Deck 17: Openness in Goods and Financial Markets

Question 1

Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate by 3% during the year.For each dollar that a U.S.resident invests in foreign bonds,he / she can expect to get back an approximate total of

A)$)93.
B)$)96.
C)$1.04.
D)$1.07.
E) $1.10.

Answer 1

$1.04.

Question 2

In 2014,which of the following countries had the highest ratio of exports to GDP?

A)Germany
B)Netherlands
C)Japan
D)United States
E) Austria

Answer 2

Netherlands

Question 3

In the U.S.,over the past forty years,

A)exports as a percentage of GDP have increased, while imports has a percentage of GDP have decreased.
B)exports as a percentage of GDP have decreased, while imports has a percentage of GDP have increased.
C)both exports and imports as a percentage of GDP have decreased.
D)both exports and imports as a percentage of GDP have increased.
E) both exports and imports as a percentage of GDP have remained constant.

Answer 3

both exports and imports as a percentage of GDP have increased.

Question 4

In 2014,exports as a percentage of GDP for the United States are approximately

A)between 1% and 5%.
B)between 10% and 20%.
C)between 20% and 40%.
D)between 40% and 75%.
E) between 75% and 90%.

Question 5

Suppose there is a real depreciation of the dollar.Which of the following may have occurred?

A)foreign currency has become more expensive in dollars.
B)foreign goods have become more expensive to Americans.
C)the foreign price level has increased relative to the U.S. price level.
D)all of the above
E) none of the above

Question 6

If the price level in Japan is 1.0,the price level in the U.S.is 2.0,and it costs 100 Yen to buy one dollar,then the real exchange rate between the U.S.and Japan is

A)2)
B)10.
C)50.
D)100.
E) 200.

Question 7

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

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

Question 8

If the exchange rate between the dollar and the pound (the pound price of the dollar)is currently 1.50,and is expected to be 1.35 in one year,then the expected rate of

A)depreciation of the dollar is 10%.
B)depreciation of the dollar is 15%.
C)appreciation of the dollar is 10%.
D)appreciation of the dollar is 15%.
E) none of the above

Question 9

As of 2014,the ratio of exports to GDP for Netherlands was approximately equal to

A)20%.
B)40%.
C)60%.
D)83%.

Question 10

Suppose the U.S.one-year interest rate is 3% per year,while a foreign country has a one-year interest rate of 5% per year.Ignoring risk and transaction costs,a U.S.investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is

A)less than 5%.
B)greater than 5%.
C)greater than 2%.
D)less than 2%.
E) less than 1%.

Question 11

Year-to-year movements in real exchange rates between industrialized countries like the U.S.and Canada are caused mostly by

A)changes in relative rates of inflation.
B)changes in relative growth rates of output.
C)changes in quotas or tariffs.
D)changes in capital controls.
E) changes in nominal exchange rates.

Question 12

From the perspective of the United States,an increase in the nominal exchange rate will cause which of the following?

A)the dollar becomes less expensive to foreigners
B)foreign goods are more expensive to Americans
C)foreign currency is more expensive to Americans
D)American goods are more expensive to foreigners
E) none of the above

Question 13

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

A)the pound to depreciate.
B)the pound to appreciate.
C)the dollar-pound exchange rate to remain fixed.
D)the U.S. interest rate to fall.
E) none of the above

Question 14

A tariff is

A)a foreign bond.
B)an order for foreign goods that have not yet been delivered.
C)a barter arrangement between importers and exporters.
D)a tax on imported goods.
E) a restriction on the quantity of imported goods allowed into the country.

Question 15

Suppose that over the past decade,U.S.inflation is less than that in Mexico.Further assume that during this same period,the dollar depreciates relative to the Mexican peso.Given this information,

A)the real exchange rate remains unchanged.
B)the real exchange rate must decrease.
C)the real exchange rate must increase.
D)the real exchange rate can increase or remain the same, but not decrease.
E) the real exchange rate can decrease or remain the same, but not increase.

Question 16

The ratio of a country's exports to its GDP must

A)be greater than one.
B)be less than one.
C)equal the ratio of imports to GDP.
D)be larger than the ratio of imports to GDP.
E) none of the above

Question 17

Which of the following,all else fixed,will cause the real exchange rate to increase?

A)a nominal depreciation
B)a reduction in the foreign price level
C)a reduction in the domestic price level
D)all of the above
E) none of the above

Question 18

Which of the following best defines the real exchange rate?

