ECONOMICS 461

Test 1
Fall Quarter 2014
Prof. Giorgio Canarella

The test is due Saturday November 1, 2014

1. A country can make 100 machines and produce 50 tons of wheat per week or make 20 machines and
produce 150 tons of wheat per week. These outcomes represent part of the countrys
A) gains from international trade.
B) redistributive effects of international trade.
C) production possibilities curve.
D) consumption desirability curve.
E) absolute advantage in international trade.
2. A country can produce 400,000 machine parts per week and produce 600,000 board feet of lumber. If
the country could also produce 300,000 machine parts and 750,000 board feet of lumber per week
then the average opportunity cost of 1 board foot of lumber is
A) 2/3 of one machine part.
B) 1.5 machine parts.
C) 2.5 machine parts.
D) 2 machine parts.
E) 1/2 of one machine part.
3. Generally speaking, as a country transfers more and more resources to the production of one good or
service the
A) absolute advantage of producing that good or service declines.
B) production possibilities curve shifts outward.
C) comparative advantage of producing that good or service rises.
D) opportunity cost of producing that good or service rises.
E) total cost of producing that good or service falls.
4. Everything else equal, as a country transfers more and more resources to the production of one good
or service the
A) absolute advantage of producing that good or service declines.
B) production possibilities curve shifts inward.
C) comparative advantage of producing that good or service falls.
D) opportunity cost of producing that good or service falls.
E) total cost of producing that good or service falls.
5. The production possibilities curve is __________ because as more of a countrys resources are used
to produce a good or service the opportunity cost to produce that good or service usually __________.
A) convex; rises
B) convex; falls
C) concave; rises
D) concave; falls
E) exponential; stays the same
6. If there is no international trade then a nations consumption possibilities curve is __________ its
production possibilities curve.
A) the same as
B) less than
C) greater than
D) flatter than

E) steeper than
7. A country that can produce more of a good or service than another country, or produce it at lower cost
than another country is said to have __________ over the other country.
A) a comparative advantage
B) a redistributive advantage
C) an international trade
D) an opportunity cost advantage
E) an absolute advantage
8. Consider the following monthly production possibilities for two countries per 100 workers:

Product
Food
Equipment

Country A
Labor
Output
100 workers
60 tons
100 workers
100 units

Country B
Labor
Output
100 workers
50 tons
100 workers
120 units

By specializing and trading, total global output in food can be increased __________ and total global
output in machines can be increased __________ per 100 workers.
A) 10 tons; 20 units
B) 20 tons; 10 units
C) 40 tons; 20 units
D) 20 tons; 40 units
E) 30 tons; 30 units
9. Consider the following monthly production possibilities for two countries per 100 workers:

Product
Food
Equipment

Country A
Labor
Output
100 workers
500 tons
100 workers
200 units

Country B
Labor
Output
100 workers
600 tons
100 workers
120 units

To maximize total global output Country A should produce __________ and Country B should
produce __________.
A) only food; only equipment
B) slightly more food; slightly more equipment
C) slightly less food; slightly less equipment
D) only equipment; only food
E) only equipment; only equipment
10. International trade allows countries to specialize in the production of goods and services in which
they have an absolute advantage. This can lead to
A) big countries exploiting small countries which lack these advantages.
B) an increase in total global output.
C) more efficient allocation of a countrys scarce resources
D) both A) and B)
E) both B) and C)
11. If Country D has an absolute advantage over Country E in the production of all goods and services
then
A) Country D may gain from international trade with Country E but Country E cannot gain.
B) Country E may gain from international trade with Country D but Country D cannot gain.
C) neither country can gain from international trade with each other.
D) both countries may still be able to gain from international trade with each other.
E) Country D must have a comparative advantage over Country E for all goods and services.

