1

Question 1

1. If a country has a $100 million debt and the interest rate on the debt is 5% and the debt is serviced each year, this would result in:
   a. an interest payment of $5 million and a reduction in the debt amount by $10 million each year.
   b. an interest payment of $15 million and a reduction in the debt amount by $10 million each year.
   c. an interest payment of $5 million and no change in the debt amount.
   d. an interest payment of $1 million and an increase in the debt amount by $10 million each year.

Answer 1

c

Question 2

2. The long-run budget constraint indicates that, in the long run, a country’s initial external

wealth must be offset by (i.e., equal to):

a. the present value of its future trade balances.
b. the future value of its future trade balances.
c. the current value of its future trade balances.
d. the present value of its future external wealth.

Answer 2

a

Question 3

3. If you are scheduled to receive a $10,000 payment in two years and the interest rate is

10%, then the present value of this payment is:

a. $9,000.
b. $8,264.
c. $12,000.
d. $5,000.

Answer 3

b

Question 4

4.Suppose that the present discounted value of a stream of payments is $1,000. If the

interest rate is 10%, what is the constant payment per year?

a. 100
b. 10
c. 11
d. 1,000

Answer 4

a

Question 5

5. The United States has been experiencing trade deficits on the order of $600–$800 billion during the past several years. Which of the following is an implication of these trade deficits?
   a. U.S. GDP has been larger than U.S. GNE.
   b. U.S. GDP has been smaller than U.S. GNE.
   c. U.S. net external wealth has been increasing.
   d. U.S. exports are greater than U.S. imports.

Answer 5

b

Combined amount of all expenditures to include those which are public and private.

Gross national expenditure differs from Gross Domestic Product in that expenditures on exports are not included.

Question 6

6. The key lesson from the Long-Run Budget Constraint (LRBC) model is:
   a. nations can safely run trade deficits as long as they can cover the interest each year.
   b. nations must balance their current account year by year.
   c. nations must maintain a balance between the present value of deficits and the present value of surpluses that satisfy the LRBC.
   d. nations may lend externally but it is dangerous to borrow.

Answer 6

c

Question 7

7. The present value of GDP:
   a. equals GNE.
   b. equals GNE only when the country begins with positive initial wealth.
   c. equals GNE only when the country begins with negative initial wealth.
   d. plus the present value of initial wealth must equal the present value of GNE.

Answer 7

d

Question 8

8. If the percentage of change in total spending (C + G) is lower than the percentage change in income, an economy has some degree of:
   a. financial autonomy.
   b. consumption smoothing.
   c. imminent recession.
   d. prosperity.

Answer 8

b

Question 9

9. Investment will occur in an open economy more often than in a closed economy because:
   a. investment decisions have fewer constraints because investors and borrowers will compare the marginal product of capital in any nation with the world real interest rate.
   b. without information, investors often make poor investment decisions.
   c. governments like to subsidize overseas investment for domestic firms.
   d. international financial organizations prefer to lend for international investments

rather than domestic ones.

Answer 9

a

Question 10

10. If the long-run budget constraint is upheld, an investment expenditure will increase the present value of consumption only if:
    a. the present value of debt is equal to zero.
    b. the present value of output is greater than the present value of the investment expenditure.
    c. the present value of exports is greater than the present value of imports.
    d. output is increasing faster than the growth of population.

Answer 10

b

Question 11

11. If capital flows freely throughout the world, one would expect it would flow:
    a. from the rich nations, where it is abundant and cheap, to the poor nations, where it is scarce and dear.
    b. from the poor nations, where it has less value, to the rich nations, where it has more value.
    c. from the savers to financial institutions.
    d. from international lenders to international borrowers.

Answer 11

a

Question 12

12. If production functions are identical, low-income nations have a ____ capital per worker than high-income nations, _____ labor productivity, and a ____ marginal product of capital.
    a. lower; lower; higher.
    b. lower; higher; higher.
    c. lower; lower; lower.
    d. higher; higher; lower.

Answer 12

a

Question 13

13. If the production functions of rich and poor nations are NOT identical, resulting in lower marginal products of capital for poor nations, then:
    a. capital markets are basically dysfunctional.
    b. it must mean the labor productivity for poor nations is higher.
    c. capital markets cannot be relied on to bring about convergence.
    d. capital markets may be functioning efficiently and correctly after all.

