Exam

Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1
Which of the following has occurred for the United States since 1960?
1)
_______

A)
X/Y has decreased and IM/Y has decreased.
B)
X/Y has increased while IM/Y has decreased.
C)
The ratio of exports to GDP (X/Y) and the ratio of imports to GDP (IM/Y) have both increased.
D)
X/Y has decreased and IM/Y has increased.

The ratio of a country's exports to its GDP must:

2)
_______

A)
be larger than the ratio of imports to GDP.
B)
be less than one.
C)
be greater than one.
D)
equal the ratio of imports to GDP.
E)
none of the above

3
Year-to-year movements in real exchange rates between industrialized countries like the U.S. and Canada are caused
mostly by:
3)
_______

A)
changes in capital controls.
B)
changes in quotas or tariffs.
C)
changes in nominal exchange rates.

D)
changes in relative growth rates of output.
E)
changes in relative rates of inflation.

4
For this question, assume the interest parity conditions holds. Also assume that the domestic interest rate is 10% and that
the foreign interest rate is 7%. Given this information, we would expect that:
4)
_______

A)
the domestic currency is expected to appreciate by 3%.
B)
individuals will only hold domestic bonds.
C)
individuals will only hold foreign bonds.
D)
the domestic currency is expected to depreciate by 3%.

5
Suppose the domestic interest rate is 3% and that the foreign interest rate is 6%. And finally, assume that the domestic
currency is expected to appreciate by 4% during the coming year. Given this information, we know that:
5)
_______

A)
individuals will be indifferent about holding domestic or foreign bonds.
B)
individuals will only hold foreign bonds.
C)
the interest parity condition holds.
D)
individuals will only hold domestic bonds.

Which of the following expressions represents the real exchange rate ()?
6)
_______
E

A)
B)

EP*
EP*/P
E/P

C)
D)

E)
none of the above

7
Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in period t. Which of the
following expressions represents the amount of U.K. pounds you will receive in one year (i.e., period t+1) from
purchasing U.K. bonds in period t?
7)
_______
i
(1 + i*)Ee
1 + i*

A)
B)
t+1/Et
C)

D)
e
(1 + i*)Et/E t+1

E)
none of the above

Which of the following expressions represents the dollar price of foreign currency?

8)
_______
1/E
EP/P*
E
EP*/P

A)
B)
C)
D)

E)
none of the above

For this question, assume that the domestic interest rate is 8% and that the foreign interest rate is 6%. And finally, assume
that the domestic currency is expected to depreciate by 3% during the coming year. Given this information, we know that:

9)
_______

A)
individuals will be indifferent about holding domestic or foreign bonds.
B)
individuals will only hold domestic bonds.
C)
individuals will only hold foreign bonds.
D)
the interest parity condition holds.

Which of the following events will cause the largest real depreciation for the domestic economy?

10)
______

A)
a 2% increase in E and a 2% increase in P
B)
a 6% increase in the domestic price level (P) and a 6% reduction in P*
C)
a 3% increase in E
D)
a 6% reduction in E and a 6% reduction in P*
E)
a 6% reduction in E and a 6% increase in the foreign price level (P*)

1
If the price level in Japan is 3.0, the price level in the U.S. is 6.0, and it costs 100 Yen to buy one dollar, then the real
exchange rate between the U.S. and Japan is:
11)
______
5.

A)

B)
20.

C)
2.
D)
50.
E)
200.

When the U.S. has a current account surplus, we know that it is also:

12)
______

A)
lending to the rest of the world.
B)
suffering from negative investment income.
C)
running a balanced trade account.
D)
borrowing from the rest of the world.
E)
none of the above

13)
Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in period t. Which of the
following expressions represents the amount of U.S. dollars you will receive in one year (i.e., period t+1) from purchasing
U.K. bonds in period t?
13)
______
i
1 + i*

A)
B)

C)
e
(1 + i*)Et/E t+1
(1 + i*)Ee

D)

t+1/Et
E)

none of the above

Which of the following best defines the real exchange rate?

14)
______

A)
the price of domestic currency in terms of foreign currency
B)
the price of foreign currency in terms of domestic currency
C)
the price of foreign bonds in terms of domestic bonds
D)
the price of domestic goods in terms of foreign goods
E)
none of the above

In 2003, which of the following countries had the lowest ratio of exports to GDP?

