ECO 302 Week 11 Quiz - Strayer

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Chapter 17 and 18

TRUE/FALSE

1. With an international sector real GNP is consumption plus gross investment plus government purchases plus net real asset income from abroad.

2. The balance of trade is net exports or imports less exports.

3. A higher current account deficit is caused by a declining domestic economy.

4. The real current account balance is real national saving less net domestic investment.

5. Tariffs and quotas lead to a higher real GDP growth rate in the country imposing them.

6. The law of one price says that there must be a unique price for a good in each location where it is sold.

7. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has a current-account deficit.

8. Foreign direct investment occurs when the home country acquires additional ownership of capital located in the rest of the world.

9. If the home country has negative trade balance, then its real GDP is less than real domestic expenditure.

10. The equilibrium business-cycle model predicts that the real current-account balance will be countercyclical.

MULTIPLE CHOICE

1. The law of one price:a. prohibits price discrimination. c. is a tax on imports.b. is that markets work to ensure that the same good has the same price in all locations. d. prohibits price increases unless firms can show their are unusual circumstances.

2. The difference between real GDP in a closed economy and real GNP in a open economy is:a. net real asset income from abroad. c. net international investment position.b. net imports. d. the trade balance.

3. Real GNP in an open economy is:a. the closed economy real output less net real asset income from abroad. c.

the closed economy real output less gross real asset income from abroad. b. the closed economy real output plus gross real asset income from abroad. d.

the closed economy real output plus net real asset income from abroad.

4. Net real asset income from abroad is:a. rt-1•Bft-1/P. c. (Bft - Bft-1)/P.b. Yt - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

5. Net real foreign investment is:a. rt-1•Bft-1/P. c. (Bft - Bft-1)/P.b. Yt - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

6. The trade balance is:a. rt-1•Bft-1/P. c. (Bft - Bft-1)/P.b. Yt - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

7. The balance on the current account:a. rt-1•Bft-1/P. c. (rt-1•Bft-1/P) + ((Bft - Bft-1)/P).b. Yt + (rt-1•Bft-1/P) - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

8. The balance on the current account is:a. real GNP less net foreign investment income. c. real GNP less the net international investment position.b. real GNP less net foreign investment.d. real GNP less real domestic expenditure.

9. The real current-account balance is:a. net real asset income from abroad less trade balance c. trade balance times the net real asset income from abroad.b. trade balance plus the net real asset income from abroad. d. trade balance less the net real income from abroad.

10. The real current account balance equals:a. net foreign investments. c. the trade balance plus net real asset income from abroad.b. real GNP less real domestic expenditure. d. all of the above.

11. The real current account balance equals:a. net foreign investments. c. the trade balance.b. the net international investment position. d. all of the above.

12. The real current account balance equals:a. the trade balance. c. the net international investment position. b. real GNP less real domestic expenditure. d. all of the above.

13. The real current account balance equalsa. the net international investment position. c. the trade balance plus net real asset income from abroad.b. the trade balance. d. all of the above.

14. The trade balance is:a. the difference between exports and imports. c. the real current-account balance less net real asset income from abroad.b. real GDP less real domestic expenditure. d. all of the above.

15. The trade balance is:a. the difference between exports and imports. c. net foreign investment.b. real asset income from abroad. d. all of the above.

16. The trade balance is:a. the balance on the current account. c. net foreign investment.b. real GDP less real domestic expenditure. d. all of the above.

17. The trade balance is:a. net foreign investment. c. the real current-account balance less net real asset income from abroad.b. the net international investment position. d. all of the above.

18. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:a. an increase in the MPK. c. an increase in borrowing from foreigners.

b. an increase in home country gross domestic investment. d. all of the above.

19. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:a. an increase in the MPK. c. an increase in lending to foreigners.b. an decrease in home country gross domestic investment. d. all of the above.

20. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:a. an decrease in the MPK. c. an increase in lending to foreigners.b. an increase in home country gross domestic investment. d. all of the above.

21. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:a. a decrease in the MPK. c. an increase in borrowing from foreigners.b. a decrease in gross domestic investment. d. all of the above.

22. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:a. a larger current account deficit. c. a lower MPK.b. a smaller current account deficit. d. lower domestic gross investment.

23. In the market clearing model with world markets for goods and credit, a decrease in technology, A, in the home country causes:a. a larger current account deficit. c. a higher MPK.b. a smaller current account deficit. d. higher domestic gross investment.