Answer 13

d

Question 14

14. When poor nations cannot compete with rich nations to attract capital because of their lower overall productivity, it creates:
    a. convergence.
    b. long-run divergence.
    c. externalities.
    d. opportunities for cross-border investment.

Answer 14

b

Question 15

15. As long as at least some output shocks are asymmetric, it is possible to:
    a. avoid all risk.
    b. lower the volatility of income by international diversification of capital assets.
    c. lower the risk of default.
    d. avoid any consumption declines as a result of the shocks.

Answer 15

b

Question 16

16. Two nations each own 50% of the capital of the other nation (diversification). What is the situation when labor comprises over 50% of available resources?
    a. In order to achieve perfect diversification, labor must move from one nation to the other.
    b. No gain will occur from the diversification.
    c. The risk from economic shock will be eliminated by the diversification of assets.
    d. Some risk from economic shocks can be eliminated, but not all.

Answer 16

d

Question 17

17. A result of an exchange rate depreciation, would occur as the spending patterns change in response to a change in the exchange rate.
    a. expenditure switching from domestic to foreign products
    b. expenditure switching from foreign to domestic products
    c. expenditure switching from rural to urban producers
    d. terms-of-trade deterioration

Answer 17

b

Question 18

18. Data on the relationship between the U.S. multilateral real exchange rate and the U.S. trade balance shows
    a. a surprising result that the decrease in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate.
    b. a predictable result that the increase in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate.
    c. a correlation that is so weak it cannot be used to support the theory that the trade balance is related to the real effective exchange rate of the U.S. dollar.
    d. a surprising result that the increase in the U.S. trade balance occurs with a decrease (appreciation) in the real effective exchange rate of the dollar.

Answer 18

b

Question 19

19. The devaluation of a currency results in a(n):
    a. initial increase in trade balance, but an eventual decline in trade balance.
    b. permanent decline in trade balance.
    c. permanent increase in trade balance.
    d. initial decrease in trade balance, but an eventual increase in trade balance.

Answer 19

d

Question 20

20. The J-curve effect means that import prices are higher, thus revenues paid out increase while export prices are lower and incoming revenues decrease. Therefore, after a currency depreciation:
    a. the trade balance will improve, then decline, then improve, and then decline, appearing to be a series of J shapes.
    b. the trade balance will increase, then decrease, then jump higher, which economists call the J-curve effect.
    c. the nation will cut back on imports immediately causing the trade balance to improve, which gives the curve an inverted J shape.
    d. the trade balance decreases and then increases over time giving the curve a J shape.

Answer 20

d

Question 21

21.The trade balance component of aggregate demand is a function of all the following

EXCEPT:

a. foreign disposable income.
b. domestic disposable income.
c. the real exchange rate.
d. consumer spending.

Answer 21

d

Question 22

22. A fall in the real exchange rate (appreciation) will decrease the trade balance in the short run and cause a(n) ___ of the total demand curve
    a. downward shift
    b. increase in the slope
    c. upward shift
    d. decrease in the slope

Answer 22

a

Question 23

23. If taxes fall and foreign income falls, what will happen to output, ceteris paribus?
    a. It will rise.
    b. It will stay the same.
    c. It will fall.
    d. It is uncertain what will happen.

Answer 23

d

Question 24

24. The open-economy IS curve slopes down because any change in the foreign or home interest rate will inversely affect demand, along with a secondary effect from a change in:
    a. the rate of depreciation of assets.
    b. the exchange rate and the trade balance.
    c. the real interest rate.
    d. the growth rate of money.

Answer 24

b

Question 25

25. If the central bank in a foreign country increases its interest rate, then the IS curve of the domestic economy will:
    a. shift to the right.
    b. shift to the left.
    c. will not shift.
    d. shift to the right because U.S. exports will decrease.

Answer 25

a

Question 26

26. The relationship between the quantity of real balances demanded and the rate of interest (called the demand for money curve) will when GDP increases because .
    a. increase (shift right); more transactions balances are needed to make

purchases and to hold between pay periods

b. increase (shift right); more asset balances are needed for saving or

precautionary reasons

c. decrease (shift left); fewer transactions balances are needed to make

purchases and to hold between pay periods

d. decrease (shift left); lower asset balances are needed for saving or precautionary reasons

Answer 26

a

Question 27

27. If the supply of money increases, what happens in the IS-LM framework?
    a. The IS curve shifts right.
    b. The LM curve shifts right.
    c. The IS curve shifts left.
    d. The LM curve shifts left.

