New Keynesian open economy model, suppose the exchange rate is flexible and there is a decline in total factor productivity

A)contractionary monetary policy is necessary.
B)expansionary monetary policy is necessary.
C)no policy intervention is necessary.
D)expansionary fiscal policy is necessary.
E)the central bank should reduce the real interest rate.

Question 7

In the monetary small open-economy model, a flexible exchange rate insulates the domestic price level from

A)increases in foreign interest rates, but not from increases in foreign price levels.
B)neither real nor nominal shocks from abroad.
C)both real and nominal shocks from abroad.
D)nominal shocks from abroad, but not from real shocks from abroad.
E)real shocks from abroad, but not from nominal shocks from abroad.

Question 8

A flexible exchange rate is determined by

A)buying and selling of foreign exchange reserves.
B)both fiscal and monetary policies only.
C)the federal government in each country.
D)the central bank in each country.
E)forces of supply and demand for the currency in the foreign exchange market.

Question 9

In the monetary small open-economy model with a fixed exchange rate, a temporary decrease in domestic total factor productivity in the absence of any other shocks

A)decreases output and the current account surplus.
B)leaves output unchanged and decreases the current account surplus.
C)decreases output and increases the current account surplus.
D)increases output and the current account surplus.
E)increases output and decreases the current account surplus.

Question 10

In the monetary small open-economy model with a flexible exchange rate, an increase in the world real interest rate

A)decreases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
B)increases domestic output and the nominal exchange rate as long as real money demand is much less responsive to real income than the real interest rate.
C)increases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
D)increases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
E)decreases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.

Question 11

In the monetary small open-economy model with a flexible exchange rate, an increase in the world real interest rate

A)shifts aggregate demand to the left, increasing output and the real interest rate.
B)shifts aggregate supply to the right, increasing output and decreasing the real interest rate.
C)shifts aggregate demand to the right, increasing output and the real interest rate.
D)has no real effects.
E)shifts aggregate demand to the left, decreasing output and the real interest rate.

Question 12

In the New Keynesian open economy model, if the exchange rate is fixed

A)a change in current total factor productivity increases output.
B)the real interest rate is an effective tool that can be changed by the central bank.
C)fiscal policy is an effective stabilization tool.
D)fiscal policy and monetary policy are powerless.
E)monetary policy is an effective stabilization tool.

Question 13

In the New Keynesian open economy model, government spending

A)is an ineffective stabilization tool with a flexible exchange rate, and an effective stabilization tool with a fixed exchange rate; prices are flexible.
B)is an effective stabilization tool with a flexible exchange rate, and an effective stabilization tool with a fixed exchange rate.
C)always requires the support of the central bank.
D)is an effective stabilization tool with a flexible exchange rate, and an ineffective stabilization tool with a fixed exchange rate.
E)is an ineffective stabilization tool with a flexible exchange rate, and an ineffective stabilization tool with a fixed exchange rate; net exports depends on the relative price of
Foreign goods to domestic goods.

Question 14

The real exchange rate is the

A)domestic currency price of foreign currency.
B)price of foreign goods in terms of domestic goods.
C)domestic currency price of domestic currency.
D)price of domestic goods in terms of foreign goods.
E)foreign currency price of domestic currency.

Question 15

In the monetary small open-economy model with a fixed exchange rate, the supply of money

A)cannot be determined independently by the central bank.
B)can be determined by the Bank of Canada within specific ranges.
C)can be determined by the financial markets.
D)can be determined in conjunction with controlling the price level.
E)can be determined by the demand for money.

Question 16

The balance of payments is zero

A)only if the capital account balance is zero.
B)only if the current account balance is zero.
C)because market forces ensure that this is so.
D)if the capital inflows equal capital outflows.
E)because each transaction has equal and opposite entries in the accounts.

