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| 1 | |
Which of the following policies is NOT a method of eliminating a current account deficit? |
| | A) | a reduction in government spending |
| | B) | a levying of tariffs |
| | C) | an increase in taxes |
| | D) | a subsidy on imports |
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| 2 | |
If e is the nominal exchange rate and P and Pf are the domestic and foreign price level, respectively, the real exchange rate R is defined as |
| | A) | R = P/(e Pf ) |
| | B) | R = Pf /(e P) |
| | C) | R = (e Pf )/P |
| | D) | R = (e P)/Pf |
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| 3 | |
If a country experiences a temporary current account deficit, which action will the central bank most likely undertake under a fixed exchange rate system? |
| | A) | sell foreign currency to keep the exchange rate from depreciating |
| | B) | devalue the currency |
| | C) | permit depreciation of the currency |
| | D) | conduct open market purchases to affect domestic interest rates |
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| 4 | |
Under a system of flexible exchange rates and perfect capital mobility, expansionary monetary policy will in the long run |
| | A) | increase inflation, the real exchange rate, and the real interest rate |
| | B) | increase real money balances, domestic prices, and the real exchange rate |
| | C) | leave output the same, while lowering the real interest rate and the real exchange rate |
| | D) | increase inflation and the nominal exchange rate, while leaving real output, relative prices, and the real exchange rate the same |
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| 5 | |
From the equation NX = (S – I) + (TA - G - TR), we can conclude that |
| | A) | an increase in the budget deficit must always be matched by a decrease in private domestic investment |
| | B) | if national saving is not enough to finance private domestic investment, the trade deficit will have to increase |
| | C) | net exports can be increased by an increase in the budget deficit |
| | D) | an external balance can only be achieved if private domestic saving is equal to private domestic investment |
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| 6 | |
Under a system of flexible exchange rates with perfect capital mobility, restrictive monetary policy leads to |
| | A) | an immediate adjustment in prices, but a gradual adjustment in the exchange rate |
| | B) | an immediate change in competitiveness |
| | C) | an increase in the real interest rate and the real exchange rate in the long run |
| | D) | a decrease in real money balances in the long run, leaving output unchanged |
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| 7 | |
The J-curve effect explains that |
| | A) | after a currency depreciation price effects are stronger in the short run; volume effects are stronger in the long run |
| | B) | after a currency depreciation the volume of trade is affected in the short run, but in the long run the change in trade is offset by the change in relative prices |
| | C) | appreciation of a currency will always worsen the trade balance unless it is accompanied by an expenditure-reducing policy |
| | D) | large exchange rate changes may lead to changes in trade patterns that persist even after exchange rates return to their initial level |
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| 8 | |
After a monetary policy change, exchange rates tend to overshoot in a freely floating exchange rate system, since |
| | A) | exchange rates and prices adjust immediately while interest rates adjust only gradually |
| | B) | prices adjust immediately while exchange rates adjust only gradually |
| | C) | exchange rates adjust immediately while prices adjust only gradually |
| | D) | exchange rates always immediately reflect differentials in inflation rates among countries |
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| 9 | |
A central bank sometimes conducts open market sales in the domestic market at the same time as it intervenes in the foreign exchange market by buying foreign currency. This action is taken since the central bank wants to |
| | A) | appreciate its currency increasing domestic money supply |
| | B) | appreciate its currency while decreasing domestic money supply |
| | C) | depreciate its currency while decreasing domestic money supply |
| | D) | depreciate its currency while keeping the domestic money supply unchanged |
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| 10 | |
Dollarization implies that |
| | A) | the domestic currency is pegged to the value of the U.S. dollar |
| | B) | the domestic currency is replaced by the stable currency of another country |
| | C) | the domestic currency is backed by either gold or U.S. currency reserves |
| | D) | none of the above |
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