Question 1

An increase in the real exchange rate will cause
A)an increase in net exports.
B)an increase in the quantity of imports.
C)an increase in output.
D)a decrease in government spending.
E)all of the above

Accepted Answer

An increase in the real exchange rate makes foreign goods relatively cheaper compared to domestic goods, leading to an increase in the quantity of imports as consumers and businesses opt for these less expensive foreign goods.

Question 2

Assume that the price levels in two countries are constant.In this situation,we know that
A)neither the real nor the nominal exchange rate can change.
B)the real exchange rate can change,while the nominal exchange rate is constant
C)the nominal exchange rate can change,while the real exchange rate is constant.
D)the real and nominal exchange rate must move together,changing by the same percentage.
E)the nominal exchange rate will fluctuate more widely than the real exchange rate.

Accepted Answer

D

Question 3

Assume that the interest parity condition holds.Also assume that the U.S.interest rate is 8% while the U.K.interest rate is 6%.Given this information,financial markets expect the pound to
A)depreciate by 14%.
B)depreciate by 2%.
C)appreciate by 2%.
D)appreciate by 6%.
E)appreciate by 14%.

Accepted Answer

According to the interest rate parity condition, if the U.S. interest rate is higher than the U.K. interest rate, it implies that the financial markets expect the currency of the country with the lower interest rate (in this case, the pound) to appreciate relative to the currency of the country with the higher interest rate. The difference in interest rates is 2% (8% - 6%), so financial markets expect the pound to appreciate by 2%.

Question 4

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant.Given this information,a reduction in the domestic interest rate will cause
A)a reduction in the exchange rate expected in the future.
B)a reduction in the current exchange rate.
C)greater depreciation of the domestic currency expected in the future.
D)all of the above
E)none of the above

Accepted Answer

According to the interest parity condition, a decrease in the domestic interest rate will lead to a decrease in the expected future exchange rate, which should lead to a corresponding decrease in the current exchange rate. Thus, option B is correct. Option A is incorrect because a decrease in the domestic interest rate would lead to a decrease, not an increase, in the expected future exchange rate. Option C is incorrect because it implies greater depreciation of the domestic currency in the future due to the decrease in the domestic interest rate, but the question assumes a constant expected exchange rate.

Question 5

In an open economy under flexible exchange rates,a reduction in the interest rate will cause a reduction in which of the following?
A)investment
B)the exchange rate,E
C)net exports
D)all of the above
E)none of the above

Accepted Answer

A reduction in the interest rate typically leads to a depreciation of the exchange rate (E) because lower interest rates make domestic assets less attractive to foreign investors, leading to a decrease in demand for the domestic currency.

Question 6

A real appreciation will tend to cause
A)an increase in exports.
B)a reduction in imports.
C)an increase in net exports.
D)a reduction in demand for domestic goods.
E)none of the above

Accepted Answer

A real appreciation of a country's currency makes its goods more expensive to foreigners, thus reducing the demand for its exports. It also makes foreign goods cheaper for domestic consumers, increasing imports. This does not directly increase exports or reduce imports, nor does it increase net exports, which contradicts options A, B, and C. Therefore, the correct answer is D, as a real appreciation would likely reduce the demand for domestic goods by making them more expensive relative to foreign goods.

Question 7

Suppose a country switches from a fixed to a flexible exchange rate.Which of the following will occur as a result of this change?
A)monetary policy will become a less effective tool for changing output.
B)a given change in government spending will now have a greater effect on output.
C)both fiscal and monetary policy will become more effective in changing GDP.
D)both fiscal and monetary policy will become completely ineffective in changing GDP.
E)none of the above

Accepted Answer

The answer of Suppose a country switches from a fixed...

Question 8

As the economy moves up and to the left along the IS curve,which of the following will occur when exchange rates are flexible?
A)investment spending decreases
B)consumption decreases
C)the domestic currency appreciates
D)all of the above
E)none of the above

Accepted Answer

Moving up and to the left along the IS curve in an economy with flexible exchange rates implies a decrease in income and interest rates. This leads to lower investment spending due to higher costs of borrowing (A), reduced consumption because of lower income (B), and an appreciation of the domestic currency as lower interest rates reduce inflow of foreign capital, decreasing the supply of the domestic currency on the foreign exchange market (C).

Question 9

The interest parity condition indicates that the domestic interest rate must be equal to
A)the foreign interest rate.
B)the expected rate of depreciation of the domestic currency.
C)the expected rate of appreciation of the domestic currency.
D)the foreign interest rate minus the expected rate of appreciation of the foreign currency.
E)none of the above

Accepted Answer

The answer of The interest parity condition indicates that the...

Question 10

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?
A)an appreciation of the domestic currency
B)a reduction in the exchange rate,E
C)a reduction in net exports
D)all of the above
E)none of the above

Accepted Answer

A reduction in consumer confidence leading to decreased consumption can cause an appreciation of the domestic currency. This is because lower consumption can lead to a decrease in imports, improving the current account balance and increasing demand for the domestic currency.

Question 11

In an open economy,we know that individuals must choose between which of the following?
A)domestic bonds and foreign currency
B)foreign goods and domestic currency
C)domestic and foreign bonds
D)domestic goods and foreign currency
E)none of the above

Accepted Answer

In an open economy, individuals can invest in both domestic and foreign bonds. They must choose between these two options depending on their investment preferences and the relative yields and risks of each option. Option A (domestic bonds and foreign currency) is not an either/or choice, as individuals can hold both simultaneously. Option B (foreign goods and domestic currency) is a choice for consumers, not investors. Option D (domestic goods and foreign currency) is not a relevant choice for investors, as they are typically not interested in holding currency for consumption purposes.