Answer 27

b

Question 28

28. A government policy deemed to be “temporary” indicates:
    a. only long-run expectations are unchanged.
    b. only expected exchange rates are unchanged.
    c. only prices are not flexible in the short run.
    d. there are sticky prices, fixed expected exchange rates, and constant

long-run expectations.

Answer 28

d

Question 29

29. If we start from long-run general equilibrium of goods, forex, and the money markets, and there is a temporary expansion of the money supply, what will be the outcome?
    a. GDP rises, the interest rate falls, and the exchange rate rises (depreciation).
    b. GDP rises, the interest rate rises, and the exchange rate falls (appreciation).
    c. GDP falls, the interest rate falls, and the exchange rate rises (depreciation).
    d. GDP falls, the interest rate rises, and the exchange rate rises (depreciation).

Answer 29

a

Question 30

30.Consider the IS-LM curves for an economy with flexible exchange rates. An increase in

the foreign income will result in the:

a. LM curve shifting to the right.
b. IS curve shifting to the right.
c. LM curve shifting to the left.
d. IS curve shifting to the left.

Answer 30

b

Question 31

31. Crowding out occurs because expansionary fiscal policy:
    a. appreciates the exchange rate.
    b. lowers foreign income.
    c. lowers the interest rate.
    d. increases net exports.

Answer 31

a

Question 32

32. The gold standard system was:
    a. a floating exchange rate system.
    b. a fixed exchange rate system, in which the country’s currency was fixed relative to a pound of gold.
    c. a fixed exchange rate system, in which the country’s currency was fixed relative to an ounce of gold.
    d. only used by the United States.

Answer 32

c

Question 33

33. Beginning in the early 1970s, many nations abandoned their dollar standard and moved toward a system of:
    a. fixed exchange rates based on gold.
    b. fixed exchange rates based on the German deutsche mark.
    c. floating exchange rates.
    d. real money systems in which currencies were backed by government bonds.

Answer 33

c

Question 34

34. If all other things remain unchanged, what would you expect to happen to European interest rates if all countries who use the euro decided to adopt expansionary fiscal policies?
    a. They would rise.
    b. They would fall.
    c. They would not change.
    d. That cannot be determined using the information provided.

Answer 34

a (?)

Question 35

35. If all other things remain unchanged, what would you expect to happen to European GDP if all countries who use the euro decided to adopt expansionary fiscal policies?
    a. It would rise.
    b. It would fall.
    c. It would not change.
    d. That cannot be determined using the information provided.

Answer 35

a

Question 36

36. Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. Would it expand, contract, or not change the European money supply?
    a. expand
    b. contract
    c. not change
    d. cannot be determined using the information provided

Answer 36

b

Question 37

37. SCENARIO: EXCHANGE RATE CHANGE

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1.

37. (Scenario: Exchange Rate Change) Now suppose that the increase in the price of oil in the second half of 2007 causes the IS curve in the United States to shift to the left. If all other things remain unchanged, what will happen to U.S. interest rates?
    a. They will rise.
    b. They will fall.
    c. They will not change.
    d. They will rise dramatically.

Answer 37

b

Question 38

38. (Scenario: Exchange Rate Change) What is likely to happen to U.S. GDP following the leftward shift of its IS curve?
    a. It will rise.
    b. It will fall.
    c. It will not change.
    d. It will rise dramatically.

Answer 38

b

Question 39

39. (Scenario: Exchange Rate Change) What will happen to the Canadian IS curve as a result of the leftward shift of the U.S. IS curve?
    a. It will shift rightward.
    b. It will shift leftward.
    c. It will not change.
    d. The IS curve will show an increase.

Answer 39

b

Question 40

40. (Scenario: Exchange Rate Change) What will happen to Canadian interest rates as a result of the leftward shift of the U.S. IS curve?
    a. They will rise.
    b. They will fall.
    c. They will not change.
    d. The IS curve will show an increase.

