Question 1

Assume that the interest parity condition holds. If the domestic interest rate is 4% and the foreign interest rate is 8% then given this information, we would expect that:

Accepted Answer

The answer of Assume that the interest parity condition holds....

Question 2

A decrease in the real exchange rate indicates that:

Accepted Answer

A decrease in the real exchange rate means that domestic goods have become cheaper relative to foreign goods, making foreign goods relatively more expensive.

Question 3

Which of the following best defines the real exchange rate?

Accepted Answer

The real exchange rate measures the relative price of domestic goods in terms of foreign goods, reflecting the purchasing power of a currency in terms of another currency's goods.

Question 4

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

Accepted Answer

If individuals expect the Australian dollar to appreciate by 5%, then they will be willing to accept a lower interest rate on an Australian bond compared to a foreign bond. This means that i (interest rate on Australian bond) will be lower than i* (interest rate on foreign bond). Hence, the correct choice is C.

Question 5

Explain the three distinct notions of openness.

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The answer of Explain the three distinct notions of openness....

Question 6

In 2011, exports or imports as a percentage of GDP for Australia are approximately:

Accepted Answer

In 2011, Australia's exports and imports as a percentage of GDP were approximately between 20% and 25%, reflecting the country's active trade in goods and services relative to the size of its economy.

Question 7

Which of the following will cause a real appreciation?

Accepted Answer

The answer of Which of the following will cause a...

Question 8

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

Accepted Answer

The answer of Assuming that the interest parity condition holds,...

Question 9

When Australia has a current account deficit, we know that it is also:

Accepted Answer

A current account deficit means that a country is importing more goods and services than it is exporting, which leads to a net outflow of money. To finance this deficit, the country must borrow from the rest of the world, resulting in a capital account deficit. Therefore, the correct choice is D) borrowing from the rest of the world.

Question 10

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

Accepted Answer

A decrease in the exchange rate (E) causes a real depreciation, while an increase in the foreign price level (P*) causes an increase in the relative price of domestic goods and a real depreciation. Therefore, option D, which includes both a decrease in E and an increase in P*, will cause the largest real depreciation for the domestic economy.

Question 11

Assume that the uncovered interest parity condition holds. Also assume that the Australian interest rate is greater than the Japanese interest rate. Given this information, we know that investors expect:

Accepted Answer

According to the uncovered interest parity condition, if the Australian interest rate is higher than the Japanese interest rate, investors expect the Australian dollar to depreciate relative to the yen, which implies that the yen is expected to appreciate.

Question 12

Because Australia traditionally gives more foreign aid than it receives, Australia traditionally has a negative value for:

Accepted Answer

Net transfers received would be negative for a country that gives more foreign aid than it receives, as this would be recorded as a negative item in the balance of payments under the current account's transfers section.

Question 13

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

Accepted Answer

The real exchange rate is defined as the nominal exchange rate (E) multiplied by the domestic price level (P) and divided by the foreign price level (P*): EP/P*. Choice D correctly represents this formula.

Question 14

Suppose that over the past decade, Australian inflation is less than that in the UK. Further assume that during this same period, the Australian dollar depreciates relative to the British pound. Given this information:

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The answer of Suppose that over the past decade, Australian...

Question 15

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

Accepted Answer

The answer of Which of the following expressions represents the...

Question 16

In Australia, over the past fifty years:

Accepted Answer

Over the past fifty years, Australia's economy has become more open and integrated with the global economy, leading to an increase in both exports and imports as a percentage of GDP. This reflects the country's growing participation in international trade.

Question 17

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

Accepted Answer

The differences in ratios of exports to GDP across countries are primarily influenced by their geographic location - countries with good access to ports and the ocean tend to have higher ratios. Additionally, a country's size can also play a role in their ability to specialize in certain industries and thus have a higher ratio of exports to GDP. Trade barriers may also be a factor in some cases, but are not the primary cause of differences in export ratios.

Question 18

A nominal depreciation of the Italian lira against all currencies indicates that:

Accepted Answer

A nominal depreciation of the Italian lira against all currencies means that it now takes more lira to buy the same amount of foreign currency, indicating that the lira price of foreign currency has increased.

Question 19

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

Accepted Answer

The answer of Suppose you have one Australian dollar with...

Question 20

Suppose that the domestic interest rate is 2% and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to appreciate by 3% during the coming year. Given this information, we know that:

Accepted Answer

The expected return on domestic bonds is 2% (interest rate) plus 3% (currency appreciation) = 5%, which matches the foreign interest rate of 5%. Thus, individuals will be indifferent between holding domestic or foreign bonds as the expected returns are equal.

Quiz 18: Openness in Goods and Financial Markets