12. If Country D has an absolute advantage over Country E in the production of all goods and services
then the production possibilities curve for Country D __________ the production possibilities curve
for Country E.
A) intersects
B) is greater at all points than
C) equal to
D) bisects
E) is less at all points than
13. The ability of a nation to produce an additional unit of a good or service at a lower opportunity cost
than another nation is referred to as
A) marginal cost.
B) marginal revenue.
C) absolute advantage.
D) redistributive advantage.
E) none of the above
14. You can buy either 3 candy bars or 2 snack cakes. The opportunity cost of a snack cake is:
A) 2/3 of a candy bar
B) 5 candy bars
C) 1.5 candy bars
D) 1 candy bar
E) indeterminate without knowing the price of each
15. __________ is more useful in explaining modern international trading patterns than __________.
A) Relative advantage; comparative advantage
B) Absolute advantage; comparative advantage
C) Comparative advantage; absolute advantage
D) Absolute advantage; relative advantage
E) Total cost; opportunity cost
16. Residents of Ireland decide it is cheaper to import 100,000 more bushels of wheat from Canada than
it is to reallocate domestic land to wheat production. In this case,
A) the opportunity cost of wheat must be lower in Canada than in Ireland.
B) Canada must have an absolute advantage in wheat production over Ireland.
C) Ireland must have an absolute advantage over Canada in goods and services other than wheat.
D) Ireland has a comparative advantage in wheat production.
E) no conclusion can be drawn about comparative advantage of wheat in Ireland and Canada.
17. As a nation dedicates an increasing amount of its resources to the production of one good or service,
the opportunity cost to produce that good or service normally
A) rises.
B) falls.
C) stays the same.
D) falls at first, then rises.
E) rises at first, then falls.
18. A country experiences large increases in labor costs and stable capital costs. Everything else equal,
labor intensive industries will have their comparative advantage __________ and the countrys
overall absolute advantage will __________.
A) reduced; stay the same
B) reduced; decline
C) increased; stay the same
D) increased; decline
E) unchanged; stay the same
19. Improvements in technology will generally
A) increase opportunity costs

B) shift the production possibilities curve outward

C) shift the consumption possibilities curve inward
D) reduce international trade
20. At current levels of production Country D has a comparative advantage in food production over the
rest of the world. Similarly, Country E currently has a comparative advantage in heavy equipment
production over the rest of the world. Neither engages in international trade. If both countries wish
to maximize their consumption possibilities then which of the following is/are correct?
A) Country D should specialize and produce only food and trade with Country E.
B) Country E should specialize and produce only heavy equipment and trade with Country D.
C) Country E may be able to benefit by exporting some equipment to Country D in exchange
for food imports from Country D.
D) Both A) and B) are correct.
E) None of the above is correct.
21. Consider the following table of the value of labor inputs required for two countries to produce
identical quantities of the three goods:

Malaysia
India

Textiles
3
2

Food
4
6

Equipment
9
6

Malaysia can benefit by exporting which good(s) to India?

A) textiles
B) textiles and equipment
C) food
D) textiles, food and equipment
E) none
22. When a large country institutes a tariff,
I.
II.
III.
IV.

domestic consumer surplus is reduced.

domestic producer surplus and government tariff revenues are increased.
foreign producer surplus is increased.
deadweight losses occur in the exporting and the importing country.

A) I and II only
B) I and III only
C) II and III only
D) I, II and IV only
E) I, II, III and IV
23. Consider the following table of the value of labor inputs required for two countries to produce
identical quantities of the two goods:

Australia
Britain

Wool
4
4

Leather
3
8

Britain could be made better of by importing __________ and Australia can be made better off by
importing __________.
A) wool; leather
B) leather; neither good
C) leather; wool

24.

25.

26.

27.

28.

29.

30.