Answer 40

b

Question 41

41. (Scenario: Exchange Rate Change) Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?
    a. Yes, the value will appreciate.
    b. Yes, the value will depreciate.
    c. No, the value will not change in value.
    d. Yes, but that pressure will be offset.

Answer 41

a

Question 42

42. Great Britain opted out of the ERM in 1992 because its government concluded that:
    a. it wanted to increase its trade with North America rather than Europe.
    b. the gains from being a member of the ERM outweighed the costs from higher German interest rates.
    c. the costs associated with higher German interest rates outweighed the gains from being a member of the ERM.
    d. it was unable to agree with the French on an exchange rate between the pound and the French franc.

Answer 42

c

Question 43

43. Britain’s decision to exit the ERM in September 1992 had what effect?
    a. Lower interest rates and a depreciated exchange rate caused the British economy to expand.
    b. It subjected Britain to a ruling by the European Courts of Justice.
    c. It caused the system to collapse.
    d. It had no effect on Britain’s economy.

Answer 43

a

Question 44

44. When a nation is economically integrated with trading partners, fixed exchange rates:
    a. would be very harmful to the dynamic nature of trade.
    b. could promote integration and economic efficiency by keeping transaction costs low.
    c. would be the best choice if that nation became the dominant nation in the transactions.
    d. would be adequate but have the disadvantage of discouraging trade because

of uncertainty.

Answer 44

b

Question 45

45. In a fixed exchange rate system, the center country, to whose currency the other countries peg their exchange rate, will:
    a. find it difficult to conduct autonomous monetary policy.
    b. find it difficult to conduct autonomous fiscal policy.
    c. easily implement monetary and fiscal policy to suit its economy.
    d. defer to advice from other countries in conducting its domestic policy.

Answer 45

c

Question 46

46. Suppose that country A pegs its currency to the currency of country B. Which of the following will NOT be a benefit of this arrangement to country A?
    a. lower transactions costs for A to conduct international trade with country B
    b. increased capital flows between the two countries because of increased certainty of future exchange rates
    c. decreased migration between the two countries because of increased certainty of future exchange rates
    d. lower costs of economic transactions costs between the two countries, leading to welfare gains for country A.

Answer 46

c

Question 47

47. Why do symmetric shocks not disturb fixed exchange rate systems?
    a. Symmetric shocks happen only once and cause a one-time shift in interest rates.
    b. Symmetric shocks imply differences in rates of interest, which is irrelevant to fixed exchange rate systems.
    c. A demand shock can easily be dealt with using domestic policies that do not involve other nations.
    d. Symmetric shocks require the same medicine in both economies, so monetary policy will be in a direction to help both situations.

Answer 47

d

Question 48

48. Suppose that Canada pegs its dollar to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to:
    a. cause asymmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate.
    b. cause symmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate.
    c. cause asymmetric shocks to the U.S. and Canadian economies and make it easier for Canada to maintain the $C1 = $US1 exchange rate.
    d. cause symmetric shocks to the U.S. and Canadian economies and make it difficult for Canada to maintain the $C1 = $US1 exchange rate.

Answer 48

a

Question 49

49. The effect of an exchange rate system on the price level between countries is that:
    a. exchange rate volatility causes the prices to converge between countries.
    b. a fixed exchange rate results in price convergence.
    c. a fixed exchange rate results in price divergence.
    d. all member nations of the ERM saw a divergence in prices.

Answer 49

b

Question 50

50. To maintain a pegged rate, a nation faces a trilemma and must also:
    a. generate extra export revenues.
    b. watch carefully to ensure imports and exports are equal.
    c. adjust its interest rates and money supply to ensure the home interest rate is equal to the foreign interest rate to prevent pressure on the exchange rate.
    d. restrict foreign capital inflows and domestic capital outflows.

Answer 50

c

Question 51

51. Comparing various exchange systems, which system offers a nation the least control over monetary policy?
    a. flexible exchange rates and a closed economy
    b. a closed economy
    c. an open nonpeg
    d. an open peg

Answer 51

d

Question 52

52. If the money supply is 2000, the price level is 20, and the inflation rate is 50%, what is the amount of seigniorage?
    a. 100.
    b. 50.
    c. 10.
    d. 5.

