Problem Set 6 Part I Multiple-choice questions 1. Wh.docx
- 1. Problem Set 6 Part I Multiple-choice questions 1. Which of the following in NOT true about a country’s current account deficit? a. By definition, an economy running a current account deficit will experience an overall capital inflow. b. A current account deficit can mean that a country is “living beyond its means.” c. A current account deficit can mean that a country is an “oasis of prosperity,” attracting investment from around the globe. d. A current account deficit means that the country is currently lending more to other countries than it borrows from other countries. 2. What causes the weakness of the dollar? The two factors most often cited are those mentioned by Fed Chairman Greenspan -- the twin deficits (CNN/Money, November 19, 2004). What do the “twin deficits” refer to? a. The trade deficit and the current account deficit. b. The current account deficit and the budget deficit.
- 2. c. The budget deficit and social security deficit. d. The trade deficit and the financial account deficit. 3. Which of the following is NOT true about the current account balance? a. It is the net export component in GDP (X). b. X = Y – E (E = C + I + G) c. X = ST – I = IF d. X = SP – I – (T – G) 4. The following five transactions are all entries to be made on the U.S. balance of payments. For balance-of-payments purposes, four of the five are fundamentally similar. Which one is different? a. The Federal Reserve Bank of New York sells dollars in the foreign exchange market. b. An American tourist on vacation spends francs in Paris. c. A South American country sells coffee in New York. d. A British shipping firm is paid to carry an American export commodity abroad. e. An American computer company receives an order for software programs from Germany. 5. According to the purchasing-power-parity (PPP) theory of
- 3. exchange rates: a. exchange rates tend to move with changes in relative price level of different countries. b. applies better to the long run than the short run. c. applies better to the short run than the long run. d. A and B. e. A and C. 6. If the market exchange rate between Swiss francs and U.S. dollars were to change from Sfr. 4 to the dollar to Sfr. 3 to the dollar, then the franc’s price must have: a. risen from 25 cents to 33 cents, and the dollar has appreciated relative to the franc. b. fallen from 33 cents to 25 cents, and the dollar has depreciated relative to the franc. c. risen from 25 cents to 33 cents, and the dollar has, been devalued relative to the franc. d. risen from 25 cents to 33 cents, and the dollar has depreciated relative to the franc. e. fallen from 33 cents to 25 cents, and the dollar has appreciated relative to
- 4. the franc. 7. Suppose that the exports of Country A to Country B have increased substantially and that both A and B operate on the gold standard. According to David Hume’s gold-flow mechanism: a. A’s domestic price level will fall, but B’s domestic price level may or may not change. b. A’s price level may or may not change, but B’s will fall. c. A’s price level will rise; B’s will fall. d. A’s price level will fall; B’s will rise. e. none of the above will happen. 8. If the exchange rate between Canadian and U.S. dollars is a floating one, and if the demand for Canadian dollars increases, then: a. the supply of Canadian dollars has decreased or will decrease. b. the price of the Canadian dollar in U.S. currency will fall. c. the supply of U.S. dollars has decreased. d. the price of the U.S. dollar in Canadian currency will fall. e. the U.S. dollar has been devalued. 9. The primary advantage of the gold standard, or any other fixed-exchange-rate system, is its: a. flexibility. b. predictability.
- 5. c. link to a precious metal. d. universal acceptance. e. relationship to the International Monetary Fund. 10. The main difficulty in all fixed-exchange-rate systems is that: a. one currency may dominate the others. b. gold is expensive to mine. c. economic adjustment may be impeded if prices fluctuate widely. d. there is no mechanism to counteract trade surpluses. e. none of the above. 11. According to the flow model of exchange rate determination, if GDP falls in the United States and exchange rates are floating (everything else unchanged), then: a. imports will tend to decrease and the price of the U.S. dollar will tend to increase. b. imports will tend to decrease and the price of the U.S. dollar will tend to decrease. c. imports will tend to increase and the price of the U.S. dollar will tend to increase. d. imports will tend to increase and the price of the U.S. dollar will tend to
- 6. decrease. e. none of the preceding statements will be true. 12. One of the principal tasks of the International Monetary Fund is to: a. serve as a partial substitute for the gold standard in maintaining stable exchange rates. b. help countries with short-term balance-of-payment difficulties. c. make loans to private companies in any country where the funds could not otherwise be borrowed at any reasonable interest rate. d. facilitate the development of free-trade “regions” similar to the European Common Market. e. coordinate the views of the larger and more developed nations concerning exchange-rate and trade problems. 13. As part of the Bretton Woods system: a. the industrialized economies adopted a system of floating exchange rates. b. the ideas of John Maynard Keynes were widely discredited. c. the U.S. dollar was recognized as the preeminent currency of the world. d. all the above. e. none of the above. 14. Assume that the following conditions hold: A. GDP is initially in equilibrium. B. The government then increases its total expenditure on
- 7. goods and services by $2 billion. C. There is no increase at all in tax collection. D. The marginal propensity to consume is 0.75. E. The marginal propensity to import is 0.25. Assuming that there is no price-inflationary consequences in the new equilibrium thus produced, GDP will: a. fall by $4 billion. b. rise by $2 billion. c. rise by $6 billion. d. rise by $8 billion. e. rise by $4 billion. 15. The difference between national output and domestic expenditure is: a. net imports. b. exports minus imports. c. imports minus exports. d. saving. e. none of the above. 16. The open-economy multiplier: a. is linked to the slope of the total spending line. b. equals the expenditure multiplier multiplied by the MPC. c. is equal to 1/Mpm. d. will decrease when imports exceed exports. e. is none of the above.