A)the price of foreign bonds in terms of domestic bonds
B)the price of foreign currency in terms of domestic currency
C)the price of domestic goods in terms of foreign goods
D)the price of domestic currency in terms of foreign currency
E) none of the above

Question 19

America's largest trading partner is

A)Canada.
B)Japan.
C)Mexico.
D)European Union.
E) none of the above

Question 20

When the dollar appreciates relative to the pound,the pound price of the dollar

A)increases.
B)decreases.
C)does not change.
D)increases or decreases, depending on the amount of the depreciation.
E) changes in the next period.

Question 21

Which of the following has occurred for the United States since 1960?

A)The ratio of exports to GDP (X / Y)and the ratio of imports to GDP (IM / Y)have both increased.
B)X / Y has increased while IM / Y has decreased.
C)X / Y has decreased and IM / Y has increased.
D)X / Y has decreased and IM / Y has decreased.

Question 22

In 2014,which of the following countries had the highest ratio of exports to GDP?

A)United States
B)Germany
C)Japan
D)Netherlands

Question 23

An increase in the real exchange rate indicates that

A)domestic goods are now relatively cheaper.
B)domestic goods are now relatively more expensive.
C)foreign goods are now relatively cheaper.
D)both B and C

Question 24

When E increases by 5%,we know that

A)a real appreciation will occur if P decreases by 5%.
B)a real depreciation will occur if P also increases by 5%.
C)a nominal appreciation will occur.
D)a nominal depreciation will occur.

Question 25

Assume that the nominal exchange rate decreases by 4%.If prices (both domestic and foreign do not change),we know 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

Question 26

The nominal exchange rate (E)as defined in the text represents

A)the number of units of foreign currency you can obtain with one unit of domestic currency.
B)the number of units of domestic goods you can obtain with one unit of foreign goods.
C)the price of domestic currency in terms of foreign currency.
D)none of the above
E) both A and C

Question 27

Which of the following expressions represents the dollar price of foreign currency?

A)EP* / P
B)EP / P*
C)1 / E
D)E
E) none of the above

Question 28

A nominal appreciation of the Japanese yen (against all currencies)indicates that

A)the yen price of the U.S. dollar has increased.
B)the yen price of the U.K. pound has increased.
C)the number of units of foreign currency that one can obtain with one yen has increased.
D)all of the above

Question 29

The differences in the ratios of exports to GDP across countries are believed to be caused primarily by

A)trade barriers.
B)each country's size.
C)monetary policy.
D)fiscal policy.
E) inflation in the domestic country.

Question 30

In 2014,which of the following countries had the lowest ratio of exports to GDP?

A)Japan
B)Switzerland
C)Austria
D)Netherlands
E) United States

Question 31

The differences in the ratios of exports to GDP across countries are believed to be caused primarily by

A)trade barriers.
B)each country's size.
C)geography.
D)all of the above
E) both B and C

Question 32

The ratio of exports to GDP for the United States in 2014 is approximately equal to

A)6%.
B)13%.
C)21%.
D)31%.

Question 33

A nominal depreciation of the Mexican peso (against all currencies)indicates that

A)the peso price of foreign currency has fallen.
B)the Mexican real exchange rate will not change if the price level in Mexico falls.
C)the peso price of, for example, the U.K. pound has increased.
D)the number of units of foreign currency that one can obtain with one peso has decreased.

Question 34

Estimates are that tradable goods in the U.S.account for approximately what share of GDP in the U.S.?

A)10%
B)16%
C)25%
D)none of the above

Question 35

Assume that the nominal exchange rate increases by 2%.If prices (both domestic and foreign do not change),we know that

A)domestic goods are now relatively cheaper.
B)domestic goods are now relatively more expensive.
C)foreign goods are now relatively cheaper.
D)both B and C

Question 36

Which of the following will cause a real appreciation?

A)a reduction in E
B)a decrease in P
C)an increase in P*
D)none of the above

Question 37

A reduction 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

Question 38

When E decreases by 3%,we know that

A)a real appreciation will occur if P also falls by 3%.
B)a real depreciation will occur if P increases by 3%.
C)nominal appreciation.
D)nominal depreciation.

Question 39

Which of the following expressions represents the real exchange rate (ε)?

A)E / P.
B)EP* / P.
C)EP*.
D)EP / P*.
E) none of the above

Question 40

Which of the following has occurred for the United States since 1960?