Answer 52

b

Question 53

53. Whenever a nation has substantial external debts and assets denominated in foreign currency:
    a. it is easier to manage, since changes in value are often offsetting.
    b. there can be large and destabilizing wealth effects.
    c. its interest payments on the debt will be matched by interest earnings on the assets.
    d. the risk of default becomes very large.

Answer 53

b

Question 54

SCENARIO: ARGENTINE PESO

Suppose that Argentina’s dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1.

54. (Scenario: Argentine Peso) What is the peso value of Argentina’s total external wealth?
    a. –60 billion pesos
    b. –150 billion pesos
    c. –0 billion pesos
    d. –90 billion pesos

Answer 54

d

Question 55

55. (Scenario: Argentine Peso) What is the dollar value of Argentina’s total external wealth?
    a. –$60 billion
    b. –$150 billion
    c. –$90 billion
    d. –$210 billion

Answer 55

c

Question 56

56. (Scenario: Argentine Peso) How was Argentina’s net external wealth affected as a result of the devaluation of the peso?
    a. Net external wealth rose.
    b. Net external wealth fell.
    c. Net external wealth was not affected.
    d. One cannot determine how net external wealth was affected with the information provided.

Answer 56

b

Question 57

57. (Scenario: Argentine Peso) What is the likely effect of the change in Argentina’s external wealth on Argentine aggregate demand?
    a. It will increase Argentine aggregate demand.
    b. It will decrease Argentine aggregate demand.
    c. It will neither increase nor decrease Argentine aggregate demand.
    d. It will first increase, then decrease Argentine aggregate demand.

Answer 57

b

Question 58

58. If China has domestic assets of $50 billion, domestic liabilities of $100 billion, and $50 billion in foreign assets, a 10% appreciation of the Chinese yuan will:
    a. cause the Chinese domestic assets to increase in value.
    b. cause the Chinese domestic liabilities to decrease in value.
    c. cause the overall wealth to decrease by 5%.
    d. cause the overall wealth to increase by 5%.

Answer 58

c

Question 59

59. Developing countries have been able to reduce the effect of depreciation on the value of their debt by:
    a. issuing debt in U.S. dollars.
    b. issuing debt in domestic currency.
    c. appreciating their currency.
    d. using expansionary fiscal policy.

Answer 59

b

Question 60

60. A cooperative outcome in a situation where one nation pegs to another would be that the:
    a. center country abandons its own stabilization policy in favor of the home country.
    b. home country absorbs the losses resulting from the stabilization policy in the center country.
    c. center country makes concessions, recognizing the impact on the home country, thereby sharing the pain.
    d. peg is temporarily abandoned.

Answer 60

c

Question 61

61. A noncooperative outcome after the center nation has undertaken a stabilization policy in response to an asymmetric shock would be that the:
    a. center country abandons its own stabilization policy in favor of the home country.
    b. home country absorbs the losses resulting from the stabilization policy in the center country.
    c. center country makes concessions, recognizing the impact on the home country and thereby sharing the pain.
    d. peg is temporarily abandoned.

Answer 61

b

Question 62

62. Political tensions may arise from nations pegging to a center base country’s currency if:
    a. asymmetric shocks cause the home nation to lose the power to stabilize.
    b. it is determined that the center nation has been misrepresenting the value of its currency.
    c. financing of military spending becomes more difficult.
    d. interest rates are affected.

Answer 62

a

Question 63

63. When a country has monetary autonomy, it can:
    a. conduct monetary policy independently of all other countries.
    b. conduct monetary policy only in coordination with all other countries.
    c. conduct monetary policy only in cooperation with its reserve currency country (the country to which it fixes its currency).
    d. print money without affecting inflation.

Answer 63

a

Question 64

64. A country is using a beggar-thy-neighbor policy whenever:
    a. it uses contractionary monetary policy to attract capital inflows from other countries.
    b. it devalues its currency to improve its macroeconomic position at the expense of its trading partners.
    c. it revalues its currency to improve its macroeconomic position and that of its trading partners.
    d. it cooperates with other countries in establishing its monetary policy.

