Extra Q's

Question 1

In the U.S., over the past forty years,
A) exports as a percentage of GDP have increased, while imports has a percentage of GDP have decreased.
B) exports as a percentage of GDP have decreased, while imports has a percentage of GDP have increased.
C) both exports and imports as a percentage of GDP have decreased.
D) both exports and imports as a percentage of GDP have increased.
E) both exports and imports as a percentage of GDP have remained constant.

Answer 1

D) both exports and imports as a percentage of GDP have increased.

Question 2

Which of the following best defines the real exchange rate?
A) the price of foreign bonds in terms of domestic bonds
B) the price of foreign currency in terms of domestic currency
C) the price of domestic goods in terms of foreign goods
D) the price of domestic currency in terms of foreign currency

Answer 2

C) the price of domestic goods in terms of foreign goods

Question 3

Which of the following, all else fixed, will cause the real exchange rate to increase?
A) a nominal depreciation
B) a reduction in the foreign price level
C) a reduction in the domestic price level
D) all of the above

Answer 3

C) a reduction in the domestic price level

Question 4

From the perspective of the United States, an increase in the nominal exchange rate will cause which of the following?
A) the dollar becomes less expensive to foreigners
B) foreign goods are more expensive to Americans
C) foreign currency is more expensive to Americans
D) American goods are more expensive to foreigners

Answer 4

D) American goods are more expensive to foreigners

Question 5

When the dollar appreciates relative to the pound, the pound price of the dollar
A) increases.
B) decreases.
C) does not change.
D) increases or decreases, depending on the amount of the depreciation.
E) changes in the next period.

Answer 5

A) increases.

Question 6

Suppose there is a real depreciation of the dollar. Which of the following may have occurred?
A) foreign currency has become more expensive in dollars.
B) foreign goods have become more expensive to Americans.
C) the foreign price level has increased relative to the U.S. price level.
D) all of the above

Answer 6

D) all of the above

Question 7

If the exchange rate between the dollar and the pound (the pound price of the dollar) is currently 0.80, and is expected to be 0.72 in one year, then the expected rate of
A) depreciation of the dollar is 10%.
B) depreciation of the dollar is 15%.
C) appreciation of the dollar is 10%.
D) appreciation of the dollar is 15%.

Answer 7

A) depreciation of the dollar is 10%.

Question 8

Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is less than the U.K. interest rate. Given this information, we know that investors expect
A) the pound to depreciate.
B) the pound to appreciate.
C) the dollar-pound exchange rate to remain fixed.
D) the U.S. interest rate to fall.

Answer 8

A) the pound to depreciate.

Question 9

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
A) $.93.
B) $.96.
C) $1.04.
D) $1.07.
E) $1.10.

Answer 9

C) $1.04.

Question 10

If the price level in Japan is 1.0, the price level in the U.S. is 2.0, and it costs 100 Yen to buy one dollar, then the real exchange rate between the U.S. and Japan is
A) 2.
B) 10.
C) 50.
D) 100.
E) 200.

Answer 10

E) 200.

Question 11

Year-to-year movements in real exchange rates between industrialized countries like the U.S. and Canada are caused mostly by
A) changes in relative rates of inflation.
B) changes in relative growth rates of output.
C) changes in quotas or tariffs.
D) changes in capital controls.
E) changes in nominal exchange rates.

Answer 11

A) changes in relative rates of inflation.

Question 12

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
A) less than 5%.
B) greater than 5%.
C) greater than 2%.
D) less than 2%.
E) less than 1%.

Answer 12

D) less than 2%.

Question 13

Which of the following has occurred for the United States since 1960?
A) The ratio of exports to GDP (X/Y) and the ratio of imports to GDP (IM/Y) have both increased.
B) X/Y has increased while IM/Y has decreased.
C) X/Y has decreased and IM/Y has increased.
D) X/Y has decreased and IM/Y has decreased.

Answer 13

A) The ratio of exports to GDP (X/Y) and the ratio of imports to GDP (IM/Y) have both increased.

Question 14

The differences in the ratios of exports to GDP across countries are believed to be caused primarily by
A) trade barriers.
B) each country's size.
C) geography.
D) both B and C

Answer 14

D) both B and C

Question 15

The nominal exchange rate (E) as defined in the text represents
A) the number of units of foreign currency you can obtain with one unit of domestic currency.
B) the number of units of domestic goods you can obtain with one unit of foreign goods.
C) the price of domestic currency in terms of foreign currency.
D) none of the above
E) both A and C

Answer 15

C) the price of domestic currency in terms of foreign currency.

Question 16

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

Answer 16

C) the number of units of foreign currency that one can obtain with one yen has increased.

Question 17

Which of the following expressions represents the real exchange rate (ε)?
A) E/P.
B) EP*/P.
C) EP*.
D) EP/P*.
E) none of the above

Answer 17

D) EP/P*.

Question 18

Which of the following expressions represents the dollar price of foreign currency?
A) EP*/P
B) EP/P*
C) 1/E
D) E

Answer 18

C) 1/E

Question 19

Assume that the nominal exchange rate decreases by 4%. If prices (both domestic and foreign do not change), we know that
A) foreign goods are now relatively cheaper.
B) foreign goods are now relatively more expensive.
C) domestic goods are now relatively more expensive.
D) both A and C

Answer 19

B) foreign goods are now relatively more expensive.

Question 20

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

Answer 20

D) both B and C

Question 21

An increase in the real exchange rate indicates that
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

Answer 21

D) both B and C

Question 22

Which of the following events will cause the largest real depreciation for the domestic economy?
A) a 6% reduction in E and a 6% increase in the foreign price level (P)
B) a 6% increase in the domestic price level (P) and a 6% reduction in P
C) a 6% reduction in E and a 6% reduction in P*
D) a 3% increase in E
E) a 2% increase in E and a 2% increase in P

Answer 22

B) a 6% increase in the domestic price level (P) and a 6% reduction in P*

Question 23

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?
A) i
B) 1 + i*
C) (1 + i*)Eet+1/Et
D) (1 + i*)Et/Eet+1
E) none of the above

Answer 23

D) (1 + i*)Et/Eet+1

Question 24

For this question, assume the interest parity conditions holds. Also assume that the domestic interest rate is 9% and that the foreign interest rate is 5%. Given this information, we would expect that
A) individuals will only hold foreign bonds.
B) individuals will only hold domestic bonds.
C) the domestic currency is expected to appreciate by 4%.
D) the domestic currency is expected to depreciate by 4%.

Answer 24

D) the domestic currency is expected to depreciate by 4%.

Question 25

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

Answer 25

A) individuals will only hold domestic bonds.

Question 26

When the U.S. has a current account surplus, we know that it is also
A) running a balanced trade account.
B) lending to the rest of the world.
C) borrowing from the rest of the world.
D) suffering from negative investment income.

Answer 26

B) lending to the rest of the world.

Question 27

In a country like Saudi Arabia, which earns substantial income from holding the stocks and bonds of other countries, we would expect
A) GNP to be larger than GDP.
B) a current account deficit.
C) a current account surplus larger than GNP.
D) a current account surplus larger than GDP.
E) GDP to be larger than GNP.

Answer 27

A) GNP to be larger than GDP.