24. The open economy equilibrium business-cycle model predicts that the real current account balance will be:a. acyclical. c. countercyclical.b. procyclical. d. exogenous.

25. The open economy equilibrium business-cycle model predicts that the real current account balance will be:a. the same in expansions and recession. c. high in expansions and low in recessions.b. low in expansions and high in recessions. d. invariant with the business cycle.

26. In US data the real current account balance is:a. procyclical when the model predicts it will be countercyclical. c.

countercyclical when the model predicts it will be procyclical.b. procyclical as the model predicts. d. countercyclical as the model predicts.

27. In US data the real current account balance is:a. procyclical. c. countercyclical.b. weakly procyclical. d. weakly countercyclical.

28. While according to the model the current account balance will be countercyclical, the balance can also decline due to:a. a temporary negative shock like a harvest failure. c. a temporary increase in government purchases as in war time.b. a less developed country having a low capital stock. d. all of the above.

29. While according to the model the current account balance will be countercyclical, the balance can also decline due to:a. a temporary negative shock like a harvest failure. c. a permanent decrease in government purchases.b. a less developed country having poor institutions for growth. d. all of the above.

30. While according to the model the current account balance will be countercyclical, the balance can also decline due to:a. a temporary positive shock like a good harvest. c. a permanent decrease in government purchases.b. a less developed country having a low capital stock. d. all of the above.

31. While according to the model the current account balance will be countercyclical, the balance can also decline due to:a. a temporary positive shock like a positive harvest c. a temporary increase in government purchases as in war time.b. a less developed country having a high capital stock. d. all of the above.

32. In the Ricardian case, if the government budget deficit is increased, then the trade balance:a. moves toward a deficit too. c. is unaffected.b. moves toward a surplus. d. is exogenous.

33. The terms of trade are:a. ($ per home good)/($ per foreign good). c. foreign good per home good.b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

34. The terms of trade are:a. ($ per home good)/($ per foreign good). c. home good per foreign good.b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

35. The terms of trade are:a. ($ per foreign good)/($ per home good). c. home good per foreign good.b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

36. The terms of trade are:a. ($ per home foreign/($ per home good). c. foreign good per home good.b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

37. An increase in the terms of trade:a. raises real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.b. increases consumption. d. all of the above.

38. An increase in the terms of trade:a. raises real GDP. c. lowers real national saving. b. decreases consumption. d. all of the above.

39. An increase in the terms of trade:a. reduces real GDP. c. lowers real national saving.b. increases consumption. d. all of the above.

40. An increase in the terms of trade:a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.b. decreases consumption. d. all of the above.

41. A decrease in the terms of trade:

a. reduces real GDP. c. decreases real national saving if the change in terms of trade is less than fully permanent.b. decreases consumption. d. all of the above.

42. A decrease in the terms of trade:a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.b. increases consumption. d. all of the above.

43. If the government reduces tariffs or quotas on imports, then:a. real GDP will increase. c. net domestic investment will rise.b. the real current account balance falls.d. all of the above.

44. If the government reduces tariffs or quotas on imports, then:a. real GDP will increase. c. net domestic investment will fall.b. the real current account balance rises. d. all of the above.

45. If the government reduces tariffs or quotas on imports, then:a. real GDP will decrease. c. net domestic investment will fall.b. the real current account balance falls.d. all of the above.

46. If the government reduces tariffs or quotas on imports, then:a. real GDP will decrease. c. net domestic investment will rise.b. the real current account balance rises. d. all of the above.

47. If the government imposes or increases tariffs or quotas on imports, then:a. real GDP will decrease. c. net domestic investment will fall.b. the real current account balance rises. d. all of the above.

48. If the government imposes or increases tariffs or quotas on imports, then:a. real GDP will decrease. c. net domestic investment will rise.b. the real current account balance falls.d. all of the above.

49. If the government imposes or increases tariffs or quotas on imports, then:a. real GDP will increase. c. net domestic investment will rise.b. the real current account balance rises. d. all of the above.

50. If the government reduces tariffs or quotas on imports, then:a. real GDP will increase. c. net domestic investment will fall.b. the real current account balance falls.d. all of the above.

51. If we observe that the price of a good is higher in one location than in another location, this observationa. violates the law of one price. c. violates the law of one GDP.b. validates the law of one price.d. validates the law of one GDP.