Question 17

In response to a temporary change in total factor productivity, the adoption of capital controls under a fixed exchange rate

A)amplifies the effect of this disturbance on domestic output and dampens the effect on the domestic nominal money supply.
B)dampens the effect of this disturbance on domestic output and amplifies the effect on domestic nominal money supply.
C)dampens the effect of this disturbance on both domestic output and the real exchange rate.
D)amplifies the effect of this disturbance on both domestic output and the domestic nominal money supply.
E)dampens the effect of this disturbance on both domestic output and the domestic nominal money supply.

Question 18

In the New Keynesian open economy model with a fixed exchange rate, an increase by the domestic government in tariffs on imports results in

A)a decline in the interest rate.
B)an increase in aggregate output.
C)a reduction in the money supply.
D)an increase in investment.
E)a decline in aggregate output.

Question 19

Under a hard peg

A)only industrialized nations commit to fixed nominal exchange rates.
B)the central bank can alter the value of the exchange rate as required.
C)only the federal government can alter the nominal exchange rate.
D)a country has a strict rule of no government intervention to target the nominal exchange rate.
E)a country commits to a fixed nominal exchange rate for an indefinite period of time.

Question 20

If a country's central bank seeks to stabilize the price level and if nominal shocks from abroad are important, then

A)a flexible exchange rate is preferable to a fixed exchange rate.
B)a fixed exchange rate is preferable to a flexible exchange rate.
C)flexible and fixed exchange rates are equivalent.
D)the central bank will not be able to realize its goal.
E)the central bank should devalue under fixed exchange rates.

Question 21

If a country's central bank seeks to stabilize the price level and if real shocks from abroad are important, then

A)the central bank should devalue under flexible exchange rates.
B)the central bank will not be able to realize its goal.
C)a flexible exchange rate is preferable to a fixed exchange rate.
D)a fixed exchange rate is preferable to a flexible exchange rate.
E)flexible and fixed exchange rates are equivalent.

Question 22

The nominal exchange rate is the

A)price of foreign goods in terms of domestic goods.
B)domestic currency price of domestic currency.
C)price of domestic goods in terms of foreign goods.
D)foreign currency price of domestic currency.
E)domestic currency price of foreign currency.

Question 23

In the monetary small open-economy model with a fixed exchange rate, an increase in the foreign price level

A)shifts aggregate demand to the left.
B)shifts aggregate demand to the right.
C)shifts the money supply curve to the right.
D)shifts the money demand curve to the left.
E)shifts the money demand curve to the right.

Question 24

Which of the following was specifically instituted to ensure a successful hard peg?

A)the European Monetary System
B)the International Monetary Fund
C)the European Monetary Union
D)the Bretton Woods Agreement
E)the U.S. Federal Reserve

Question 25

Purchasing power parity holds if

A)countries are small and underdeveloped.
B)inflation is low so purchasing power increases.
C)real wage rates adjust so that purchasing power is the same across all countries.
D)purchases are made in the short run and long run.
E)prices of all goods in the world economy were equal, corrected for nominal exchange rates.

Question 26

In the New Keynesian open economy model

A)the nominal exchange rate is always flexible.
B)the nominal exchange rate is always fixed.
C)net exports depends on the relative price of foreign goods to domestic goods.
D)prices are flexible.
E)the real interest rate is determined by the central bank.

Question 27

In the monetary small open-economy model with a fixed exchange rate, a devaluation of the domestic currency in the absence of any other shocks

A)increases the domestic money supply and has no effect on the current account surplus.
B)decreases the current account surplus and has no effect on the domestic money supply.
C)decreases the domestic money supply and has no effect on the current account surplus.
D)increases the current account surplus and has no effect on the domestic money supply.
E)decreases the current account surplus and increases the price level.

Question 28

In the monetary small open-economy model with a fixed exchange rate, an increase in the foreign price level

A)decreases the domestic money supply and decreases the domestic price level.
B)decreases the domestic money supply and increases the domestic price level.
C)the domestic price level decreases in proportion to the increase in the foreign price level.
D)increases the domestic money supply and decreases the domestic price level.
E)increases the domestic money supply and increases the domestic price level.