15)
______
Canada

A)

B)
Mexico

C)
Western Europe
D)
China

1
Assume the interest parity condition holds and that individuals expect the dollar to appreciate by 5% during the coming
year. Given this information, we know that:
16)
______

A)

i < i*.
i = i*.

B)

C)
the interest rate differential between the two countries is less than 5%.
D)
individuals will only hold foreign bonds .
E)
none of the above

An increase in the real exchange rate indicates that:

17)
______

A)
domestic goods are now relatively cheaper.
B)
domestic goods are now relatively more expensive.
C)
foreign goods are now relatively cheaper.
D)
both B and C

1
For this question, assume that the domestic interest rate is 6% and that the foreign interest rate 4%. And finally, assume
that the domestic currency is expected to appreciate by 3% during the coming year. Given this information, we know that:

18)
______

A)
the interest parity condition holds.
B)
individuals will only hold foreign bonds.
C)
individuals will be indifferent about holding domestic or foreign bonds.
D)
individuals will only hold domestic bonds.

1
Assume that the nominal exchange rate increases by 2%. If prices (both domestic and foreign do not change), we know
that:

19)
______

A)
domestic goods are now relatively cheaper.
B)
foreign goods are now relatively cheaper.
C)
domestic goods are now relatively more expensive.
D)
both B and C

2
Assume that the nominal exchange rate decreases by 4%. If prices (both domestic and foreign do not change), we know
that:
20)
______

A)
domestic goods are now relatively more expensive.
B)
foreign goods are now relatively more expensive.
C)
foreign goods are now relatively cheaper.
D)
both A and C

A nominal appreciation of the Japanese yen (against all currencies) indicates that:

21)
______

A)
the yen price of the U.K. pound has increased.
B)
the yen price of the U.S. dollar has increased.
C)
the number of units of foreign currency that one can obtain with one yen has increased.
D)
all of the above

2
Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate by 3%
during the year. For each dollar that a U.S. resident invests in foreign bonds, he/she can expect to get back an approximate

total of:
22)
______
$.93.

A)

B)
$.96.
C)
$1.04.
D)
$1.07.
E)
$1.10.

A reduction in the real exchange rate indicates that:

23)
______

A)
domestic goods are now relatively more expensive.
B)
foreign goods are now relatively more expensive.
C)
foreign goods are now relatively cheaper.
D)
both A and C

In 2003, which of the following countries had the highest ratio of exports to GDP?
24)
______
Mexico

A)

B)
Japan
C)
Canada
D)
China

2
For this question, suppose the domestic interest rate is 4% and that the foreign interest rate is 7%. And finally, assume that
the domestic currency is expected to depreciate by 3% during the coming year. Given this information, we know that:
25)
______

A)
individuals will be indifferent about holding domestic or foreign bonds.
B)
individuals will only hold foreign bonds.
C)
individuals will only hold domestic bonds.
D)
the interest parity condition holds.

2
Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year interest rate of 5% per year.
Ignoring risk and transaction costs, a U.S. investor should invest in foreign bonds as long as the expected yearly rate of
depreciation of the foreign currency is:
26)
______
less than 1%.
less than 2%.

A)
B)

C)
greater than 2%.
D)
less than 5%.
E)
greater than 5%.

When the dollar appreciates, we know that:

27)
______

A)
foreign currency is less expensive to Americans.
B)
American goods are less expensive to foreigners.
C)
foreign goods are less expensive to Americans.
D)
the dollar is less expensive to foreigners.
E)
none of the above

America's largest trading partner is:

28)
______
Germany.
Mexico.
Japan.
France

A)
B)
C)
D)

E)
none of the above

2
For this question, assume the interest parity conditions holds. Also assume that the domestic interest rate is 5% and that
the foreign interest rate is 9%. Given this information, we would expect that:
29)
______

A)
the domestic currency is expected to appreciate by 4%.
B)
the domestic currency is expected to depreciate by 4%.

C)
individuals will only hold domestic bonds.
D)
individuals will only hold foreign bonds.

In 2003, exports or imports as a percentage of GDP for the United States are approximately:
30)
______

A)
between 1% and 5%.
B)
between 10% and 20%.
C)
between 20% and 40%.
D)
between 40% and 75%.
E)
between 75% and 90%.

1)
C

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7)

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14)

15)

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