Question 1

The real exchange rate, q, is defined as
A) the price of the foreign basket in terms of the domestic one.
B) the price of the domestic basket in terms of the foreign one.
C) the price of the foreign basket.
D) the price of the domestic basket.
E) the nominal exchange rate in terms of the domestic basket.

Accepted Answer

The real exchange rate is defined as the price of the foreign basket in terms of the domestic one, reflecting the relative prices of goods between countries.

Question 2

The domestic currency price of a representative domestic expenditure basket is
A) P, the domestic price level.
B) E, the nominal exchange rate.
C) P times E, the domestic price level times the domestic price level.
D) P*, the foreign price level.
E) P* times E, the foreign price level times the nominal exchange rate.

Accepted Answer

The domestic currency price of a representative domestic expenditure basket represents the domestic price level. Therefore, the correct option is A, which corresponds to P, the domestic price level.

Question 3

A country's domestic currency's real exchange rate, q, is defined as
A) E.
B) E times P.
C) E times P*.
D) (E times P)/P*.
E) P*/(E times P).

Accepted Answer

The real exchange rate q is defined as (E times P)/P*, where E is the nominal exchange rate, P is the domestic price level, and P* is the foreign price level. This makes D the correct choice.

Question 4

When EP/P* rises
A) IM will rise.
B) IM will fall.
C) IM may rise or fall.
D) IM is not affected.
E) IM and P* will both rise.

Accepted Answer

It is not certain whether the IM will rise or fall when EP/P* rises. It will depend on several factors, such as the elasticity of demand for imports and exports, the competitiveness of the domestic industry, and the exchange rate.

Question 5

Which one of the following statements is MOST accurate?
A) In general, consumption demand rises by less than disposable income.
B) In general, consumption demand rises by more than disposable income.
C) In general, consumption demand rises by more than income.
D) In general, consumption demand rises by the same amount as disposable income rises.
E) In general, consumption demand rises are unrelated to disposable income rises.

Accepted Answer

The statement "In general, consumption demand rises by less than disposable income" is the most accurate as individuals tend to save a portion of their disposable income rather than spending it all on consumption. This implies that there is a positive relationship between disposable income and consumption but the increase in consumption demand is proportionally less than the increase in disposable income.

Question 6

If the representative basket of European goods and services costs 40 euros, the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is
A) [(0.9 $/euro) (40 euro per a European basket)]/[(50 $/U.S. basket)].
B) [(0.9 $/euro) (50 $/U.S. basket)]/[(40 euro per a European basket)].
C) [(40 euro per a European basket)]/[(50 $/U.S. basket) (0.9 $/euro)].
D) [(50 $/U.S. basket)].
E) [(0.9 $/euro) (40 euro per a European basket) (50 $ U.S. basket)].

Accepted Answer

To find the price of the European basket in terms of the U.S. basket, you convert the cost of the European basket into dollars using the exchange rate ($0.90 per euro), which gives you $36 (0.9 * 40). Then, you divide this by the cost of the U.S. basket in dollars ($50) to find the ratio. This calculation matches option A.

Question 7

Which one of the following statements is the MOST accurate?
A) An increase in the real exchange rate and an increase in disposable income improve the current account.
B) A decrease in the real exchange rate and a decrease in disposable income improve the current account.
C) A decrease in the real exchange rate and an increase in disposable income improve the current account.
D) An increase in the real exchange rate and a decrease in disposable income improve the current account.
E) An increase in the real exchange rate and a decrease in disposable income lowers the current account.

Accepted Answer

The answer of Which one of the following statements is...

Question 8

Current account is given by the equation:
A) CA = IM - EX (measured in terms of domestic output).
B) CA = IM - EX (measured in terms of foreign output).
C) CA = EX - IM (measured in terms of domestic output).
D) CA = EX - IM (measured in terms of foreign output).
E) CA = EX + IM (measured in terms of domestic output).

Accepted Answer

The current account measures the net exports of goods and services, which is given by the difference between exports (EX) and imports (IM). In this case, the measure is in terms of domestic output, so we use EX - IM to calculate the current account.

Question 9

The current account balance is
A) the supply of a country's exports less the country's own demand for imports.
B) the demand for a country's exports plus the country's own demand for imports.
C) the country's own demand for imports less the demand for a country's exports.
D) the demand for a country's exports less the country's own demand for imports.
E) the country's federal reserves minus the national debt.

Accepted Answer

The current account balance is the difference between the value of exports and the value of imports of goods and services. Therefore, option D, which states "the demand for a country's exports less the country's own demand for imports," is the correct definition of current account balance. Option A is incorrect because it puts the emphasis on supply of exports instead of demand for exports, while option B adds the demand for a country's exports instead of subtracting it. Option C subtracts the demand for exports instead of subtracting the demand for imports. Lastly, option E describes an unrelated concept.

Question 10

What is the best way to describe aggregate demand?
A) quantity required to satisfy equilibrium
B) exports decrease; imports increase
C) amount of a country's goods and services demanded by households and firms throughout the world
D) individual's demand
E) domestic demand of foreign imports.

Accepted Answer

Aggregate demand refers to the amount of goods and services demanded by households and firms not only domestically, but also throughout the world. It takes into account both domestic and foreign demand for a country's products.

Answer: A
 Aggregate demand is the total amount of goods and services demanded in an economy at a given price level. At equilibrium, the aggregate demand equals the aggregate supply, meaning that the desired quantity of goods and services is satisfied at a given price level.

