Exam

Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
In a flexible exchange rate regime, an increase in the foreign interest rate (i*) will cause:
1)
_______
A)
a movement along the I curve!
")
neither a shift nor movement along the I curve!
#)
the I curve to shift to the right$%own!
&)
the I curve to shift to the left$u'!

()
)or this *uestion, assume that the econom+ is o'erating in a fixe% exchange rate regime an% that 'erfect ca'ital mobilit+ exists! ,iven
this information, which of the following will occur-
()
_______
A)
.he central ban/ cannot use monetar+ 'olic+ to affect %omestic out'ut!
")
An ex'ansionar+ fiscal 'olic+ will re*uire that the central ban/ increase the mone+ su''l+!
#)
.he %omestic an% foreign interest rates must be e*ual!
&)
all of the above
E)
none of the above

0)
Assume the interest 'arit+ con%ition hol%s an% that initiall+ i = i*! A re%uction in the foreign interest rate (i*) will cause:
0)
_______
A)
an ex'ecte% %e'reciation of the %omestic currenc+!
")
an increase in E!
#)
an increase in the %eman% for the %omestic currenc+!
&)
all of the above

1)
Assume that the interest 'arit+ con%ition hol%s! Also assume that the 2!3! interest rate is 45 while the 2!6! interest rate is 75! ,iven
this information, financial mar/ets ex'ect the 'oun% to:
1)
_______
A)
a''reciate b+ 45!
")
a''reciate b+ (5!
#)
%e'reciate b+ 115!
&)
%e'reciate b+ (5!
E)
a''reciate b+ 15!

8)
An in%ivi%ual will be in%ifferent between hol%ing foreign or %omestic bon%s when which of the following con%itions hol%s-
8)
_______
A)
the 9arshall-:erner con%ition hol%s
")
the ex'ecte% rate of %e'reciation of the %omestic currenc+ is ;ero
#)
the foreign an% %omestic interest rates are e*ual
&)
none of the above

4)
In an o'en econom+ un%er flexible exchange rates, a re%uction in the mone+ su''l+ will alwa+s cause:
4)
_______
A)
an increase in the exchange rate, E!
")
an increase in the interest rate!
#)
a re%uction in out'ut!
&)
all of the above
E)
onl+ A an% "

<)
Assume 'olic+ ma/ers in a fixe% exchange rate regime %eci%e to 'eg the exchange rate at a lower level! .his is calle%:
<)
_______
A)
a revaluation!
")
a %e'reciation!
#)
a %evaluation!
&)
an a''reciation!

7)
In the earl+ 1==>s, Euro'ean unem'lo+ment rose largel+ because of:
7)
_______
A)
high inflation!
")
re%uctions in stoc/ 'rices!
#)
un%ervalue% currencies!
&)
overvalue% currencies!
E)
none of the above

=)
An increase in the mone+ su''l+ in a flexible exchange rate regime will cause:
=)
_______
A)
a %e'reciation of the %omestic currenc+!
")
no change in E!
#)
an increase in E!
&)
a shift of the I curve!

1>)
3u''ose 'olic+ ma/ers are 'ursuing a 'olic+ to fix the exchange rate! In such a s+stem with 'erfect ca'ital mobilit+, an o'en mar/et
sale of %omestic bon%s b+ the %omestic central ban/ will eventuall+ result in:
1>)
______
A)
a 'ermanent re%uction in the monetar+ base!
")
a gra%ual re%uction in the %omestic interest rate!
#)
a 'ermanent increase in the monetar+ base!
&)
a change in the com'osition of the monetar+ base!

11)
2n%er a fixe% exchange rate regime, the central ban/ must act to /ee':
11)
______
A)
E = 1!
")
= *!
#)
the real exchange rate fixe%!
&)
i = i*!
E)
none of the above

1()
2n%er a fixe% exchange rate regime, we /now that a tax increase will cause which of the following-
1()
______
A)
an increase in investment
")
an increase in net ex'orts
#)
an increase in im'orts
&)
all of the above

10)
.he Euro'ean 9onetar+ 3+stem re'resente% a(n):
10)
______
A)
crawling 'eg!
")
a flexible exchange rate regime!
#)
exchange rate regime with ?ban%s!?
&)
none of the above

11)
3u''ose a countr+ is 'ursuing a fixe% exchange rate regime with im'erfect ca'ital mobilit+! .he abilit+ of that countr+ to move its
%omestic interest rate while maintaining its exchange rate will %e'en% on:
11)
______
A)
the %egree of %evelo'ment of its financial mar/ets!
")
the amount of foreign exchange it hol%s!
#)
the %egree of ca'ital controls!
&)
all of the above
E)
both A an% "

18)
A common argument for fixe% exchange rates is that the+:
18)
______
A)
ma/e tra%e more costl+, an% thus encourage %omestic citi;ens to bu+ %omesticall+ 'ro%uce% out'ut!
")
forever free the central ban/ from have to a%@ust the exchange rate to fun%amental changes in the econom+!
#)
give central ban/s greater free%om in a%@usting their econom+As level of out'ut!
&)
all of the above
E)
none of the above

14)
)or this *uestion, assume that there is a simultaneous increase in government s'en%ing an% monetar+ contraction! In a flexible
exchange rate regime, we /now with certaint+ that such a 'olic+ mix will cause which of the following-
14)
______
A)
a re%uction in net ex'orts
")
an increase in the exchange rate
#)
an increase in the %omestic interest rate
&)
all of the above
E)
onl+ A an% #

1<)
In an o'en econom+ un%er flexible exchange rates, an increase in the interest rate will cause an increase in which of the following-
1<)
______
A)
the exchange rate, E
")
net ex'orts
#)
investment
&)
all of the above
E)
none of the above

17)
Assume 'olic+ ma/ers in a fixe% exchange rate regime %eci%e to 'eg the exchange rate at a higher level! .his is calle%:
17)
______
A)
a revaluation!
")
a %evaluation!
#)
a %e'reciation!
&)
an a''reciation!

