Chap14 Test Bank

7/30/2019 Chap14 Test Bank

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Macroeconomics, 3e (Williamson)Chapter14

Money in the Open Economy

1)

The nominal exchange rate is theA)

domestic currency price of foreign currency.B)

foreign currency price of domestic currency.C)

price of domestic goods in terms of foreign goods.

D)

price of foreign goods in terms of domestic goods.Answer:

AQuestion

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Previous Edition

2)

The real exchange rate is theA)

domestic currency price of foreign currency.B)

foreign currency price of domestic currency.C)

price of domestic goods in terms of foreign goods.D)

price of foreign goods in terms of domestic goods.Answer:

DQuestion

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3)

In an open economy, the law of one price implies thatA)

the domestic economy may have a comparative advantage in only half the goods itproduces.

B)

perfect competition holds in all domestic markets.C)

purchasing power parity should hold.D)

the nominal exchange rate should equal one.Answer:

CQuestion

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Previous Edition

4)

According to purchasing power parity, the relationship among the domestic price (P), theforeign price (P), and the nominal exchange rate (e), can be written as

A)

P = e - P.B)

P = P- e.C)

P = eP.D)

P = e/P.Answer:

CQuestion

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5)


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If purchasing power parity holds, the exchange rate (e) can be expressed as a function ofthe domestic price (P) and the foreign price (P*) as

A)

e = P - P*.

B)

e = P* - P.

C)

e = P* + P.

D)

e = P/P*.

Answer:

DQuestion

Status:

New


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6)

A principal reason that purchasing power parity does not hold exactly in practice isA)

that foreign and domestic assets are not perfect substitutes.B)

the existence of non-traded goods.C)

that consumers in different countries have different preferences.D)

that costs of production are not the same in all countries.Answer:

BQuestion

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7)

iPods are less expensive in Canada than the United States, once the exchange rate is takeninto account. This is an indication that

A)

the nominal exchange rate is equal to one.

B)

purchasing power parity does not hold.C)

the law of one price holds.D)

the exchange rate is fixed.Answer:

BQuestion

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New

8)

Purchasing power parity may not hold in practice due to all of the following exceptA)


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transportation costs.B)

cross-country differences in environmental regulations.C)

trade barriers like tariffs and quotas.D)

the existence of non-traded goods.Answer:

BQuestion

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9)

The Big Mac index, published by The EconomistA)

computes real exchange rates based on the local currency price of Big Macs in differentcountries.

B)

compares the market shares of American fast food companies in different countries.C)

compares the barriers to trade erected by different foreign governments.D)

computes the relative cost of a Big Mac to the typical full-service restaurant meal in differentcountries.

Answer:

AQuestion

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10)

Over the period from 1989-2006, an examination of purchasing power parity between theUnited States and Canada shows that

A)

purchasing power parity held almost exactly between the two countries.


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B)

the real exchange rate has fluctuated, but has shown no trend.C)

Canada's real exchange rate vs. that of the United States has increased by approximately70%.

D)

the United States' real exchange rate vs. Canada has increased by approximately 70%.Answer:

CQuestion

Status:

Revised


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11)

Under purely flexible exchange rates,A)

there is no intervention by the domestic fiscal or monetary authorities to specifically targetthe nominal exchange rate.

B)

there is only occasional intervention by the domestic fiscal or monetary authorities tospecifically target the nominal exchange rate.

C)

the domestic fiscal and monetary authorities retain considerable flexibility to prevent short-run variability in the nominal exchange rate.

D)

the domestic fiscal and monetary authorities retain considerable flexibility to prevent long-run variability in the nominal exchange rate.

Answer:

AQuestion

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Previous Edition

12)

A devaluation of the exchange rate is a policy action thatA)

increases the real exchange rate.B)

decreases the real exchange rate.C)

increases the nominal exchange rate.D)

decreases the nominal exchange rate.Answer:

CQuestion

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Previous Edition

13)


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A revaluation of the exchange rate is a policy action thatA)

increases the real exchange rate.B)

decreases the real exchange rate.C)

increases the nominal exchange rate.D)

decreases the nominal exchange rate.Answer:

DQuestion

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Previous Edition

14)

A hard peg may be achieved by all of the following exceptA)

following the rules of the Bretton Woods Agreement.B)

dollarization.C)

establishing a currency board.D)

mutual agreements establishing a common currency.Answer:

A

QuestionStatus:

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15)

Dollarization is a policy action thatA)

tries to stabilize the value of the local currency vs. the U.S. dollar.