Question 29

A hard peg may be achieved by

A)buying and selling bonds in the open market.
B)following the rules of the Bretton Woods Agreement.
C)becoming a lender of last resort.
D)revaluation of the exchange rate.
E)dollarization.

Question 30

An agreement among countries to adopt a common currency is called a

A)central bank consolidation.
B)currency union.
C)common monetary union.
D)monetary compact.
E)common banking treaty.

Question 31

In the European Monetary Union, the supply of Euros

A)automatically varied in response to short-run fluctuations in the exchange rates of the member nations.
B)is managed by the International Monetary Fund.
C)is managed by the European Central Bank.
D)is determined by market forces.
E)is managed by the individual central banks of the member countries.

Question 32

In the New Keynesian open economy model with a flexible exchange rate, an increase in anticipate future total factor productivity

A)increases aggregate output.
B)reduces aggregate consumption.
C)causes an exchange rate appreciation.
D)causes an exchange rate depreciation.
E)has no effects.

Question 33

In the monetary small open-economy model with a fixed exchange rate, an increase in the world real interest rate

A)decreases the money supply and has no effect on domestic output.
B)increases the domestic price level and has no effect on domestic output.
C)decreases the domestic price level and has no effect on domestic output.
D)increases domestic output and has no effect on the domestic price level.
E)decreases domestic output and has no effect on the domestic price level.

Question 34

A hard peg may be achieved by

A)establishment of a currency board.
B)government's printing currency.
C)following the rules of the Bretton Woods Agreement.
D)revaluation of the exchange rate.
E)becoming a lender of last resort.

Question 35

Purchasing power parity may not hold in practice due to

A)the existence of traded goods.
B)the evolution of free trade agreements.
C)the existence of trade imbalances.
D)transportation costs.
E)cross-country differences in environmental regulations.

Question 36

Dollarization is a policy action that

A)mimics policy actions taken by the Bank of Canada.
B)outlaws the holding of foreign currencies other than the U.S. dollar.
C)tries to stabilize the value of the local currency vs. the U.S. dollar.
D)adopts the currency of another country as the national medium of exchange.
E)buys and sells foreign exchange reserves in the foreign exchange market.

Question 37

In response to a temporary change in total factor productivity, the adoption of capital controls under a flexible exchange rate

A)amplifies the effect of this disturbance on both domestic output and the nominal exchange rate.
B)dampens the effect of this disturbance on domestic output and amplifies the effect on the nominal exchange rate.
C)dampens the effect of this disturbance on both domestic output and the real exchange rate.
D)dampens the effect of this disturbance on both domestic output and the nominal exchange rate.
E)amplifies the effect of this disturbance on domestic output and dampens the effect on the nominal exchange rate.

Question 38

In the monetary small open-economy model with a flexible exchange rate, an increase in the foreign price level decreases

A)the domestic price level and the nominal exchange rate, but has no effect on domestic output.
B)the domestic price level, but has no effect on domestic output or the nominal exchange rate.
C)domestic output and the price level, but has no effect on the nominal exchange rate.
D)the nominal exchange rate, but has no effect on domestic output or the domestic price level.
E)domestic output, but has no effect on the domestic price level or the nominal exchange rate.

Question 39

In the New Keynesian open economy model with a flexible exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response
To keep the output gap at zero?

A)Increase the money supply.
B)Reduce the money supply.
C)Nothing.
D)Reduce government spending.
E)Increase government spending.

Question 40

Purchasing power parity assumes

A)that foreign and domestic assets are perfect substitutes.
B)similar prices for inputs.
C)no transportation costs and no trade barriers.
D)similar real wage rates.
E)no inflationary pressures.