D) neither good; wool

E) wool; neither good
A U.S. tourist traveling in Europe spends money on a hotel room and food in Paris. These
transactions result in a __________ to the __________ category of the U.S. balance of payments.
A) debit; goods
B) credit; goods
C) debit; services
D) credit; services
E) credit; income
In the U.S. balance of payments accounts U.S. firms importing goods results in a __________ and
U.S. residents purchasing foreign stocks and bonds results in a __________.
A) debit; credit
B) credit; debit
C) credit; credit
D) debit; debit
A German resident buys a long term U.S. Treasury bond and receives coupon interest in the same
year. The purchase price of the Treasury bond is recorded in the German __________ account and
the income is recorded in the German __________ account.
A) capital; current
B) capital; capital
C) current; capital
D) current; official settlements
E) official settlements; capital
A Swiss resident buys a long term U.S. Treasury bond and receives coupon interest in the same year.
The purchase of the Treasury bond is a __________ in the Swiss balance of payments and the income
received is a __________.
A) debit; debit
B) credit; credit
C) debit; credit
D) credit; debit
Suppose that in a given month U.S. residents buy $16 million of foreign stocks and bonds, at the
same time foreigners buy $25 million of U.S. stocks and bonds and the official settlement account
increases $10 million. The net effect of these three sets of transactions is to
A) increase the capital account by $51 million.
B) decrease the capital account by $41 million.
C) increase the capital account by $19 million.
D) decrease the capital account by $1 million.
E) none of the above
Changes in the financial assets and deposits of government agencies are recorded in the
A) current account.
B) services account.
C) capital account.
D) official settlements account.
E) income account.
A country imports $800 million worth of goods and services and exports $600 million. The countrys
private agents purchase $200 million of foreign assets and foreigners buy $300 million of domestic
assets. If the statistical discrepancy is $100 million, what must be the net official settlements
balance if there are no other transactions?
A) $400 million credit
B) $200 million credit
C) $300 million debit

D) $200 million debit

E) $400 million debit
31. A country has a current account surplus of $300 million and a capital account deficit of $400 million.
If the statistical discrepancy is zero this situation must result in
A) a balances of payment deficit.
B) a positive official settlements balance.
C) a negative official settlements balance.
D) both A) and B)
E) both A) and C)
32. The current account includes which of the following categories?
I.
II.
III.
IV.

goods
services
income
unilateral transfers

A) I and II only
B) I and III only
C) II and IV only
D) I, II and IV only
E) I, II, III and IV
33. A capital account surplus implies that a countrys domestic residents
A) purchased more foreign assets than foreigners purchased domestic assets.
B) purchased less foreign assets than foreigners purchased domestic assets.
C) imported more goods and services than they exported.
D) exported more goods and services than they imported.
E) received more income from foreign asset holdings than foreigners received on their domestic
asset holdings.
Table 1, Balance of Payment Data
Hypothetical U.S. BOP Data
Bill $
Exports of merchandise
$125 Imports of merchandise
Exports of services
$ 55 Imports of services
U.S. foreign aid payments to
Income received from domestic
$ 10
Afghanistan
holdings of foreign assets
Statistical discrepancy
Foreign purchases of U.S. assets
Official Settlements Balance
$ 5 U.S. purchases of foreign assets
Income paid to foreigners on their
$ 9
domestic asset holdings

Bill $
$120
$ 45
$ 11
$ 25
$ 55

34. Refer to Table 1 to answer the following question: The current account must be equal to a
A) $27 billion surplus.
B) $17 billion surplus.
C) $15 billion surplus.
D) $27 billion deficit.
E) $17 billion deficit.
35. Refer to Table 1 to answer the following question: The capital account must be equal to a
A) $28 billion deficit.
B) $30 billion deficit.
C) $28 billion surplus.

36.

37.

38.

39.

40.

41.

42.

D) $18 billion surplus.