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B)

adopts the currency of another country as the national medium of exchange.C)

mimics policy actions taken by the U.S. Federal Reserve.D)

outlaws the holding of foreign currencies other than the U.S. dollar.Answer:

BQuestion

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16)

Which of the following was specifically instituted to ensure a successful hard peg?A)

the Bretton Woods AgreementB)

the European Monetary SystemC)

the European Monetary Union

D)

the International Monetary FundAnswer:

CQuestion

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17)

In the European Monetary Union, the supply of eurosA)

is managed by the individual central banks of the member countries.B)

is managed by the European Central Bank.C)

is determined by market forces.D)

automatically varied in response to short-run fluctuations in the exchange rates of themember nations.

Answer:

BQuestion

Status:

Previous Edition

18)

The supply of euros is managed byA)

the European Monetary Union.

B)

the European Monetary System.C)

the European Central Bank.D)

the European Bank for Reconstruction and Development.Answer:

CQuestion

Status:

New

19)

Adoption of a currency boardA)


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is one method for achieving a soft peg policy.B)

places responsibility for exchange rate management in the hands of an agency that isindependent of political influences.

C)

mandates the use of currency in all domestic transactions.D)

requires that a centralized institution holds interest-bearing assets denominated in thecurrency against which the nominal exchange rate is being fixed.

Answer:

DQuestion

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Previous Edition

20)

Compared to dollarization, a currency boardA)

has a flexible exchange rate.B)

has a separate currency.

C)

conducts independent monetary policy.D)

is the same institution.Answer:

BQuestion

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New

21)

Compared to a fixed exchange rate, a monetary unionA)

involves soft pegs.B)


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does not allow adjustments to exchange rates.C)

is managed at the International Monetary Fund.D)

has no central bank.Answer:

BQuestion

Status:

New

22)

The Bretton Woods AgreementA)

fixed the value of the U.S. dollar relative to gold.B)

fixed the value of the U.S. dollar relative to the euro.C)

required foreign central banks to hold certain minimum amounts of gold as foreignexchange reserves.

D)

required member nations, other than the United States, to disband their central banks.Answer:

AQuestion

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23)

A key international institution that plays an important role in exchange rate determination isthe

A)

U.S. Currency Board.B)

European Central Bank.C)

World Bank.D)

International Monetary Fund.Answer:

DQuestion

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Previous Edition

24)

The International Monetary Fund plays the key role ofA)

providing deposit insurance for banks in its member nations.

B)

acting as lender of last resort for its member countries' central banks.C)

providing loans to member countries to help finance development projects.D)

enforcing international monetary agreements.Answer:

BQuestion

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Previous Edition

25)

Which of the following institutions plays the role of an international lender of last resort?A)


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the World BankB)

the International Monetary FundC)

the European Monetary SystemD)

the Federal Reserve SystemAnswer:

BQuestion

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Previous Edition

26)

In the monetary small open-economy model with a flexible exchange rate, an increase in theforeign price level has which impact on domestic money demand?

A)

It increases it.B)

It decreases it.C)

It has no impact.D)

It depends.Answer:

AQuestion

Status:

New

27)

In the monetary small open-economy model with a flexible exchange rate, an increase in thedomestic price level has which impact on domestic money demand?

A)

It increases it.B)


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It decreases it.C)

It has no impact.D)

It depends.Answer:

AQuestion

Status:

New

28)

In the monetary small open-economy model with a flexible exchange rate, an increase in theexchange rate has which impact on domestic money demand?

A)

It increases it.B)

It decreases it.C)

It has no impact.D)

It depends.Answer:

AQuestion

Status:

New


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29)

In the monetary small open-economy model with a flexible exchange rate, an increase in thedomestic money supply increases

A)

domestic output, but has no effect on the domestic price level or the nominal exchange rate.B)

the domestic price level, but has no effect on domestic output or the nominal exchange rate.C)

the nominal exchange rate, but has no effect on domestic output or the domestic price level.D)

the domestic price level and the nominal exchange rate, but has no effect on domesticoutput.

Answer:

DQuestion

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Previous Edition

30)

Under a flexible exchange rate, an increase in the domestic money supply leads toA)

a devaluation of the domestic currency.B)

a revaluation of the domestic currency.C)

a depreciation of the domestic currency.D)

an appreciation of the domestic currency.