Question 41

Under purely flexible exchange rates

A)there is no intervention by the domestic fiscal or monetary authorities to specifically target the nominal exchange rate.
B)there is only occasional intervention by the domestic fiscal or monetary authorities to specifically target the nominal exchange rate.
C)there is only intervention by monetary authorities to specifically target the nominal exchange rate.
D)the domestic fiscal and monetary authorities retain considerable flexibility to prevent long-run variability in the nominal exchange rate.
E)the domestic fiscal and monetary authorities retain considerable flexibility to prevent short-run variability in the nominal exchange rate.

Question 42

A principal reason that purchasing power parity does NOT hold exactly in practice is

A)that consumers in different countries have different preferences.
B)that foreign and domestic assets are not perfect substitutes.
C)costs of production are not the same in all countries.
D)that it is a short-run theory.
E)the existence of non-traded goods.

Question 43

The acquisition of a new physical asset by a foreign resident is called

A)capital outflow.
B)foreign capital investment.
C)a portfolio outflow.
D)foreign direct investment.
E)a portfolio inflow.

Question 44

A key international institution that plays an important role in exchange rate determination is the

A)International Monetary Fund.
B)European Central Bank.
C)U.S. Currency Board.
D)World Bank.
E)United Nations.

Question 45

The International Monetary Fund plays the key role of

A)providing loans to member countries to help finance development projects.
B)acting as lender of last resort for its member countries' central banks.
C)enforcing international monetary agreements.
D)ensuring that exchange rates remain fixed to the value of the U.S. dollar.
E)providing deposit insurance for banks in its member nations.

Question 46

A natural region over which a single currency dominates as a medium of exchange is called

A)monetary union area.
B)national sovereignty.
C)currency union.
D)common currency area.
E)sovereign nation.

Question 47

In the New Keynesian open economy model with a flexible exchange rate, suppose there is an increase in money demand. Which of the following happens?

A)investment goes up
B)the exchange rate appreciates
C)the exchange rate depreciates
D)output increases
E)nothing

Question 48

In the New Keynesian open economy model with a fixed exchange rate, suppose there is an increase in money demand. Which of the following happens?

A)output increases
B)output decreases
C)nothing
D)the exchange rate appreciates
E)the money supply increases

Question 49

In the monetary small open-economy model with a flexible exchange rate, an increase in the domestic money supply causes

A)the nominal exchange rate to equal the real interest rate.
B)the nominal exchange rate to decrease.
C)the nominal exchange rate to increase in proportion with the money supply.
D)the nominal exchange rate to increase faster than the money supply.
E)the nominal exchange rate to remain unchanged.

Question 50

A capital inflow occurs when

A)a foreign resident purchases a foreign asset.
B)a domestic resident purchases a domestic asset.
C)a foreign resident purchases a domestic asset.
D)imports exceed exports.
E)a domestic resident purchases a foreign asset.

Question 51

In the monetary small open-economy model with a fixed exchange rate, the domestic

A)central bank loses control over the price level.
B)central bank loses control over the domestic stock of money.
C)government loses control over the level of domestic government spending.
D)government loses control over the level of domestic government spending and domestic taxes.
E)government loses control over the level of domestic taxes.

Question 52

Which of the following institutions plays the role of an international lender of last resort?

A)the European Monetary System
B)the World Trade Organization
C)the International Monetary Fund
D)the World Bank
E)the U.S. Federal Reserve System

Question 53

A devaluation of the exchange rate is a policy action that

A)increases the nominal exchange rate.
B)fixes the nominal exchange rate.
C)decreases the real exchange rate.
D)increases the real exchange rate.
E)decreases the nominal exchange rate.

Question 54

A revaluation of the exchange rate is a policy action that

A)increases the real exchange rate.
B)decreases the nominal exchange rate.
C)decreases the real exchange rate.
D)increases the nominal exchange rate.
E)fixes the nominal exchange rate.

Question 55

The acquisition of a domestic financial asset by a foreign resident is called

A)a portfolio inflow.
B)foreign direct investment.
C)capital outflow.
D)foreign capital investment.
E)a portfolio outflow.