E) $30 billion surplus.
Refer to Table 1 to answer the following question: The statistical discrepancy must be equal to
________ billion.
A) +$3
B) $3
C) $0
D) +$2
E) $2
Which one of the following does not belong in the current account?
A) humanitarian foreign aid payments
B) income earned on foreign assets
C) purchases of domestic financial assets by foreigners
D) payments for military services abroad
E) exports and imports of services
The foreign exchange market is a market for the exchange of
A) currency.
B) goods.
C) services.
D) income streams.
E) none of the above
The U.S. had a capital account surplus in 2001. This means that the U.S.
A) either net sold assets to foreigners and/or net increased its indebtedness to foreigners.
B) exported more than goods than services.
C) exported more goods and services than it imported.
D) imported more goods and services than it exported.
E) must have had a positive official settlements balance.
The bulk of foreign exchange trading activity is
A) hard currency transfers across borders.
B) due to tourism, travel and illegal activities.
C) in the forward market.
D) done with currency futures.
E) electronic or phone originated trades of foreign currency denominated financial
instruments.
Citigroup has a 10 million deposit in the U.K. that they wish to convert to Swiss francs (Sfr). UBS
is willing to switch the pounds to francs at a rate of 2.32 Sfrs per pound. Deutsche Bank will accept
0.43 per franc. Based on these quotes, what is the greatest amount of francs that Citigroup can get
for its 10 million?
A) 23,255,813
B) 23,200,000
C) 4,310,345
D) 25,433,336
E) 4,300,000
Rank the following foreign exchange participants from largest to smallest in trading activity:
I. banks
II. foreign exchange trading websites
III. foreign exchange brokers
A) I, II, III
B) I, III, II
C) II, III, I

43.

44.

45.

46.

47.

48.

49.

D) III, II, I
E) III, I, II
The currency per U.S. dollar quote for the British pound is 1.55. If you wish to buy $1,000 worth of
pounds, how many pounds could you get?
A) 1,550
B) 645
C) 450
D) 1000
E) 550
The exchange rate for the euro changed from 0.9968 on December 2, 2002 to 0.9966 (U.S. dollar
equivalent) on December 3, 2002. If you used $1 million to buy euros on December 2 and sold them
on December third you made
A) +$200.68.
B) $144.45.
C) $200.64.
D) +$144.79.
E) none of the above
The Canadian dollar is worth 64 cents U.S. If the Canadian dollar drops in value by 2% the Canadian
dollar will be worth __________ cents U.S.
A) 62.72
B) 65.28
C) 66.00
D) 62.00
E) none of the above
The Canadian dollar is worth 64 cents U.S. If the U.S. dollar drops in value by 3% the Canadian
dollar will be worth __________ cents U.S.
A) 65.28
B) 65.92
C) 65.31
D) 62.08
E) none of the above
The currency per U.S. $ for the South Korean won is 1217. The similar quote for the Japanese yen
against the dollar is 124.533. What is the implied won per yen cross exchange rate?
A) 151,556.66
B) 0.000007
C) 9.9986
D) 0.102328
E) none of the above
The British pound is worth 2.3198 Swiss francs and the Mexican peso is worth 0.14512 Swiss francs.
How many pesos is the British pound worth?
A) 0.0626
B) 0.3354
C) 2.9818
D) 15.985
E) none of the above
The CPI is now at 181 and last year it was at 170. Inflation over the year was
A) 9.00%.
B) 1.065%.
C) 11.00%.
D) 6.47%.
E) 3.23%.

50. Suppose that the CPI in Britain is at 125 and the CPI in the U.S. is at 120. If the nominal exchange
rate is $1.5625 to the pound, what is the real exchange rate for the dollar?
A) $1.6276
B) $1.5000
C) 0.6667
D) 0.6144
E) none of the above
51. A U.S. firm has contracted to purchase French wines and has agreed to pay 5 million in 6 months.
Which of the following methods could be used to reduce the U.S. firms exchange rate risk that
results from the deal?
I. Buy the euro forward.
II. Buy a call option on the euro.
III. Swap euros for dollars now.

52.

53.

54.

55.

56.