Answer:

CQuestion

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Previous Edition

31)

In the monetary small open-economy model with a flexible exchange rate, an increase in the


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foreign price level decreasesA)

domestic output, but has no effect on the domestic price level or the nominal exchange rate.B)

the domestic price level, but has no effect on domestic output or the nominal exchange rate.C)

the nominal exchange rate, but has no effect on domestic output or the domestic price level.D)

the domestic price level and the nominal exchange rate, but has no effect on domesticoutput.

Answer:

CQuestion

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Previous Edition

32)

In the monetary small open-economy model with a flexible exchange rate, an increase in theworld real interest rate

A)

increases domestic output and increases the nominal exchange rate, as long as real moneydemand is much more responsive to real income than to the real interest rate.

B)

increases domestic output and decreases the nominal exchange rate, as long as real moneydemand is much more responsive to real income than to the real interest rate.

C)

decreases domestic output and increases the nominal exchange rate, as long as real moneydemand is much more responsive to real income than to the real interest rate.

D)

decreases domestic output and decreases the nominal exchange rate, as long as real moneydemand is much more responsive to real income than to the real interest rate.Answer:

BQuestion

Status:

Previous Edition

33)


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In the monetary small open-economy model with a fixed exchange rate, an increase in theforeign price level has which impact on domestic money demand?

A)

It increases it.B)

It decreases it.C)

It has no impact.D)

It depends.Answer:

AQuestion

Status:

New

34)

In the monetary small open-economy model with a fixed exchange rate, an increase in thedomestic price level has which impact on domestic money demand?

A)

It increases it.

B)

It decreases it.C)

It has no impact.D)

It depends.Answer:

AQuestion

Status:

New

35)

In the monetary small open-economy model with a fixed exchange rate, an increase in theexchange rate has which impact on domestic money demand?


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A)

It increases it.B)

It decreases it.C)

It has no impact.D)

It depends.Answer:

AQuestion

Status:

New

36)

For a country with a fixed exchange rate, foreign exchange reserves areA)

an asset of the domestic government.B)

a liability of the domestic government.

C)

held by private banks.D)

are unnecessary.Answer:

AQuestion

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Previous Edition

37)

To maintain a fixed exchange rate, authoritiesA)

make laws stipulating the exchange rate.B)


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modify money supply.C)

modify government expenses.D)

modify taxes.Answer:

BQuestion

Status:

New

38)

In the monetary small open-economy model with a fixed exchange rate, the domesticA)

government loses control over the level of domestic government spending.B)

government loses control over the level of domestic taxes.C)

government loses control over the level of domestic government spending and domestictaxes.

D)

central bank loses control over the domestic stock of money.Answer:

DQuestion

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Previous Edition


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39)

In the monetary small open-economy model with a fixed exchange rate, an increase in theforeign price level

A)

increases the domestic money supply and increases the domestic price level.B)

increases the domestic money supply and decreases the domestic price level.C)

decreases the domestic money supply and increases the domestic price level.D)

decreases the domestic money supply and decreases the domestic price level.Answer:

AQuestion

Status:

Previous Edition

40)

In the monetary small open-economy model with a fixed exchange rate, an increase in theworld real interest rate

A)

increases domestic output and has no effect on the domestic price level.B)

decreases domestic output and has no effect on the domestic price level.C)

increases the domestic price level and has no effect on domestic output.D)

decreases the domestic price level and has no effect on domestic output.

Answer:

AQuestion

Status:

Previous Edition

41)

In the monetary small open-economy model with a fixed exchange rate, a devaluation of the


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domestic currency in the absence of any other shocksA)

increases the current account surplus and has no effect on the domestic money supply.B)

decreases the current account surplus and has no effect on the domestic money supply.C)

increases the domestic money supply and has no effect on the current account surplus.D)

decreases the domestic money supply and has no effect on the current account surplus.Answer:

DQuestion

Status:

Previous Edition

42)

In the monetary small open-economy model with a fixed exchange rate, a temporarydecrease in domestic total factor productivity in the absence of any other shocks

A)

increases the current account surplus and increases the domestic money supply.B)

increases the current account surplus and decreases the domestic money supply.C)

increases the domestic money supply and decreases the current account surplus.D)

decreases the domestic money supply and decreases the current account surplus.Answer:

D QuestionStatus:

Previous Edition

43)

In the monetary small open-economy model, a fixed exchange rate insulates the domesticprice level from

A)


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both real and nominal shocks from abroad.B)

real shocks from abroad, but not nominal shocks from abroad.C)

nominal shocks from abroad, but not from real shocks from abroad.D)

neither real nor nominal shocks from abroad.Answer:

BQuestion

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Previous Edition

44)

In the monetary small open-economy model, a flexible exchange rate insulates the domesticprice level from

A)

both real and nominal shocks from abroad.B)

real shocks from abroad, but not from nominal shocks from abroad.C)

nominal shocks from abroad, but not from real shocks from abroad.D)

neither real nor nominal shocks from abroad.Answer:

CQuestion

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45)

A natural region over which a single currency dominates as a medium of exchange is calledA)

sovereign nation.B)


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monetary union area.C)

common currency area.D)

currency union.Answer:

CQuestion

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46)

An agreement among countries to adopt a common currency is called aA)

central bank consolidation.B)

currency union.C)

monetary compact.D)

common banking treaty.Answer:

BQuestion

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47)

What is the major problem in a currency union?A)

Money demand becomes more erratic.B)

Participating central banks may not agree on monetary policy.C)

It is akin to dollarization.


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D)

The capital account becomes difficult to define.Answer:

BQuestion

Status:

New

48)

A capital inflow occurs when aA)

domestic resident purchases a domestic asset.B)

domestic resident purchases a foreign asset.C)

foreign resident purchases a domestic asset.D)

foreign resident purchases a foreign asset.Answer:

C

QuestionStatus:

Previous Edition

49)

A capital outflow occurs when aA)

domestic resident purchases a domestic asset.B)

domestic resident purchases a foreign asset.C)

foreign resident purchases a domestic asset.D)

foreign resident purchases a foreign asset.Answer:


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BQuestion

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50)

The balance of payments is zero

A)

as an accounting identity.B)

because market forces ensure that this is so.C)

only if the current account balance is zero.D)

only if the capital account balance is zero.Answer:

AQuestion

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51)

The balance of payments improvesA)

when there is an exchange rate appreciation.B)

when there is an exchange rate depreciation.C)

when the interest rate rises.D)

never.Answer:

DQuestion

Status:

New

52)

The balance of payments equalsA)

the current account surplus plus the capital account surplus.B)

the current account surplus plus the capital account deficit.C)

the current account deficit plus the capital account surplus.D)

the current account deficit plus the capital account deficit.Answer:

AQuestion

Status:

New

53)

The acquisition of a new physical asset by a foreign resident is calledA)


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foreign direct investment.B)

foreign capital investment.C)

a portfolio inflow.D)

a portfolio outflow.Answer:

AQuestion

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Previous Edition

54)

The acquisition of a domestic financial asset by a foreign resident is calledA)

foreign direct investment.B)

foreign capital investment.C)

a portfolio inflow.D)

a portfolio outflow.Answer:

CQuestion

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Previous Edition

55)

In response to a temporary change in total factor productivity, the adoption of capitalcontrols under a flexible exchange rate

A)

amplifies the effect of this disturbance on both domestic output and the nominal exchangerate.

B)


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amplifies the effect of this disturbance on domestic output and dampens the effect on thenominal exchange rate.

C)

dampens the effect of this disturbance on domestic output and amplifies the effect on thenominal exchange rate.

D)

dampens the effect of this disturbance on both domestic output and the nominal exchangerate.

Answer:

DQuestion

Status:

Previous Edition


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56)

In response to a temporary change in total factor productivity, the adoption of capitalcontrols under a fixed exchange rate

A)

amplifies the effect of this disturbance on both domestic output and the domestic nominalmoney supply.

B)

amplifies the effect of this disturbance on domestic output and dampens the effect on thedomestic nominal money supply.

C)

dampens the effect of this disturbance on domestic output and amplifies the effect ondomestic nominal money supply.

D)

dampens the effect of this disturbance on both domestic output and the domestic nominalmoney supply.

Answer:

DQuestion

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57)

The adoption of capital controls makes

A)

everyone in the domestic economy better off.B)

some domestic residents better off and some worse off, although on average welfareincreases.

C)

some domestic residents better off and some worse off, although on average welfare

decreases. D)

everyone in the domestic economy worse off.Answer:

CQuestion

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