1=)
3u''ose 'olic+ ma/ers are 'ursuing a 'olic+ to fix the exchange rate! In such a s+stem with 'erfect ca'ital mobilit+, an o'en mar/et
'urchase of %omestic bon%s b+ the %omestic central ban/ will eventuall+ result in:
1=)
______
A)
a 'ermanent increase in the monetar+ base!
")
a change in the com'osition of the monetar+ base!
#)
a gra%ual re%uction in the %omestic interest rate!
&)
a 'ermanent re%uction in the monetar+ base!

(
>
Assume that the current exchange rate between 2!6! 'oun% an% the 2!3! %ollar is ( (E = (!>)! If interest 'arit+ hol%s, an% the 2!3!
interest rate is 45 while the 2!6! interest rate is 75, the ex'ecte% exchange rate in one +ear is:
(>)
______
A)
1!=7!
")
1!==!
#)
(!>1!
&)
(!>(!
E)
(!>1!

(1)
In a flexible exchange rate regime, a re%uction in the foreign interest rate (i*) will cause:
(1)
______
A)
the I curve to shift to the right$%own!
")
a movement along the I curve!
#)
neither a shift nor movement along the I curve!
&)
the I curve to shift to the left$u'!

(()
3u''ose a countr+ with a fixe% exchange rate %eci%es to re%uce the 'rice of its currenc+! .his change in 'olic+ is calle%:
(()
______
A)
a 'eg!
")
a %evaluation!
#)
a %e'reciation!
&)
an a''reciation!
E)
a revaluation!

(0)
.he exchange rate 'olic+ of the 2nite% 3tates is:
(0)
______
A)
a crawling 'eg!
")
the E93!
#)
a float!
&)
a fixe% rate within a ban%!
E)
none of the above

(1)
In a flexible exchange rate regime, a re%uction in the ex'ecte% future exchange rate will cause:
(1)
______
A)
the I curve to shift to the right$%own!
")
the I curve to shift to the left$u'!
#)
neither a shift nor movement along the I curve!
&)
a movement along the I curve!

(8)
)or this *uestion, assume that there is a simultaneous tax cut an% monetar+ contraction! In a flexible exchange rate regime, we /now
with certaint+ that:
(8)
______
A)
the exchange rate woul% increase an% out'ut woul% %ecrease!
")
the exchange rate an% out'ut woul% both increase!
#)
the exchange rate woul% %ecrease an% out'ut woul% increase!
&)
the exchange rate woul% increase!
E)
none of the above

(4)
In 'ractice, un%er the E93, a member countr+:
(4)
______
A)
coul% change its interest rate onl+ if other countries change% theirs as well!
")
coul% never change its interest rate!
#)
ha% com'lete free%om in choosing the interest rate it wante%!
&)
ha% com'lete free%om in choosing its interest rate onl+ if it is a ver+ small countr+!
E)
must a''l+ to a s'ecial Euro'ean #ommission in or%er to change its interest rate!

(<)
Assume that the interest 'arit+ hol%s an% that the %ollar is ex'ecte% to a''reciate against the 'oun%! ,iven this information, we /now
that:
(<)
______
A)
in%ivi%uals will 'refer to hol% 2!3! bon%s because the 2!3! interest rate excee%s the 2!6! interest rate!
")
2!3! an% 2!6! interest rates are e*ual!
#)
the 2!6! interest rate excee%s the 2!3! interest rate!
&)
the 2!3! interest rate excee%s the 2!6! interest rate!
E)
none of the above

(7)
2n%er a fixe% exchange rate regime, we /now that an increase in stoc/ mar/et wealth that increases consum'tion will cause:
(7)
______
A)
an increase in im'orts!
")
an increase in investment!
#)
a re%uction in net ex'orts!
&)
all of the above
E)
none of the above

(=)
In the earl+ 1==>s, which nation too/ the lea% in %riving u' Euro'ean interest rates-
(=)
______
A)
)rance
")
Englan%
#)
3'ain
&)
,erman+
E)
none of the above

0>)
3u''ose there is a re%uction in the real exchange rate! Bhich of the following will occur as a result of this change in the real exchange
rate-
0>)
______
A)
a %ecrease in government s'en%ing
")
an increase in im'orts
#)
an increase in net ex'orts
&)
a re%uction in out'ut
E)
all of the above

1)
#

()
&

0)
A

1)
&

8)
A

4)
&

<)
A

7)
"

=)
A

1>)
&

11)
"

1()
"

10)
#

11)
&

18)
E

14)
&

1<)
&

17)
"

1=)
"

(>)
#

(1)
&

(()
E

(0)
#

(1)
"

(8)
&

(4)
A

(<)
&

(7)
&

(=)
E

0>)
#