A) I only
B) II only
C) I and II only
D) II and III only
E) I, II and III
In foreign exchange, the European demand for the dollar also represents the
A) European demand for dollar denominated goods and services.
B) supply of the euro made available for foreign exchange.
C) European supply of euro denominated goods and services.
D) supply of the dollar made available for foreign exchange.
E) both A) & B)
The Thai baht is currently trading at 42 baht to the dollar in the spot market. The 3 month forward
rate is 0.025 dollars per baht. What is the standard forward premium or discount for the baht?
A) 5% premium
B) 19.04% premium
C) 20% premium
D) 4.76% discount
E) 19.04% discount
The ruble is currently trading at 31 rubles to the dollar in the spot market. The 4 month forward rate
is 35 rubles to the dollar. What is the standard forward premium or discount for the ruble?
A) 12.90% premium
B) 11.43% discount
C) 20% premium
D) 34.29% discount
E) 11.43% premium
The yen has a one year forward discount of 3% against the dollar. If the spot exchange rate is 124
yen to the dollar what is the expected future spot rate in one year given that there is no bias in the
forward rate?
A) 120.280 yen/$
B) 120.388 yen/$
C) 127.720 yen/$
D) 126.632 yen/$
E) 127.827 yen/$
You believe the yen will increase in value by 4% against the dollar in one year. If you think the spot
exchange rate in one year will be 120 yen to the dollar, what must the spot rate be right now?
A) 124.80 yen/$
B) 125.76 yen/$

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C) 115.20 yen/$
D) 119.81 yen/$
E) 125.00 yen/$
If the spot exchange rate is $1.57 U.S. to the pound and the pound is expected to depreciate by 3%
over the next year, what is the dollar expected to do against the pound?
A) appreciate 3%
B) depreciate 3%
C) appreciate 3.09%
D) depreciate 3.05%
E) appreciate 3.05%
Which one of the following statements about differences in currency futures and forwards is not
correct?
A) Futures contracts are more standardized than forward contracts.
B) Futures contracts may require the holder to pay out cash before contract maturity and forwards do
not.
C) Forward contracts are generally for smaller amounts of currency than futures contracts.
D) Futures contracts are more liquid than forward contracts.
E) Futures contracts are traded on organized exchanges and forwards are OTC contracts negotiated
between two parties.
A contract that grants the holder the right to buy a given amount of a foreign currency at a
predetermined exchange rate until or on a specified date is a currency
A) forward contract.
B) futures contract.
C) call option.
D) put option.
E) swap agreement.
A contract that grants the holder the right to sell a given amount of a foreign currency at a
predetermined exchange rate until or on a specified date is a currency
A) forward contract.
B) futures contract.
C) call option.
D) put option.
E) swap agreement.
A contract that allows the holder to buy a given amount of a foreign currency at a predetermined
exchange rate only on a specified date is a/an
A) American put option.
B) European put option.
C) American call option.
D) European call option.
E) swap agreement.
Suppose that on the gold standard, the U.S. fixes the price of an ounce of gold at $25. Great Britain
fixes the price of gold at 16 per ounce. What is the implied exchange rate between the dollar and the
pound?
A) 1.5625 / $
B) $0.65 /
C) $1.5625 /
D) 0.65 / $
E) none of the above
Suppose that the U.S. fixed the price of gold at $22 an ounce. Great Britain fixed the price of the
pound at $2.20 per pound and France had pegged the French franc (FF) to 10 FF to the dollar. An

identical basket of goods costs $200 in the U.S., 85 in Great Britain and 3100 francs in France. If
you have 10 ounces of gold convertible in the U.S., which of the following statements is/are correct?
I. In the United States you can buy 1.2 baskets.
II. In Great Britain you can buy about 1.18 baskets.
III. The nominal exchange rate between the pound and the franc is 22 francs per pound.
IV. Your money has the greatest purchasing power in Great Britain.

64.

65.

66.

67.

68.