- 8. 17. The expenditure multiplier in an open economy will be: a. larger than in a closed economy. b. smaller than in a closed economy. c. the same as in a closed economy. d. zero. e. larger or smaller than in a closed economy. Part II. Problem-solving questions 18. Fill in the blanks in the following exchange rate table (keep four digits after the decimal point for each answer): Your Answer: Blank A: ___________________
- 9. Blank B: ___________________ Blank C: ___________________ Blank D: ___________________ 19. If the Federal Reserve raises dollar interest rates, this induces investors into dollar securities and raises the demand for dollar-denominated assets. Fed’s tightening of monetary policy will shift the “demand for dollars” A (up to the right or down to the left). The U.S. dollar will B (appreciate/depreciate). Your Answer: A:_______________________ (up to the right/down to the left) B:_______________________ (appreciate/depreciate) Suppose that a recession or deflation in Japan reduces the Japanese demand for dollars. This will shift “demand for dollars” curve C (up to the right/down to the left/up to the left/down to the right) and lead the dollar to D (appreciate/depreciate). Your Answer: C:_______________________ (up to the right/down to the
- 10. left/up to the left/down to the right) Currency Units of foreign currency per U.S. dollar U.S. dollars per unit of foreign currency Canada (Dollar) 1.0372 Blank A Japan (Yen) 76.9050 Blank B Mexico (Peso) 13.9660 0.0716 Switzerland (Frank) 0.9186 1.0886 U.K. (Pound) Blank C 1.5624 Euro (Euro) Blank D 1.3451 D:_______________________ (appreciate/depreciate) 20. For a market basket of goods, it costs $1000 in the United States, and 10,000 pesos in Mexico. A. If the exchange rate is 10 pesos per dollar, where would you
- 11. buy these goods (assuming there is free trade between the United States and Mexico)? a. Definitely in the United State, not Mexico b. Definitely in Mexico, not the United States c. Indifferent since the prices in the two countries are the same Your Answer: __________________ B. Suppose the United States has a 2% inflation so that the dollar price increases from $1,000 to $1,020. In the meantime, Mexico has a 12.2% inflation so that the price in Mexico increases from 10,000 pesos to 11,220 pesos. At the old exchange rate of 10 pesos per dollar, the Mexican price is now $1,122 (=11,220 peso / (10 peso/$)). The price now is higher in Mexico than in the United States at the old exchange rate. Mexicans would buy from the United States. The increased demand for U.S. goods translates into increased demand for U.S. dollars. The dollar would appreciate. What is the new equilibrium exchange rate according to purchasing power parity (assuming the U.S. dollar price is set at $1,020)? Your Answer: __________________ peso/$
- 12. C. Does the dollar appreciate or depreciate? By how much? Your Answer: _________________ (appreciate/depreciate) By how much: _________________% (provide an absolute number; keep two digits after the decimal point) D. Does the peso appreciate or depreciate? By how much? Your Answer: _________________ (appreciate/depreciate) By how much: _________________% (provide an absolute number; keep two digits after the decimal point) 21. In 2010, the U.S. domestic investment was $1,795.1 billion, and net exports were -$516.9 billion (negative $516.9 billion). a. What was the total saving (ST) of the United States in 2010? Your Answer: $___________________billion (keep one digit after the
- 13. decimal point) b. What was the financial account balance for the United States in 2010? Your Answer: $___________________billion (keep one digit after the decimal point) c. Did the United States invest more or less abroad than foreigners invest in the United States in 2010? Your Answer: ____________________(more/less) d. Was there a net capital inflow or outflow for the United States in 2010? Your Answer: ____________________(inflow/outflow) Part III. Essay(s) 22. According to the PPP doctrine, why do countries with high inflation rates tend to have depreciating currencies? 23. Discuss the major characteristics, advantages, and disadvantages of fixed and floating exchange rate regimes. 24. Discuss how the current account balance connects the