52. Foreign direct investment isa. the home country’s additional supply of labor to the rest of the world. c.

the home country’s additional demand for labor from the rest of the world.b. the home country’s additional ownership of capital in the rest of the world.d.

the foreign country’s additional demand for labor in the home country.

53. When the home country acquires additional ownership of capital located in the rest of the world, it has isa. reduced foreign indirect investment. c. acquired foreign direct investment.b. acquired foreign divested investment. d. reduced foreign direct intervention.

54. Real gross national product in an open economy includesa. real GDP. c. net real labor costs from abroad.b. net real asset income from abroad. d. (a) and (b).

55. If the home country has a real GNP which is greater than real domestic expenditure, then the home country hasa. a current-account suplus. c. balance on the current account.b. a current-account deficit. d. none of the above.

56. If the home country has a real GNP which is less than real domestic expenditure, then the home country hasa. a current-account suplus. c. balance on the current account.b. a current-account deficit. d. none of the above.

57. If the home country has a real GNP which is equal to real domestic expenditure, then the home country hasa. a current-account suplus. c. balance on the current account.b. a current-account deficit. d. none of the above.

58. If the home country has a real GNP which is greater than net foreign investment, then the home country hasa. a current-account suplus. c. balance on the current account.b. a current-account deficit. d. none of the above.

59. If the home country has a real GDP which is greater than real domestic expenditure, then the home country hasa. a trade balance that is positive. c. a trade balance that is zero.b. a trade balance that is negative. d. none of the above.

60. If the home country has a real GDP which is less than real domestic expenditure, then the home country has

a. a trade balance that is positive. c. a trade balance that is zero.b. a trade balance that is negative. d. none of the above.

61. Historical data on the U.S. current account balance showa. a deficit from the turn of the twentieth century through the mid-1970s. c.

a surplus for the twentieth century through the mid-1970s.b. a surplus in most of the past two decades. d. a zero current account balance for most of the twentieth century.

62. Historical data on the U.S. current account balance show that one of the largest ratios for the current-account balance relative to GDP occurreda. as a surplus, in the early 1970s. c. as a surplus, in the early 2000s.b. as a deficit, in the early 1990s. d. as a deficit, in the early 2000s.

63. Historical data on the ratio of U.S. nominal exports and imports to GDP showa. a generally rising ratio since 1950. c. a generally positive but steady ratio since 1950.b. a generally falling ratio since 1950. d. a ratio hovering around zero since 1950.

64. Historical data on the ratio of U.S. net international investment to GDP showa. a steady increase in the ratio since 1980. c. a steady ratio since 1980.b. a steady decline in the ratio since 1980. d. no discernable pattern in the ratio since 1980.

65. Historical data on the ratio of U.S. net factor income from abroad to GDP showa. a steady increase in the ratio since 1980. c. a peak in the ratio around 1980, followed by a decline through 1987.b. a steady decline in the ratio since 1960. d. no discernable pattern in the ratio since 1980.

66. A developing country with good prospects means that the country’s current-account balance would likely bea. negative. c. zero.b. positive. d. impossible to determine.

SHORT ANSWER

1. What is the real current account balance?

2. What are the effects of a permanent increase in technology in the open market clearing model?

3. What does the open market clearing model predict about the association of the real current account balance and real GDP growth and what do the data on the US show?

4. Does a government budget deficit lead to a real current-account deficit?

5. What are the effects of reducing tariffs and quotas in the open market clearing model?

Chapter 18

TRUE/FALSE

1. If the dollar per yen exchange rate rises, then so does the value of the dollar.

2. When absolute purchasing power parity holds, the real exchange rate is 1.

3. Relative purchasing power parity says that the country with the higher inflation rate will see its currency depreciate.

4. The interest rate differential between two countries is the real interest rate.

5. If a country fixes its exchange rate, it gives up control of its money supply.

6. The nominal exchange rate is measured by quantities of currencies exchanged, while the real exchange rate is measured by quantities of goods exchanged.

7. Fixed exchange rates are determined by market forces.

8. Flexible exchange rates are determined by market forces.

9. Poorer countries tend to have high real exchange rates because the prices for nontradable goods is low in these countries.

10. The combination of interest rate parity and relative purchasing power parity implies that expected real incomes are the same in the home country and the foreign country.

MULTIPLE CHOICE

1. The nominal exchange rate is:a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.

b. the number of units of foreign currency per one unit of home currency divided by the ratio of the foreign price level to the home price level. d. all of the above.