A) I only
B) II only
C) II and IV only
D) II, III and IV only
E) III and IV only
The gold standard era occurred
A) from 1945 to 1971.
B) from 1971 to 1973.
C) from 1961 to 1968.
D) from 1914 to 1933.
E) prior to 1914.
Suppose that Britain and the U.S. are on the gold standard; the U.S. has fixed the price of the dollar at
$15 per ounce of gold and Britain has fixed the price of the pound at 6.5 per ounce of gold. What
would happen to the value of the dollar and the value of the pound if Britain changed the pound to
gold ratio to 7 per ounce? The value of the dollar relative to the pound would __________ and the
value of the pound relative to the dollar would __________.
A) not change; devalue
B) not change; revalue
C) revalue; devalue
D) devalue; revalue
E) not change; not change
Suppose that Britain and the U.S. are on the gold standard; the U.S. has fixed the price of the dollar at
$27 per ounce of gold and Britain has fixed the price of the pound at 8 per ounce of gold. What
would happen to the value of the dollar and the value of the pound if Britain changed the pound to
gold ratio to 7 per ounce? The value of the pound relative to the dollar would
A) not change.
B) increase by 14.29%.
C) increase by 12.5%.
D) decrease by 12.5%.
E) decrease by 14.29%.
Suppose that during the Bretton Woods era, Great Britain fixed the price of the pound at 0.80 per
dollar and France had pegged the French franc (FF) to 6 Ffr to the dollar. Suppose further that a
basket of goods costs 115 in Great Britain. Using only this data, what should have been the cost of
an identical basket of goods in France?
A) Ffr 750.00
B) Ffr 143.75
C) Ffr 945.20
D) Ffr 862.50
E) none of the above
Suppose that under the gold standard France exchanged 105 francs for an ounce of gold. At the same
time the franc was also worth $0.25. How much gold should the dollar have been worth?
A) $23.81
B) $26.25
C) $24.33

D) $35.00
E) $20.46
69. The positive aspects of a gold standard include:
I. It promotes long run price stability.
II. It promotes short run price stability.
III. More flexible domestic monetary policy is possible under the gold standard.
A) I only
B) II only
C) I and III only
D) II and III only
E) I, II and III
70. The negative aspects of a gold standard include:
I. The costs of obtaining, storing and transporting gold.
II. The unpredictable nature of the supply of gold available.
III. The resulting difficulty in adjusting the money supply to meet changing conditions.
A) I only
B) I and II only
C) I and III only
D) I and III only
E) I, II and III
71. Part of the reason the gold standard was successful was because:
I. most of that era was relatively peaceful with few wars.
II. there was only limited capital mobility among nations.
III. there was no currency speculation allowed in that time period.
A) I only
B) I and II only
C) II and III only
D) I and III only
E) I, II and III
72. According to Keynes, during the gold standard era the __________ could have claimed to have been
the conductor of the international orchestra.
A) Federal Reserve
B) International Monetary Fund
C) Bank of England
D) Rothschild Bank
E) U.S. economy
73. The institution that serves as an agent for central banks and a center for economic cooperation among
the worlds largest industrialized nations is the
A) International Monetary Fund.
B) International Bank for Reconstruction and Development.
C) Bank of International Settlements. (check)
D) World Trade Organization.
E) Bretton Woods Organization.
74. The organization that was founded to lend reserves to member countries experiencing a temporary
shortage in foreign exchange reserves is the
A) International Monetary Fund.
B) International Bank for Reconstruction and Development.
C) Bank of International Settlements.

D) World Trade Organization.