A)The ratio of exports to GDP (X / Y)and the ratio of imports to GDP (IM / Y)have both decreased.
B)X / Y has increased while IM / Y has decreased.
C)X / Y has decreased and IM / Y has increased.
D)X / Y and IM / Y have stayed relatively constant.
E) none of the above

Question 41

Which of the following events will cause the largest real depreciation for the domestic economy?

A)a 6% reduction in E and a 6% increase in the foreign price level (P*)
B)a 6% increase in the domestic price level (P)and a 6% reduction in P*
C)a 6% reduction in E and a 6% reduction in P*
D)a 3% increase in E
E) a 2% increase in E and a 2% increase in P

Question 42

When the dollar depreciates relative to the pound,the pound price of the dollar

A)increases.
B)decreases.
C)does not change.
D)increases or decreases, depending on the amount of the depreciation.
E) changes in the next period.

Question 43

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

A)the pound to depreciate.
B)the pound to appreciate.
C)the dollar-pound exchange rate to remain fixed.
D)the U.S. interest rate to fall.
E) none of the above

Question 44

Suppose you have one U.S.dollar with which you wish to purchase U.K.(one-year)bonds in period t.Which of the following expressions represents the amount of U.S.dollars you will receive in one year (i.e.,period t + 1)from purchasing U.K.bonds in period t?

A)i
B)1 + i*
C)(1 + i*)Eᵉt₊₁ / Et
D)(1 + i*)Et / Eᵉt₊₁
E) none of the above

Question 45

Which of the following will cause a real depreciation?

A)an increase in E
B)a reduction in P*
C)a reduction in P
D)all of the above
E) none of the above

Question 46

Assume the interest parity condition holds and that individuals expect the dollar to appreciate by 5% during the coming year.Given this information,we know that

A)the interest rate differential between the two countries is less than 5%.
B)i < i*.
C)i = i*.
D)individuals will only hold foreign bonds.
E) none of the above

Question 47

For this question,assume that the domestic interest rate is 6% and that the foreign interest rate 4%.And finally,assume that the domestic currency is expected to appreciate by 3% during the coming year.Given this information,we know that

A)individuals will only hold domestic bonds.
B)individuals will only hold foreign bonds.
C)individuals will be indifferent about holding domestic or foreign bonds.
D)the interest parity condition holds.

Question 48

Suppose that over the past decade,U.S.inflation is greater than that in Mexico.Further assume that during this same period,the dollar appreciates relative to the Mexican peso.Given this information,

A)the real exchange rate remains unchanged.
B)the real exchange rate must decrease.
C)the real exchange rate must increase.
D)the real exchange rate can increase or remain the same, but not decrease.
E) the real exchange rate can decrease or remain the same, but not increase.

Question 49

Which of the following,all else fixed,will cause the real exchange rate to decrease?

A)a nominal appreciation
B)an increase in the foreign price level
C)an increase in the domestic price level
D)all of the above
E) none of the above

Question 50

A nominal appreciation of the Mexican peso (against all currencies)indicates that

A)the peso price of foreign currency has risen.
B)the Mexican real exchange rate will not change if the price level in Mexico falls.
C)the peso price of, for example, the U.K. pound has decreased.
D)the number of units of foreign currency that one can obtain with one peso has increased.

Question 51

For this question,suppose the domestic interest rate is 4% and that the foreign interest rate is 7%.And finally,assume that the domestic currency is expected to depreciate by 3% during the coming year.Given this information,we know that

A)individuals will only hold domestic bonds.
B)individuals will only hold foreign bonds.
C)individuals will be indifferent about holding domestic or foreign bonds.
D)the interest parity condition holds.

Question 52

Which of the following events will cause the smallest change in the real exchange rate (ε)?

A)a 6% drop in E and a 6% increase in the foreign price level (P*)
B)a 6% increase in the domestic price level (P)and a 6% reduction in P*
C)a 6% drop in E and a 6% reduction in P*
D)a 3% increase in E
E) a 2% increase in E and a 2% increase in P

Question 53

Which of the following expressions represents the amount of foreign currency you can obtain with one U.S.dollar?

