Sample Questions

1) The highest component of GNP is

A) Investment B) government purchases C) consumption D) trade E) the current account

2) Which one of the following statements is the MOST correct?

A) The GNP does not include sale of used items priced only below $1000.
B) The sale of a used textbook does enter GNP.
C) The sale of both a used textbook and a used house do not enter GNP.
D) The sale of a used house does not enter GNP, but the sale of a used book does.
E) The sale of a used textbook does not enter GNP, but the sale of a used house does.

3) Government transfer payments like social security and unemployment benefits are
A) Included in government purchases.
B) Not included in government purchases, but they are part of the investment component of
GNP.
C) Not included in government purchases, but they are included in the consumption component
of GNP.
D) Not included in government purchases.
E) Included in government purchases but not in the GNP.

4) In a closed economy, private saving is equal to

A) I-(G-T) B) I+(G-T)+C C) I+(G+T) D) I+(G-T) E) I-(G+T)

5) The official settlements balance or balance of payments is the sum of

A) The current account balance and the interest in all investments.
B) The current account balance and the non-reserve portion of the financial account balance.
C) The current account balance, the capital account balance, the non-reserve portion of the
financial account balance, the statistical discrepancy.
D) The current account balance, the capital account balance, the non-reserve portion of the
financial account balance.
E) The current account balance and the capital account balance.

6) The earnings of a Spanish factory with British owners are

A) Only part of Spain’s GNP
B) Part of Britain’s GNP
C) Only counted in Britain’s GDP
D) Counted in Spain’s GDP
E) Counted in Britain’s GDP and are a part of Spain’s GNP

7) How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the
exchange rate is 1.5 dollars per British pound?
 A) 25 B) 10 C) 30 D) 35 E) 20

8) A(n) _________ of a nation’s currency will cause imports to ___________ and exports to _______,
all other things held constant.
A) Appreciation; increase; increase
B) Depreciation; decrease; decrease
C) Depreciation; increase; decrease
D) Appreciation; decrease; increase
E) Depreciation; decrease; increase

9) In 2010, what is the percentage of foreign exchange transactions that involved exchanges of
foreign currencies for U.S. dollars?
A) 20 percent B) 30 percent C) 10 percent D) 40 percent E) 85 percent

10) If the dollar interest rate is 4 percent, the euro interest rate is 6 percent, then
A) Invest only in euros if the exchange rate is expected to remain constant.
B) An investor should invest only in dollars
C) An investor should invest only in euros
D) Invest only in dollars if the exchange rate is expected to remain constant
E) An investor should be indifferent between dollars and euros

11) Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro.
Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar
deposits is 10 percent and on euro it is 4 percent. Under these assumptions
A) it is hard to tell whether interest parity does or does not hold
B) interest parity does not hold
C) interest parity does hold
D) not enough information is given to answer the question
E) interest parity fluctuates

12) The covered interest rate parity condition can be stated as follows: The interest rate on dollar
deposits equals the interest rate on euro deposits ___________ the forward ____________ on
euros against dollars.
A) Plus; premium
B) times; premium
C) minus; premium
D) plus; discount
E) minus; discount

13) Individuals base their demand for an asset on

A) The expected return, how risky that expected return is, and the asset’s liquidity
B) The asset’s liquidity
 C) The riskiness of the asset’s expected return
D) The expected return the asset offers compared with the returns offered by other assets
E) The aesthetic qualities of the asset

14) An increase in
A) Real output decreases the interest rate while a fall in a real output increases the interest rate,
given the price level
B) Nominal output raises the interest rate while a fall in a real output lowers the interest rate,
given the price level and the money supply
C) Real output raises the interest rate while a fall in a real output lowers the interest rate, given
the price level and the money supply
D) Real output raises the interest rate while a fall in a real output lowers the interest rate, given
the money supply
E) Nominal output raises the interest rate while a fall in a real output lowers the interest rate,
given the price level

15) If there is an excess supply of money

A) The real money supply shifts left to make an equilibrium
B) The interest rate rises
C) The interest rate stays constant, but consumer confidence falters
D) The real money supply shifts right to make an equilibrium
E) The interest rate falls

16) A permanent increase in a country’s money supply

A) Leaves its price level constant in long-run equilibrium
B) Causes a proportional increase in its price level
C) Causes a less than proportional increase in its price level
D) Causes a more than proportional increase in its price level
E) Causes an inversely proportional fall in its price level

17) After a permanent decrease in the money supply

A) The exchange rate remains the same
B) The exchange rate overshoots in the long run
C) The exchange rate smoothly depreciates in the short run
D) The exchange rate overshoots in the short run
E) The exchange rate smoothly appreciates in the short run

18) Under Purchasing Power Parity

A) E$/E = PUS - PE
B) E$/E = PUS/PE
C) E$/E = PE/PUS
D) E$/E = PUS + PE
 E) E$/E = PUS × PE

19) Which of the following statements is the MOST accurate?