The other choices do not accurately describe aggregate demand. B describes the trade balance of a country, D describes individual demand, and E describes the demand for foreign imports within a country.

Question 11

When the real exchange rate rises
A) imports measured in terms of domestic output will rise.
B) imports measured in terms of domestic output will fall.
C) imports measured in terms of domestic output will never be affected.
D) imports measured in terms of domestic output may rise or fall.
E) imports measured in terms of foreign output will rise.

Accepted Answer

When the real exchange rate rises, it becomes more expensive for the domestic economy to purchase foreign goods, which may lead to a fall in imports. However, if the rise in the real exchange rate is due to an increase in the productivity of the domestic economy, then its income and demand for imports may also increase, leading to a rise in imports. Therefore, imports measured in terms of domestic output may rise or fall depending on the underlying factors affecting the real exchange rate.

Question 12

Which one of the following statements is the MOST accurate?
A) An increase in disposable income improves the current account.
B) An increase in disposable income does not affect the current account.
C) An increase in disposable income worsens the current account.
D) An increase in income worsens the current account.
E) An increase in income improves the current account.

Accepted Answer

An increase in disposable income typically leads to higher consumer spending, which can increase imports. This, in turn, can worsen the current account by increasing the trade deficit.

Question 13

The real exchange rate is:
A) how much of a foreign currency you can buy with the domestic currency.
B) foreign CPI divided by the domestic CPI.
C) the price of foreign goods in terms of domestic goods.
D) the price of foreign goods in dollars.
E) the domestic currency divided by the price level.

Accepted Answer

The real exchange rate is essentially the price of foreign goods in terms of domestic goods. It adjusts the nominal exchange rate by the price levels (inflation) of the two countries involved, providing a more accurate measure of the exchange of goods between them.

Question 14

Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?
A) appreciation and depreciation
B) crowding out effect and producers effect
C) volume effect and value effect
D) volume effect and inflation
E) producers effect and value effect

Accepted Answer

The volume effect and value effect compete to determine whether the current account improves or worsens following a rise in the real exchange rate. The volume effect relates to changes in the volume of exports and imports due to the change in relative prices, while the value effect relates to changes in the value of exports and imports due to changes in the exchange rate. The other options are not relevant to this particular scenario.

Question 15

How does an increase in the real exchange rate affect exports and imports?
A) exports increase; imports decrease
B) exports decrease; imports increase
C) exports increase; imports change ambiguously
D) exports change ambiguously; imports decrease
E) exports increase; imports are constant

Accepted Answer

The answer of How does an increase in the real...

Question 16

Which of the following would cause the current account to decrease?
A) an increase in the nominal exchange rate, E
B) an appreciation of the home currency
C) an increase in disposable income
D) an increase in foreign prices, P*
E) a decrease in domestic prices, P

Accepted Answer

The answer of Which of the following would cause the...

Question 17

An increase in the real exchange rate
A) makes imports more expensive.
B) makes imports less expensive.
C) does not affect import values.
D) always makes the number of imports rise.
E) makes domestic consumers spend more on only foreign imports.

Accepted Answer

An increase in the real exchange rate means that the currency of the country has appreciated. This means that the country's exports become more expensive for foreign buyers and imports become expensive for domestic buyers. Therefore, choice A is correct.

Question 18

Assuming that the value effect dominates, the current account will increase if
A) the real exchange rate decreases.
B) the real exchange rate increases.
C) disposable income increases.
D) exports fall.
E) domestic prices fall.

Accepted Answer

The answer of Assuming that the value effect dominates, the...

Question 19

The domestic currency price of a representative foreign expenditure basket is
A) P, the domestic price level.
B) E, the nominal exchange rate.
C) P times E, the domestic price level times the domestic price level.
D) P*, the foreign price level.
E) P* times E, the foreign price level times the nominal exchange rate.

Accepted Answer

The domestic currency price of a representative foreign expenditure basket is determined by multiplying the foreign price level (P*) by the nominal exchange rate (E), since the expenditure basket is in foreign currency and needs to be converted to domestic currency. Therefore, the correct choice is E: P* times E.

Question 20

Disposable income is defined as
A) Y - C.
B) Y - T.
C) C - T.
D) I - C.
E) Y - I.

Accepted Answer

Disposable income is the income that households have available after paying taxes. Therefore, it is the difference between income (Y) and taxes (T), represented by option B. Option A represents national savings, option C represents government savings, option D represents private investment, and option E represents national income minus investment.

Quiz 17: Output and the Exchange Rate in the Short Run

The real exchange rate, q, is defined as

The domestic currency price of a representative domestic expenditure basket is

A country's domestic currency's real exchange rate, q, is defined as

When EP/P* rises

Which one of the following statements is MOST accurate?

If the representative basket of European goods and services costs 40 euros, the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is

Which one of the following statements is the MOST accurate?

Current account is given by the equation:

The current account balance is

What is the best way to describe aggregate demand?

When the real exchange rate rises

Which one of the following statements is the MOST accurate?

The real exchange rate is:

Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?

How does an increase in the real exchange rate affect exports and imports?

Which of the following would cause the current account to decrease?

An increase in the real exchange rate

Assuming that the value effect dominates, the current account will increase if

The domestic currency price of a representative foreign expenditure basket is

Disposable income is defined as