Question 56

In the New Keynesian open economy model with a fixed exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response
To keep the output gap at zero?

A)Increase government spending.
B)Increase the money supply.
C)Reduce the money supply.
D)Reduce government spending.
E)Nothing.

Question 57

The large exchange rate depreciations which preceded the Asian Crisis was likely the result of

A)rapid growth of the money supply.
B)decrease in GDP growth.
C)decreased domestic demand for money.
D)high rates of inflation.
E)large decrease in foreign investors' demand for Asian currencies.

Question 58

For a country with a fixed exchange rate, foreign exchange reserves are

A)an asset of the domestic government.
B)dictated by the trade balance.
C)unnecessary.
D)held by private banks.
E)a liability of the domestic government.

Question 59

A capital outflow occurs when

A)a domestic resident purchases a domestic asset.
B)a foreign resident purchases a foreign asset.
C)a foreign resident purchases a domestic asset.
D)a domestic resident purchases a foreign asset.
E)exports exceed imports.

Question 60

Question 61

Capital controls refer to

A)government restrictions on the trade of assets across international borders.
B)increased movements in the nominal exchange rate.
C)barriers to trade and investment.
D)increased fluctuations in foreign exchange reserves under a fixed exchange rate regime.
E)controls placed on central banks to maintain fixed exchange rates.

Question 62

The Bretton Woods arrangement

A)fixed the value of the U.S. dollar relative to gold.
B)required that conditions specifying permissible policy actions be placed on member countries.
C)required foreign central banks to hold certain minimum amounts of gold as foreign exchange reserves.
D)fixed the value of the U.S. dollar relative to the Euro.
E)required that member nations, other than the United States, to disband their central banks.

Question 63

In an open economy, the law of one price implies that

A)perfect competition holds in all domestic markets.
B)the domestic economy may have a comparative advantage in only half the goods it produces.
C)purchasing power parity should hold.
D)the real exchange rate is greater than one.
E)the nominal exchange rate should equal one.

Question 64

In the New Keynesian open economy model, a decrease in the tariff imposed by the SOE on imports causes

A)demand for imports to fall.
B)demand for imports to rise.
C)demand for exports to fall.
D)demand for exports to rise.
E)demand for net exports to rise.

Question 65

In the monetary small open-economy model, a fixed exchange rate insulates the domestic price level from

A)neither real nor nominal shocks from abroad.
B)increases in foreign price levels, but not from increases in foreign interest rates.
C)both real and nominal shocks from abroad.
D)real shocks from abroad, but not nominal shocks from abroad.
E)nominal shocks from abroad, but not from real shocks from abroad.

Question 66

The adoption of capital controls makes

A)some domestic residents better off and some worse off, although on average welfare increases.
B)everyone in the domestic economy worse off.
C)the economy suffer a loss in economic efficiency.
D)everyone in the domestic economy better off.
E)some domestic residents better off and some worse off, although on average welfare decreases.

Question 67

Under a flexible exchange rate, an increase in the domestic money supply leads to

A)the real interest rate increasing.
B)a depreciation of the domestic currency.
C)a revaluation of the domestic currency.
D)a devaluation of the domestic currency.
E)an appreciation of the domestic currency.

Question 68

Determine the impact of an increase in total factor productivity on domestic aggregate output, absorption, the
current account surplus, the nominal exchange rate, and the price level. Assume a flexible exchange rate and
flexible prices.

Question 69

In the monetary small open-economy model with a fixed exchange rate, a temporary decrease in domestic total factor productivity in the absence of any other shocks

A)increases the domestic money supply and decreases the current account surplus.
B)decreases the current account surplus and increases the price level.
C)increases the current account surplus and decreases the domestic money supply.
D)increases the current account surplus and increases the domestic money supply.
E)decreases the domestic money supply and decreases the current account surplus.