Question 12

Under a "crawling peg" system,a country's exchange rate
A)is fixed except for small,surprise changes.
B)changes at a predetermined rate against the dollar or some other major currency.
C)can fluctuate within a narrow band.
D)can change,but the changes are kept secret from the public.
E)is determined by the central bank of another country.

Accepted Answer

A crawling peg system allows a country's exchange rate to adjust gradually at a predetermined rate against another major currency or a basket of currencies.

Question 13

For this question,assume that the economy is operating in a fixed exchange rate regime and that perfect capital mobility exists.Given this information,which of the following will occur?
A)the domestic and foreign interest rates must be equal.
B)the central bank cannot use monetary policy to affect domestic output.
C)an expansionary fiscal policy will require that the central bank increase the money supply.
D)all of the above
E)none of the above

Accepted Answer

In a fixed exchange rate regime with perfect capital mobility, the exchange rate is fixed and the interest rate is determined by the world interest rate. Therefore, the domestic and foreign interest rates must be equal (option A). Since the exchange rate is fixed, the central bank cannot use monetary policy to affect domestic output (option B). An expansionary fiscal policy will require that the central bank increase the money supply to maintain the fixed exchange rate (option C). Therefore, all of the above options are correct (option D).

Question 14

In order for an individual to be indifferent between holding foreign or domestic bonds,
A)the Marshall-Lerner condition must hold.
B)the foreign and domestic interest rates must be equal.
C)the expected rate of depreciation of the domestic currency is zero.
D)the interest parity condition must hold.

Accepted Answer

The interest parity condition states that the expected return on domestic bonds must be equal to the expected return on foreign bonds after adjusting for exchange rate changes. Therefore, if this condition holds, an individual would be indifferent between holding foreign or domestic bonds. The Marshall-Lerner condition is related to the impact of exchange rate changes on the trade balance, while the equality of foreign and domestic interest rates alone may not determine an individual's investment decision. The expected rate of depreciation of the domestic currency may also influence investment decisions, but this information is not sufficient to answer the question.

Question 15

In 2005,China increased the price of its currency while continuing to pursue a fixed exchange rate.This change in policy is called
A)an appreciation.
B)a depreciation.
C)a peg.
D)a devaluation.
E)a revaluation.

Accepted Answer

The answer of In 2005,China increased the price of its...

Question 16

Suppose a country with a fixed exchange rate decides to reduce the price of its currency.This change in policy is called
A)an appreciation.
B)a depreciation.
C)a peg.
D)a devaluation.
E)a revaluation.

Accepted Answer

The answer of Suppose a country with a fixed exchange...

Question 17

In an open economy under flexible exchange rates and represented by the IS-LM-IP model,a reduction in government spending will cause a reduction in which of the following?
A)net exports
B)the exchange rate,E
C)exports
D)all of the above
E)none of the above

Accepted Answer

The answer of In an open economy under flexible exchange...

Question 18

Assume that the interest parity holds and that the dollar is expected to depreciate against the pound.Given this information,we know that
A)U.S.and U.K.interest rates are equal.
B)the U.S.interest rate exceeds the U.K.interest rate.
C)the U.K.interest rate exceeds the U.S.interest rate.
D)individuals will prefer to hold U.S.bonds because the U.S.interest rate exceeds the U.K.interest rate.
E)none of the above

Accepted Answer

When the dollar is expected to depreciate against the pound, interest rate parity suggests that the U.S. interest rate must be higher than the U.K. interest rate to compensate for the expected loss in the value of the dollar relative to the pound.

Question 19

In an open economy under flexible exchange rates,expansionary monetary policy that results in an increase in the money supply will always cause
A)an increase in output.
B)an increase in exports.
C)a reduction in the exchange rate,E.
D)all of the above
E)only A and C

Accepted Answer

The answer of In an open economy under flexible exchange...

Question 20

The exchange rate policy of the United States is
A)the EMS.
B)a crawling peg.
C)a float.
D)a fixed rate within a band.
E)none of the above

Accepted Answer

The United States has a floating exchange rate policy, where the exchange rate is determined by supply and demand in the foreign exchange market. The value of the U.S. dollar fluctuates freely in response to changes in economic conditions and market forces.

Quiz 20: Output,the Interest Rate,and the Exchange Rate

An increase in the real exchange rate will cause

Assume that the price levels in two countries are constant.In this situation,we know that

Assume that the interest parity condition holds.Also assume that the U.S.interest rate is 8% while the U.K.interest rate is 6%.Given this information,financial markets expect the pound to

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant.Given this information,a reduction in the domestic interest rate will cause

In an open economy under flexible exchange rates,a reduction in the interest rate will cause a reduction in which of the following?

A real appreciation will tend to cause

Suppose a country switches from a fixed to a flexible exchange rate.Which of the following will occur as a result of this change?

As the economy moves up and to the left along the IS curve,which of the following will occur when exchange rates are flexible?

The interest parity condition indicates that the domestic interest rate must be equal to

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?

In an open economy,we know that individuals must choose between which of the following?

Under a "crawling peg" system,a country's exchange rate

For this question,assume that the economy is operating in a fixed exchange rate regime and that perfect capital mobility exists.Given this information,which of the following will occur?

In order for an individual to be indifferent between holding foreign or domestic bonds,

In 2005,China increased the price of its currency while continuing to pursue a fixed exchange rate.This change in policy is called

Suppose a country with a fixed exchange rate decides to reduce the price of its currency.This change in policy is called

In an open economy under flexible exchange rates and represented by the IS-LM-IP model,a reduction in government spending will cause a reduction in which of the following?

Assume that the interest parity holds and that the dollar is expected to depreciate against the pound.Given this information,we know that

In an open economy under flexible exchange rates,expansionary monetary policy that results in an increase in the money supply will always cause

The exchange rate policy of the United States is