A) Relative PPP is only valid when absolute PPP is valid, provided the factors causing deviations
from relative PPP are more or less stable over time
B) Absolute PPP may be valid even when relative PPP is not, provided the factors causing
deviations from relative PPP are more or less stable over time
C) Relative PPP may be valid even when absolute PPP is not, provided the factors causing
deviations from absolute PPP are more or less stable over time
D) Relative PPP may be valid even when absolute PPP is not, provided the factors causing
deviations from relative PPP are more or less stable over time
E) Relative PPP is not valid when absolute PPP is not

20) The monetary approach makes the general prediction that

A) The exchange rate, which is the relative price of American and European money, is fully
determined in the short run and long run by the relative supplies of those monies and the
relative demands for them.
B) The exchange rate, which is the relative price of American and European money, is fully
determined in the short run by the relative supplies of those monies and the relative demands
for them.
C) The money supply in the U.S. will adjust to European monetary equilibrium.
D) The exchange rate, which is the relative price of American and European money, is fully
determined in the long run by the relative supplies of those monies and the relative demands
for them.
E) The exchange rate, which is the relative price of American and European money, is fully
determined in the long run by the relative supplies of those monies.

21) If people expect relative PPP to hold

A) The difference between the interest rates offered by dollar and euro deposits will equal the
difference between the inflation rates expected, over the relevant horizon, in the United
States and Europe, respectively, in the short run.
B) The difference between the interest rates offered by dollar and euro deposits will be below
the difference between the inflation rates expected, over the relevant horizon, in the United
States and Europe, respectively, in the short run.
C) The difference between the interest rates offered by dollar and euro deposits will equal the
difference between the inflation rates expected in the United States and Europe.
D) The difference between the interest rates offered by dollar and euro deposits will be above
the difference between the inflation rates expected, over the relevant horizon, in the United
States and Europe, respectively.
E) The difference between the interest rates offered by dollar and euro deposits will equal the
difference between the inflation rates expected, in the United States and Europe,
respectively, over the relevant horizon.
22) The PPP theory fails in reality for all of the following reasons except
A) The inflation data reported in different countries are based on different commodity baskets
B) Transport costs
C) Monopolistic or oligopolistic practices in goods markets
D) Restrictions on trade
E) Inflation rates are unrelated to money supply growth

23) An increase in the world relative demand for U.S. output causes
A) A long-run real appreciation of the euro against the dollar
B) A long-run real depreciation of the dollar against the euro
C) A long-run real appreciation of the dollar against the euro
D) A short-run real depreciation of the dollar against the euro
E) A short-run real appreciation of the euro against the dollar

24) In the long run

A) Exchange rates obey relative PPP when all disturbances occur in the output markets
B) Exchange rates obey absolute PPP when all disturbances occur in the output markets
C) Exchange rates obey absolute PPP when all disturbances are monetary in nature
D) Exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature
E) Exchange rates are unlikely to obey relative PPP when all disturbances occur in the output
markets

25) Which one of the following statements is the most accurate?

A) An increase in the real exchange rate and a decrease in disposable income improve the
current account.
B) An increase in the real exchange rate and a decrease in disposable income lower the current
account.
C) An increase in the real exchange rate and an increase in disposable income improve the
current account.
D) A decrease in the real exchange rate and a decrease in disposable income improve the current
account.
E) A decrease in the real exchange rate and an increase in disposable income improve the
current account.

26) Why is the economy at full employment in the long run?

A) Prices don’t adjust.
B) Only wages have the ability to adjust.
C) Government policies eventually converge on the full employment strategy.
D) Wages and the price level eventually adjust to full employment equilibrium levels.
E) Only price can adjust.
27) Temporary tax cuts would cause
A) the AA-curve to shift right
B) the DD-curve to shift left
C) the DD-curve to shift right
D) the AA-curve to shift left
E) a shift in the AA-curve, although the direction is ambiguous.

28) Imagine that the economy is at a point that is above both AA and DD, where both the output and
asset markets are out of equilibrium. Which first action is true?
A) The exchange rate will first move to a point on the DD schedule.
B) The AA-DD equilibrium will shift to the position of the economy.
C) The exchange rate will first move left to a position on the AA schedule.
D) The economy will stay at this level in the short run.
E) The exchange rate will first drop to a point on the AA schedule.

29) In long-run equilibrium after a permanent money-supply increase there follows

A) a decrease in nominal exchange rate.
B) a decrease in output.
C) an increase in nominal exchange rate.
D) an unchanged nominal exchange rate.
E) an increase in output.

30) The J-curve illustrates which of the following?

A) The short-term effects of depreciation on the current account.
B) The effects of depreciation on the home country’s economy.
C) The Keynesian view of international trade dynamics.
D) The gradual adjustment of home prices to a currency depreciation.
E) The immediate increase in current account caused by a currency depreciation.