Answer 64

b

Question 65

65. Which is the best characterization of the current international payments system?
    a. The World Bank and the IMF approve nations’ exchange rate regimes and ensure that financial flows are not hampered by imbalances.
    b. All nations are now operating with floating exchange rates and free capital flows.
    c. The four richest industrial nations have floating exchange rates, while the rest of the nations peg to those currencies.
    d. There is no standard and no rules, and each nation chooses the regime that works best for its individual situation at the time.

Answer 65

d

Question 66

66. One economic cost of an exchange rate crisis is:
    a. a decrease in the rate of inflation.
    b. an increase in exports.
    c. a slowing in a country’s rate of economic growth.
    d. an increase in employment.

Answer 66

c

Question 67

67. Which of the following is CORRECT?
    a. Exchange rate crises typically impose larger costs on advanced countries than on emerging-market countries.
    b. Exchange rate crises typically impose larger costs on emerging-market countries than on advanced countries.
    c. Exchange rate crises typically impose the same costs on advanced countries and on emerging-market countries.
    d. Exchange rate crises typically do not impose any costs on advanced countries.

Answer 67

b

Question 68

68. Which of the following occurs during a banking crisis?
    a. Banks close or declare bankruptcy.
    b. A government is unable to pay principal or interest on debt owed to banks.
    c. No one wants to borrow from banks.
    d. A country’s central bank runs out of reserve currencies.

Answer 68

a

Question 69

69. The reason for the concurrence of exchange rate crises and other financial disruptions centers around:
    a. the inherent instability of most banks in low-income nations.
    b. the tendency of most elected officials to be susceptibility to influence and corruption.
    c. the fact that changes in exchange rates can raise debt burdens (denominated in other currencies) to intolerable levels.
    d. the tendency of the current administration to react by nationalizing banks and implementing capital controls.

Answer 69

c

Question 70

70. When a nation is maintaining an exchange rate peg, its money supply is typically backed by:
    a. gold.
    b. nothing.
    c. domestic bonds and foreign exchange assets purchased with the national currency.
    d. domestic credit only.

Answer 70

c

Question 71

71. In the home economy, when “money” is a liability of the government, to what is the supply of money equal?
    a. gold reserves on a one-to-one basis
    b. the physical quantity of currency and coins in circulation
    c. the assets in a nation’s account at the IMF
    d. the total of bonds (domestic credit) plus foreign currency and gold reserves held by the central bank

Answer 71

d

Question 72

72. Saudi Arabia pegs its currency (the riyal, or SAR) to the U.S. dollar. Currently, the exchange rate is SAR3.75 = $US1. Suppose that the Saudi Arabian money multiplier is 1. By how much will the Saudi Arabian money supply change when the Saudi central bank makes loans of SAR 1 million?
    a. +SAR 1 million
    b. –SAR 1 million
    c. +SAR 3.75 million
    d. –SAR 3.75 million

Answer 72

a

Question 73

Simplified Central Bank Balance Sheet (millions of pesos)

• Assets
  
  • Reserves R 750
    
    • Foreign assets (dollar reserves)
  • Domestic credit B 1,500
    
    • Domestic assets (peso bonds
• Liabilities
  
  • Money supply M 2,250
    
    • Currency in circulation

73. (Table: Mexico’s Central Bank Balance Sheet) If the country sells 325 million pesos of foreign assets and reduces domestic credit by 425 million pesos, then:
    a. the reserves will be 450 million pesos.
    b. the domestic assets will be 1,125 million pesos.
    c. the domestic assets will be 1,075 million pesos.
    d. the reserves will be 1,075 million pesos.

Answer 73

c

Question 74

74. Which method would the central bank NOT use to keep the exchange value of its currency fixed?
    a. It would purchase its own currency for foreign reserves when the domestic credit expanded.
    b. It would ensure that the domestic money supply remained constant.
    c. It would sell its own currency for foreign reserves when domestic credit contracted.
    d. It would ensure that the domestic money supply increased to maintain uncovered interest and PPP.

Answer 74

d

Question 75

SCENARIO: ARUBAN FLORIN

Aruba pegs its currency (the Aruban florin) to the U.S. dollar at a rate of Af 1.79 = $US1.

Suppose that the actual exchange rate is equal to this pegged rate.

75. (Scenario: Aruban Florin) Now suppose that the Aruban central bank buys dollars. Which of the following describes the effect of this dollar purchase on Aruba’s exchange rate?
    a. upward pressure on the exchange rate (depreciation of florin)
    b. downward pressure on the exchange rate (appreciation of florin)
    c. no effect on the exchange rate
    d. Not enough information is provided to answer.