E) Bretton Woods Organization.
75. The organization that focuses on making loans to developing nations was originally called the
A) International Monetary Fund.
B) International Bank for Reconstruction and Development.
C) Bank of International Settlements.
D) World Trade Organization.
E) Bretton Woods Organization.
76. To become a member of the IMF a country must pay an initial quota. Which of the following is/are
true?
I. The quota amount is the same for all developed countries.
II. Twenty-five percent of the quota must be paid in gold, and seventy-five percent may be
paid in the countrys local currency.
III. The U.S., as the founding country, is exempt from the quota.
A) I only
B) II only
C) I and II only
D) II and III only
E) I, II and III
77. In a small country, the imposition of a tariff will result in __________ domestic supply and
__________ domestic demand.
A) increased; increased
B) increased; decreased
C) decreased; decreased
D) decreased; increased
E) unchanged; decreased
78. A small country imposes a tariff on a good. As a result:
I. Consumer surplus falls
II. Domestic producer surplus rises
III. Foreign producer surplus falls
A) I only
B) I and II only
C) II and III only
D) I and III only
E) I, II and III
79. In general, when a small country imposes a tariff this represents a wealth transfer from __________
to __________.
A) domestic producers; foreign producers
B) foreign producers; domestic producers
C) foreign producers; domestic consumers
D) domestic consumers; domestic producers
E) domestic consumers; foreign producers
80. Losses from trade barriers that result in a decline in economic efficiency are called
A) countervailing losses.
B) consumer surplus losses.
C) deadweight losses.

D) producer surplus losses.

E) none of the above
81. Deadweight losses include losses due to
A) allocating too many scarce resources into protected industries.
B) consumers choosing to buy different goods because of the relatively high cost of goods in a
protected industry.
C) tariff revenues transferred to the government.
D) increased domestic producer surplus.
E) Both A and B constitute deadweight losses.

Figure 1, Soccer balls

Price
Supply Domestic

S1 Global

$15

S0 Global

$10

Demand Domestic
2

Quantity
(millions)

A small country imposes a tariff resulting in a shift in global supply made available in this country
from S0Global to S1Global.
82. Refer to Figure 1 to answer the following question: What is the amount of the tariff?
A) less than $5
B) $5
C) more than $5
D) cant tell from the information given
83. Refer to Figure 1 to answer the following question: What is the loss in consumer surplus that results
from the tariff (millions of $)?
A) $25.0
B) $40.0
C) $29.3
D) $32.5
E) $30.0
84. Refer to Figure 1 to answer the following question: What is the change in domestic producer surplus
that results from the tariff (millions of $)?
A) $20.0
B) $10.0
C) $15.0
D) $12.5
E) $17.5
85. Refer to Figure 1 to answer the following question: What are the total deadweight losses?

86.

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89.

90.

91.

A) $12.5
B) $5.0
C) $7.5
D) $17.5
E) $25.0
A small country imposes a tariff of $100 on imported appliances. As a result quantity demanded
drops to 150,000 units from 175,000 units. The loss in consumer surplus is
A) $15,000,000.
B) $2,500,000.
C) $17,500,000.
D) $16,250,000.
E) $1,250,000.
For absolute purchasing power parity to strictly hold in two countries all but which one of the
following is required?
A) zero transportation costs on all goods and services
B) the same basket of goods must be consumed in the two countries
C) tax rates must be the same in the two countries
D) tariffs must be zero in both countries
E) the nominal exchange rate must equal 1
If flour costs $3 a pound in the U.S. and 35 pesos in Mexico, what should the exchange rate (S) be if
absolute purchasing power parity holds?
A) 0.0857
B) 11.67
C) 32
D) 38
E) cannot tell without knowing the price levels in the U.S. and Mexico
Suppose that absolute purchasing power parity for lettuce does not hold for the U.S. and Mexico. The
price of a box (containing about 50 heads) of lettuce in the U.S. is selling for $25 and is selling for
175 pesos in Mexico when the exchange rate is 9 pesos to the dollar. As people arbitrage away the
price disparity, the price of lettuce in the U.S. will __________ and the value of the peso will tend to
__________.
A) rise; rise
B) fall; fall
C) rise; fall
D) fall; rise
E) stay the same; stay the same
Assuming that absolute purchasing power parity holds, what should the U.S./Canadian exchange rate
be if the CPI in Canada is 225 and the CPI in the U.S. is 179 and the U.S. interest rate is 6%?
A) 1.257
B) 0.796
C) 1.332
D) 0.843
E) none of the above
Suppose that the exchange rate between the Polish Zloty and the U.S. dollar is currently 4 Zls to the
dollar. The one year forward rate for the Zloty is 4.5 Zls to the dollar. If U.S. inflation is 3% what is
the approximate Polish inflation rate if relative purchasing power holds?
A) 12.75%
B) 9.50%
C) 8.11%
D) 15.50%
E) 14.11%