2. The real exchange rate is:a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.b. nominal exchange rate divided by the ratio of the foreign price level to the home price level. d. all of the above.

3. Flexible exchange rates are determined by:a. the market. c. the UN.b. the home country government. d. the International Monetary Fund.

4. Fixed exchange rates are determined by:a. the market. c. the UN.b. the governments of the two countries. d. the International Monetary Fund.

5. Purchasing power parity is the idea that:a. the nominal exchange equals the ratio of the foreign price to the home price.

c. the nominal exchange equals the home price less the foreign price.b. the nominal exchange rate equals the foreign price time the home price. d.

the nominal exchange equals the home price less the foreign price.

6. Purchasing power parity may not hold due to:a. inflation. c. market clearing.b. nontraded goods such as services. d. all of the above.

7. Purchasing power parity may not hold due to:a. inflation. c. shifts in the terms of trade. b. market clearing. d. all of the above.

8. Absolutely purchasing power parity means:a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price. b. buying and selling goods looks equally attractive in both countries. d.

all of the above.

9. Absolute purchasing power parity means:a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the home price to the world price. b. buying and selling goods looks more attractive in the home country. d.

all of the above.

10. Absolute purchasing power parity means:a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the world price. b. buying and selling goods looks equally attractive in both countries. d.

all of the above.

11. Absolutely purchasing power parity means:a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price. b. buying and selling goods looks more attractive in the home country. d.

all of the above.

12. Non-traded goods include:a. personal services like haircuts. c. consumer goods like shirts.b. durable goods like tv sets. d. all of the above.

13. Non-traded goods include:a. commodities like wheat. c. consumer goods like shirts.b. real estate. d. all of the above.

14. Relative purchasing power parity says that:a. the growth rate of the nominal exchange rate is the foreign inflation rate less the home inflation rate. c. the growth rate of the nominal exchange rate is the home inflation rate plus the foreign inflation rate.b. the growth rate of the nominal exchange rate is the foreign inflation rate times the home inflation rate. d. the growth rate of the nominal exchange rate is the foreign inflation rate divided by the home inflation rate.

15. Relative purchasing power parity implies a country will see its currency fall in value, if a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate. b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

16. Relative purchasing power parity implies a country will see its currency rise in value, if a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate. b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

17. Relative purchasing power parity implies a country will see its currency keep the same value, if a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is equal to the foreign inflation rate. b. its price level is higher than the foreign price level. d. its price level is equal to the foreign price level.

18. If the home inflation rate is 5% and the foreign inflation rate is 9%, then by relative purchasing power parity the home country would expect is exchange rate to:a. rise in value by 5%. c. rise value by 4%.b. fall in value by 5%. d. fall in value by 4%.

19. If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:a. rise in value by 5%. c. rise value by 4%.b. fall in value by 5%. d. fall in value by 4%.

20. If the home inflation rate is 5% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:a. rise in value by 5%. c. have no change in its value.b. fall in value by 5%. d. fall in value by 10%.

21. Interest rate parity says that:a. the interest rate differential is the growth rate of the nominal exchange rate.

c. the interest rate differential is the growth rate of the real exchange rate. b. the interest rate differential is ratio of the foreign price level to the home price level. d. the interest rate differential is ratio of the home price level to the foreign price level.

22. If the home interest rate is 5% and the foreign interest rate is 7%, then the expected growth of the nominal exchange rate is:a. 2%. c. -2%.b. 5%. d. -12%.

23. If the home interest rate is 5% and the foreign interest rate is 7%, then the difference in the expected inflation rates is:a. 2%. c. -2%.b. 5%. d. -12%.

24. If the home interest rate is 7% and the foreign interest rate is 5%, then the expected growth of the nominal exchange rate is:a. 2%. c. -2%.b. 7%. d. -12%.

25. If the home interest rate is 7% and the foreign interest rate is 5%, then the difference in the expected inflation rates is:a. 2%. c. -2%.b. 7%. d. -12%.

26. If absolute purchasing power parity holds, under fixed exchange rates:a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.b. the home inflation rate equals the foreign inflation rate. d. all of the above.

27. If absolute purchasing power parity holds, under fixed exchange rates:a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is positive.b. the home inflation is lower than the foreign inflation rate. d. all of the above.