Answer 75

a

Question 76

76. (Scenario: Aruban Florin) Which of the following BEST describes the effect on Aruba’s money supply from purchasing dollars?
    a. The money supply will increase.
    b. The money supply will decrease.
    c. The money supply will not change.
    d. The money supply will not change as the exchange rate appreciates.

Answer 76

a

Question 77

77. (Scenario: Aruban Florin) Suppose that Aruba’s money supply is Af 20 billion and Aruba’s central bank holds $10 billion of dollar reserves and Af 2.10 billion of domestic bonds. What will happen to Aruba’s backing ratio if its central bank sells $5 billion of U.S. dollars to Aruban citizens?
    a. It will not change.
    b. It will fall to 33%.
    c. It will fall to 2.6%.
    d. It will fall to 81%.

Answer 77

d

Question 78

78. Assume the money supply is backed by bonds and reserves, and the exchange rate is pegged. If the demand for money rises, how might the central bank maintain the peg?
    a. by selling back domestic bonds and foreign currency reserves
    b. by selling domestic bonds equal to the increase in demand
    c. by purchasing reserves equal to the increase in demand
    d. by selling reserves equal to the increase in demand

Answer 78

c

Question 79

79. Which of the following is NOT likely to cause a money demand shock under a fixed exchange rate system?
    a. a decline in foreign interest rates
    b. a sudden decline in domestic output
    c. a sudden increase in domestic output
    d. a change in marginal tax rate in the foreign country

Answer 79

d

Question 80

80. Uncovered interest parity may actually result in domestic interest rates being _______ than foreign rates because of investors’ perceived risk of holding assets based in the domestic currency.
    a. lower
    b. more unstable
    c. higher
    d. more stable

Answer 80

c

Question 81

81. An example in the text of Argentina’s convertibility plan during 1993–1994 indicated that because of a growing economy, the central bank expanded the supply of money to maintain its U.S. dollar peg by:
    a. acquiring foreign reserves.
    b. buying domestic bonds.
    c. issuing new government liabilities.
    d. selling gold.

Answer 81

a

Question 82

82. If the central bank desires to purchase additional domestic bonds to stimulate the economy, then to maintain the peg, what must it do?
    a. Decrease domestic spending.
    b. Sell enough reserves to keep the interest rate unchanged.
    c. Convince the public and investors that the peg is credible.
    d. Immediately lower domestic rates of interest.

Answer 82

b

Question 83

83. A shock to domestic credit, whereby the holding of domestic bonds decreases, would result in:
    a. a rise in the backing ratio and the need for the central bank to purchase domestic bonds.
    b. a fall in the backing ratio and the need for the central bank to sell domestic bonds.
    c. a fall in the backing ratio and the need for the central bank to purchase foreign currency reserves.
    d. a rise in the backing ratio and the need for the central bank to purchase foreign currency reserves.

Answer 83

d

Question 84

84. When the central bank engages in sterilization of reserves, it is:
    a. buying reserves to offset the purchase of government bonds.
    b. selling reserves to offset the sale of government bonds.
    c. selling reserves to offset the purchase of government bonds.
    d. printing more money.

Answer 84

c

Question 85

85. A danger to the peg is a situation in which the central bank lends to insolvent private financial institutions to bail them out of crises. Why might this cause a problem?
    a. The private financial institutions are often corrupt and should not be bailed out.
    b. Foreign investors are helped and domestic investors harmed.
    c. It requires a drawdown of foreign reserves to maintain the peg, lowering the backing ratio.
    d. The central bank is assuming more than its share of political power, which can cause problems down the road.

Answer 85

c

Question 86

86. When there is a banking crisis under a peg, the monetary authority may be tempted to bail out the banks. Why is this risky?
    a. Banks are the least important entity in the financial sector, and attention should be paid to manufacturing, which is more important.
    b. Banks are critical to the success of the economy, and when they are in bad shape, it is best to allow the weaker banks to fail and support the stronger ones.
    c. The central bank would have to sell reserves to maintain the peg, and they could fall to an unsafe level.
    d. The monetary authority would be forced to buy reserves in exchange for domestic currency—so there would be plenty of money in circulation.