92. Suppose that the exchange rate between the Russian ruble and the U.S. dollar is currently $0.03 to the
ruble. The one year forward rate for the ruble is $0.025 dollars to the ruble. If Russian inflation is
20% what is the approximate U.S. inflation rate if relative purchasing power holds?
A) 16.67%
B) 3.33%
C) 0.00%
D) 40.00%
E) 4.32%
93. Most studies indicate that
I. relative PPP performs better than absolute PPP.
II. the Big Mac Index is a reliable predictor of short term exchange rate movements.
III. relative PPP only holds over long time periods.

94.

95.

96.

97.

98.

A) I only
B) I and II only
C) II and III only
D) I and III only
E) I, II and III
A U.S. investor is considering investing in a bond denominated in Swiss francs. One year U.S bond
rates are 6% and the Swiss franc is currently worth about 68 U.S. If Swiss bond rates on similar
bonds are paying 7%, the investor is better off investing in the U.S. if over the next year the
A) dollar is expected to depreciate by more than 1%.
B) Swiss franc is expected to appreciate by more than 1%.
C) dollar is expected to appreciate by 3%.
D) Swiss franc is expected to appreciate by less than 1%.
Suppose that the one year Swiss franc interest rate is 5% and the one year U.K. interest rate is 4%. If
the one year forward rate is 0.45 pounds per francs what must the spot exchange rate be (/Sfr) if
covered interest parity holds?
A) 0.2250
B) 0.4455
C) 0.4545
D) 1.4500
E) 0.4645
Suppose that the one year U.S. interest rate is 5%. If the one year forward rate against the pound is
$1.75 per pound and the spot exchange rate is $1.78 per pound, what must the equivalent British
interest rate be if covered interest parity holds?
A) 3.29%
B) 6.69%
C) 3.31%
D) 6.83%
E) 5.45%
If uncovered interest parity holds and the U.S. interest rate on a one year bond is 5% and the Russian
rate on a similar one year bond is 8% which one of the following is true?
A) The forward rate for the dollar must be less than the spot rate.
B) The forward rate for the ruble must be greater than the spot rate.
C) The expected future spot rate for the ruble must be less than the 1 year forward rate.
D) The expected future spot rate for the dollar must be greater than the 1 year forward rate.
E) none of the above
Rates on one year British bonds are 9%. The expected one year change in the value of the dollar is
+2%. If rates on similar maturity U.S. bonds are 6%, and investors charge a risk premium which of
the following is true assuming that uncovered interest parity holds with a risk premium?

A) British bonds are perceived to be riskier than U.S. bonds.

B) U.S. bonds are perceived to be riskier than British bonds.
C) The risk premium must be zero.
D) All investors must prefer British bonds to U.S. bonds.
E) U.S. bonds and British bonds are equally risky.
99. Which of the following methods of currency forecasting are not strictly adaptive expectations?
A) Plotting historical exchange rates on a graph, you rough out a trend line and use the trend to
forecast next years exchange rate.
B) Your regress historical exchange rates using ordinary least squares to estimate the intercept and
slope of the line and then use the equation to give you a predicted exchange rate value.
C) You obtain a forecast of next years expected balance of payment data and try to figure out
how this will cause the exchange rate to move.
D) You calculate a 3 year moving average of exchange rates and use the average as your prediction
of exchange rates.
E) You estimate that the current exchange rate is the best estimate of the future exchange rate.
100. Nominal one year interest rates in the U.S. are 9% and U.S. inflation is 3%. One year British interest
rates are 11% and the current British CPI is 190. What is the projected CPI level in Britain in one
year if real interest parity holds?
A) 191.9
B) 180.5
C) 188.1
D) 199.5
E) 193.4