28. If absolute purchasing power parity holds, under fixed exchange rates:a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is negative.b. the home inflation rate equals the foreign inflation rate. d. all of the above.

29. If absolute purchasing power parity holds, under fixed exchange rates:a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.

b. the home inflation rate is lower than the foreign inflation rate. d. all of the above.

30. If a country with a fixed exchange rate tries to raise its money stock it will:a. see its central bank gain domestic government bonds. c. see its money stock fall back to its initial level.b. see its central bank lose international reserves. d. all of the above.

31. If a country with a fixed exchange rate tries to raise its money stock it will:a. see its central bank gain domestic government bonds. c. see its money stock continue to rise.b. see its central bank gain international reserves. d. all of the above.

32. If a country with a fixed exchange rate tries to raise its money stock:a. see its central bank lose domestic government bonds. c. see its money stock continue to rise.b. see its central bank lose international reserves. d. all of the above.

33. If a country with a fixed exchange rate tries to raise its money stock:a. see its central bank lose domestic government bonds. c. see its money stock fall back to its initial level.b. see its central bank gain international reserves. d. all of the above.

34. A revaluation is when a country:a. allows its currency’s value to float. c. lowers the fixed value of its currency.b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

35. A devaluation is when a country:

a. allows its currency’s value to float. c. lowers the fixed value of its currency.b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

36. A depreciation is when the value of a country’s currency:a. is fixed by the government. c. falls in value in the exchange market.b. rises in value in the exchange market. d. is fixed in relationship to gold.

37. An appreciation is when the value of a country’s currency:a. is fixed by the government. c. falls in value in the exchange market.b. rises in value in the exchange market. d. is fixed in relationship to gold.

38. Under a fixed exchange rate regime, losses of international reserves imply that:a. the pressure on a country that needs to devalue it currency is greater. c.

countries are not under much pressure to change the value of their currency.b. the pressure on a country that needs to revalue its currency is greater. d.

countries can not change the value of their currencies.

39. Fixed exchange rates:a. facilitate transactions between countries compared to floating exchange rates.

c. constrain monetary policy officials. b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

40. Fixed exchange rates:a. facilitate transactions between countries compared to floating exchange rates.

c. give domestic monetary policy officials more autonomy. b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

41. Fixed exchange rates:a. make transactions between countries riskier compared to floating exchange rates. c. give domestic monetary policy officials more autonomy. b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

42. Fixed exchange rates:a. make transactions between countries riskier compared to floating exchange rates. c. constrain monetary policy officials. b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

43. Floating exchange rates:a. make transactions between countries more difficult. c. provide autonomy for monetary policy authorities. b. make monetary policy independent. d. all of the above.

44. Floating exchange rates:a. make transactions between countries more difficult. c. constrain monetary policy officials. b. make monetary policy interdependent between the countries. d. all of the above.

45. Floating exchange rates:a. make transactions between countries easier. c. constrain monetary policy officials. b. make monetary policy independent. d. all of the above.

46. Floating exchange rates:a. make transactions between countries easier. c. provide autonomy for monetary policy authorities. b. make monetary policy interdependent between the countries. d. all of the above.

47. Under fixed exchange rates a country’s:a. money supply is fixed. c. monetary policy makers are not independent.b. inflation rate is fixed. d. all of the above.

48. Under fixed exchange rates a country’s:a. money supply is fixed. c. monetary policy makers are independent.b. inflation rate will rise. d. all of the above.

49. Under fixed exchange rates a country’s:a. money supply is domestically controlled. c. monetary policy makers are independent.b. inflation rate is fixed. d. all of the above.

50. Under fixed exchange rates a country’s:a. money supply is domestically controlled. c. monetary policy makers are not independent.b. inflation rate will rise. d. all of the above.

51. Suppose the exchange rate between the U.S. dollar and the Argentinian peso is 3 pesos per dollar today. It rises to 3.1 pesos per dollar the next day. This means the dollar hasa. appreciated and the peso has depreciated. c. appreciated, and the peso has appreciated.b. depreciated and the peso has appreciated. d. depreciated, and the peso has depreciated.

52. In 1950, one U.S. dollar bought 361 Japanese yen, and in 2006, one U.S. dollar bought 117 yen. The U.S. dollara. gained over half of its value in terms of yen. c. appreciated relative to the yen.

b. lost over half of its value in terms of yen. d. appreciated relative to most of the world’s currencies.