Answer 86

c

Question 87

87. The name for borrowing by the central bank to fund the purchase of foreign currency reserves:
    a. is sterilization bonds.
    b. is official government debt.
    c. is foreign debt liabilities.
    d. is municipal bonds.

Answer 87

a

Question 88

88. Paul Krugman has analyzed fixed currency pegs and the likely cause for them to break. His model is one in which the central bank is under political control, which results in:
    a. fiscal dominance by the elected government whereby the central bank must print money to fund government deficits.
    b. authority of the central bank to set rules for proper monetary management.
    c. the establishment of a currency board to manage the pegged exchange rate.
    d. the ability to control the money supply and interest rates to maintain the peg.

Answer 88

a

Question 89

89. Because of speculative attacks due to the belief a fixed rate will fail, pegged exchange rates:
    a. usually exhibit a long, lingering decline and eventual failure.
    b. often collapse suddenly.
    c. will be revived as the central bank has a wake-up call from the financial sector.
    d. are usually not a good idea in the first place.

Answer 89

b

Question 90

90. A situation in which maintaining the peg could cause worse harms to the economy (such as high interest rates) may sway even prudent and cautious central bankers to abandon it. This situation is called:
    a. the rolling peg.
    b. the contingency claim.
    c. a contingent commitment.
    d. a partial peg.

Answer 90

c

Question 91

91. Whenever the market believes there will be a depreciation (the peg will break) then:
    a. the benefits of pegging are greater than the costs of maintaining the peg.
    b. the benefits of depreciation are greater than the costs of depreciation.
    c. the benefits of pegging are negative.
    d. there are never any benefits from depreciation.

Answer 91

b

Question 92

92. Euro-optimists are convinced that with OCA criteria as guiding principles:
    a. Eurozone members will never again be caught in the trap of fiscal irresponsibility.
    b. the euro will strengthen against other world currencies to the extent that even occasional debt issues will not affect it.
    c. greater market integration will bring about labor and capital mobility and increased trade that will serve to strengthen the Eurozone.
    d. the ECB will be able to loosen its stranglehold and provide sufficient liquidity for the Eurozone economies to thrive.

Answer 92

c

Question 93

93. The Stability and Growth Pact (SGP) adopted in 1997 addressed concerns related to the:
    a. tendency of nations to let their fiscal discipline promises slip once they had attained Eurozone member status.
    b. micromanagement tendency of the ECB toward its members.
    c. loss of political power of the European Parliament.
    d. tendency of nations to revert to using their own national currencies.

Answer 93

a

Question 94

94. Some say the ECB draws too heavily on the German model. What is its major focus?
    a. reliance on the ability of the European parliament to engage in fiscal policy when necessary
    b. the notion that the economy needs monetary stimulus to weather frequent recessions
    c. that the unemployment problem, especially in Eastern Europe, should take priority over price stability
    d. that price stability (low inflation) is the primary policy goal, separated from political influence or having to address regional economic slowdowns

Answer 94

d

Question 95

95. The original six nations that formed the European Economic Community (EEC) were:
    a. Spain, Portugal, Italy, Austria, Germany, and the United Kingdom.
    b. France, Bulgaria, Romania, Luxembourg, East Germany, and Russia.
    c. Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany.
    d. Hungary, Austria, Germany, Poland, Belgium, and the United Kingdom.

Answer 95

c

Question 96

96. Another benefit from entering a currency union that is not optimal would include:
    a. the idea that economies interconnected in a currency union with increased trade also develop a symmetry of demand shocks.
    b. the reduction of interdependence and an increase in self-sufficiency.
    c. the cessation of disagreement over trade protection.
    d. the possibility of increasing the currency area.

Answer 96

a

Question 97

97. The theory of an OCA sets out benefits to be derived from increased trade. A comparison of the U.S. currency area with that of the Eurozone reveals that:
    a. interstate and interregion trade is roughly equal in both areas.
    b. interstate and interregion trade in the United States is smaller as a percent of gross state product than the same figure for Europe.
    c. interstate and interregion trade in the United States is much larger as a percent of gross state product than the same figure for Europe.
    d. trade comparisons are largely irrelevant to the success of a currency union.

Answer 97

c