A)Et
B)Eᵉt₊₁
C)1 / Eᵉt₊₁
D)εt
E) none of the above

Question 54

For this question,assume the interest parity conditions holds.Also assume that the domestic interest rate is 9% and that the foreign interest rate is 5%.Given this information,we would expect that

A)individuals will only hold foreign bonds.
B)individuals will only hold domestic bonds.
C)the domestic currency is expected to appreciate by 4%.
D)the domestic currency is expected to depreciate by 4%.

Question 55

For this question,assume the interest parity conditions holds.Also assume that the domestic interest rate is 10% and that the foreign interest rate is 7%.Given this information,we would expect that

A)individuals will only hold foreign bonds.
B)individuals will only hold domestic bonds.
C)the domestic currency is expected to appreciate by 3%.
D)the domestic currency is expected to depreciate by 3%.

Question 56

From the perspective of the United States,a reduction in the nominal exchange rate will cause which of the following?

A)The dollar becomes more expensive to foreigners.
B)Foreign goods are less expensive to Americans.
C)Foreign currency is less expensive to Americans.
D)American goods are less expensive to foreigners.
E) none of the above

Question 57

For this question,assume that the domestic interest rate is 8% and that the foreign interest rate is 6%.And finally,assume that the domestic currency is expected to depreciate by 3% during the coming year.Given this information,we know that

A)individuals will only hold domestic bonds.
B)individuals will only hold foreign bonds.
C)individuals will be indifferent about holding domestic or foreign bonds.
D)the interest parity condition holds.

Question 58

Suppose the domestic interest rate is 3% and that the foreign interest rate is 6%.And finally,assume that the domestic currency is expected to appreciate by 4% during the coming year.Given this information,we know that

A)individuals will only hold domestic bonds.
B)individuals will only hold foreign bonds.
C)individuals will be indifferent about holding domestic or foreign bonds.
D)the interest parity condition holds.

Question 59

Which of the following conditions will occur when two countries are engaged in a credible,fixed exchange rate regime?

A)E = 1
B)E > 1
C)i = i*
D)E < 1

Question 60

Suppose you have one U.S.dollar with which you wish to purchase U.K.(one-year)bonds in period t.Which of the following expressions represents the amount of U.K.pounds you will receive in one year (i.e.,period t + 1)from purchasing U.K.bonds in period t?

A)i
B)1 + i*
C)(1 + i*)Eᵉt₊₁ / Et
D)(1 + i*)Et / Eᵉt₊₁
E) none of the above

Question 61

First,write out the expression / equation for the real exchange rate.Second,explain all factors that determine the real exchange rate.

Question 62

Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 6% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.

Question 63

Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate.What does this imply about the current versus future expected exchange rate? Explain.

Question 64

Explain the three distinct notions of openness.

Question 65

Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 6% and that the one-year interest rate in Canada is 5%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.

Question 66

Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 5% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.

Question 67

Discuss what factors could cause a real depreciation.

Question 68

Explain the difference between gross domestic product and gross national product.

Question 69

Assuming that the interest parity condition holds,what type of information is contained in interest rate differentials between domestic and foreign bonds? Explain.

Question 70

Explain what factors determine the expected return on a foreign bond.

Question 71

Explain why a comparison between the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.

Question 72

When the U.S.has a current account surplus,we know that it is also

A)running a balanced trade account.
B)lending to the rest of the world.
C)borrowing from the rest of the world.
D)suffering from negative investment income.
E) none of the above

Question 73

What is uncovered interest parity? Explain.

Question 74

Suppose the interest parity condition holds and that the domestic interest rate is less than the foreign interest rate.What does this imply about the current versus future expected exchange rate? Explain.

Question 75

Suppose the one-year nominal interest rate is 2.0% in the United States and 5.0% in Canada.Should you hold Canadian bonds or U.S.bonds? Explain.

Question 76

Another name for "current account transactions" is

A)"capital account transactions."
B)"investment income."
C)"net transfers received."
D)"checking account transactions."
E) "transactions above the line."

Question 77

Suppose you are considering the purchase of a bond issued in another country.What calculations must you do to calculate the expected return on a foreign bond? Explain.

Question 78

Because the U.S.traditionally gives more foreign aid than it receives,the U.S.traditionally has a negative value for

A)the capital account balance.
B)the trade balance.
C)investment income.
D)net transfers received.
E) all of the above

Question 79

What are the differences between the real exchange rate and nominal exchange rate? Explain.

Question 80

The difference between net capital flows and the current account deficit is called the

A)capital account surplus.
B)capital account deficit.
C)international error.
D)missing number.
E) statistical discrepancy.