53. If a country’s government intervenes often in the exchange rate market, then the countrya. is operating closer to a flexible exchange-rate model than a fixed exchange-rate model. c. is operating closer to a fixed exchange-rate model than a flexible exchange-rate model.b. will experience repeated appreciations of its currency. d. is not a member of the International Monetary Fund (IMF).

54. At a simplified level, purchasing power parity makes sense because, if it did not, housefholds woulda. want to purchase all of their goods in one place, the more expensive country.

c. not want to purchase any goods from either country.b. want to purchase equal portions of their goods in each country. d.

want to purchase all of their goods in one place, the cheaper country.

55. The real exchange rate is measured in units ofa. goods bought in the foreign country relative to goods bought in the home country. c. labor supply in the foreign country relative to labor supply in the home country.b. prices in the foreign country relative to prices in the home country. d.

none of the above.

56. If you can buy one pound of flour for $1.25 in the U.S. and one pound of flour for 0.75 £ (pounds) in the U.K., then purchasing power parity implies thea. real exchange rate is 1.25 £ per $. c. nominal exchange rate is 1.67 £ per $.b. nominal exchange rate is 0.6 £ per $. d. real exchange rate is 0.6 £ per $.

57. Purchasing power parity implies thea. nominal exchange rate equals one. c. real exchange rate equals one.b. nominal exchange is greater than one. d. real exchange rate is less than one.

58. The Balassa-Samuelson hypothesis identifies a pattern of poor countries havinga. low nominal exchange rates. c. low real exchange rates.b. high nominal exchange rates. d. high real exchange rates.

59. The pattern of real exchange rates across countries that is identified by the Balassa-Samuelson hypothesis occurs becausea. low-income countries tend to have low prices for nontradable goods. c.

low-income countries tend to have low prices for tradable goods.b. low-income countries tend to have high prices for nontradable goods. d.

low-income countries tend to have low real exchange rates.

60. The combination of interest-rate parity and relative purchasing power parity leads to the conclusion that thea. foreign expected real interest rate is greater than the home expected real interest rate. c. foreign expected nominal interest rate equals the home expected real interest rate.b. foreign expected real interest rate equals the home expected real interest rate.

d. foreign expected nominal interest rate equals the home expected nominal interest rate.

61. The Bretton Woods System refers toa. the flexible exchange-rate system that the International Monetary Fund (IMF) prefers. c. the fixed exchange-rate regime which linked other currencies to the dollar and the dollar to gold.b. the flexible exchange-rate regime introduced just after World War II that gave France the major role in stabilizing currencies. d. the fixed exchange-rate regime which linked the U.S. and other currencies to silver.

62. Under the Bretton Woods System, the U.S. dollara. was allowed to vary around a wide band compared to other participating countries. c. was not fixed, but the U.S. nominal interest rate was fixed relative to other participating countries.

b. varied according to market conditions, but the other participating countries did not allow their currencies to vary. d. was the only participating currency linked directly to gold.

63. If the country of Colombia decides to fix its nominal exchange rate with the U.S. dollar, then in the long run, it will havea. roughly the same inflation rate as the U.S. c. roughly the same real GDP as the U.S.b. a higher inflation rate than the inflation rate for the U.S. d. a higher real GDP than the real GDP in the U.S.

64. One reason that a country with a record of high inflation might want to fix its nominal exchange rate with the U.S. dollar is thata. the country will, in the long run, have about the same inflation rate as the U.S.

c. the fixed exchange-rate will act as a monetary-policy rule which prevents the country from reneging on a pledge of low inflation.b. the fixed exchange-rate will help the country gain credibility in fighting high inflation. d. all of the above.

65. In exchange rate policy, sterilization refers toa. the market’s ability to clear excess quantities of currency supplied rapidly. c.

anti-crime laws the U.S. passed to prevent “money laundering.”b. the central bank’s attempt to offset an initial intervention in the exchange market. d. the process the International Monetary Fund (IMF) uses to lend to a country in need.

66. In a fixed exchange-rate regime, the money supply isa. exogenous. c. endogenous.b. interdependent. d. highly skewed.

SHORT ANSWER

1. What is a nominal exchange rate?

2. What is absolute purchasing power parity, what does it imply and why might it not hold?

3. What is relative purchasing power parity and when does it say the home country will see its currency lose value?

4. What is interest-rate parity and what does this imply about when the exchange rate will be stable?

5. What are the advantages of fixed and floating exchange rates?