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University of Cape Town

School of Economics

ECO2004S
Test 2
9th October 2014
Time: 75 Minutes
INSTRUCTIONS
Fill in the answers on the MCQ sheet provided
Write your name, student number and test number on the MCQ sheet provided
Use PENCIL only on the MCQ answer sheet
Time: 75 Minutes
Total Questions: 30
Marks: Correct Answer + 4
Incorrect Answer - 1
No answer 0

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D) all of the above E) none of the above 2. 10% to 3% E) the natural rate of unemployment is zero 2 .1.) unchanged in the medium run? A) a reduction in government spending B) a cut in taxes C) a reduction in the desire to save D) an increase in consumer confidence E) an increase in the money supply 4. If National Income is greater than the natural level of output then. If the economy is operating at the natural level of output. C) the price level will be higher next period than it is this period. In the short run. B) the price level is greater than the expected price level. investment. If the economy is operating at its natural level of output. A short-run monetary expansion will cause. A) the markup over labour costs was zero. for example. A) inflation and unemployment are both increasing B) inflation and unemployment are both decreasing C) the price level is decreasing D) the rate of inflation is falling from. the percentage of GDP composed of consumption.. B) the expected rate of inflation would be zero.e. which of the following will keep the composition of output (i. . D) all of the above E) none of the above 7. C) the actual and expected rates of inflation would always be equal. A) the unemployment rate is less than the natural unemployment rate. During a deflation.. etc.. A) an increase in output B) a fall in the interest rate C) an increase in the price level D) all of the above E) none of the above 3. a reduction in the price of oil will cause A) a reduction in output B) an increase in the price level C) a reduction in the interest rate D) all of the above E) none of the above 6. then a fiscal contraction must cause A) an increase in investment in the medium run B) a reduction in investment in the short run C) no change in investment in the medium run D) an increase in investment in the short run E) none of the above 5. The original Phillips curve implied or assumed that.

Its leverage ratio is A) 0.17 9. Further assume that during this same period.00 C) 1. but not depreciate E) The real exchange rate in South Africa can depreciate or remain the same. U. Securitization allows financial intermediaries to A) decrease the cost of borrowing B) convert an illiquid portfolio of loans into highly liquid securities C) attract more investors to buy and hold their securities D) all of the above E) none of the above 12. B) The price of foreign bonds in terms of domestic bonds. we know that A) The uncovered interest parity condition no longer holds B) The real exchange rate must be constant as well C) Each country can freely allow its interest rate to diverge from that of the other country D) The interest rate in the two countries must be equal E) Neither country will run a trade deficit 3 .32 D) 3. A) The real exchange rate in South Africa remains unchanged.16 E) 4. the U. B) The real exchange rate in South Africa must appreciate. 14. Which of the following factors did not contribute to the financial crisis? A) The liabilities issued by banks were very liquid B) The assets held by banks were often very illiquid C) There was a sharp decline in housing prices in the United States D) Banks held too much capital E) Many banks experienced large losses as borrowers defaulted on their mortgages 11. but not appreciate.14 B) 1. Suppose that over the past decade.8.S inflation is less than that in South Africa. C) The real exchange rate in South Africa must depreciate D) The real exchange rate in South Africa can appreciate or remain the same.S dollar depreciates relative to South African rand. and capital of 60. Suppose bank A has assets of 250. Which of the following best defines the real exchange rate? A) The price of domestic currency in terms of foreign currency. Which of the following is most likely to coincide with a liquidity trap? A) inflation is rising B) inflation is constant C) inflation is zero D) individuals prefer to hold money rather than bonds E) the real interest rate is negative 10. liabilities of 190. Suppose two countries make a credible commitment to fix their bilateral exchange rate in the short run. In such a situation. Given this information. C) The price of domestic goods in terms of foreign goods D) The price of foreign currency in terms of domestic currency E) The price of domestic bonds in terms of foreign bonds 13.

an increase E) an increase in the foreign output.3% and that the foreign interest rate is 1. then that country traditionally has a surplus in the net income balance. The quantity of imports will decrease when there is A) An appreciation in the real exchange rate B) A reduction in domestic output C) A reduction in foreign output D) All of the above E) None of the above 20. Given this information.3% The domestic currency is expected to appreciate by 7. In an open economy. A) The financial account B) The current account C) The capital transfer account D) The change in net gold and foreign reserves E) The financial and foreign reserves account 17. we would expect that A) B) C) D) E) The domestic currency is expected to depreciate by 6.1% The domestic currency is expected to depreciate by 7. If a country’s residents traditionally receive more income from holding foreign assets than foreign residents receive as income from holding domestic assets. of the balance of payments. a decrease D) a real appreciation. a decrease C) a real appreciation. This figure will be recorded in …………………. For this question. An open economy with a low saving rate ( private and public) must have A) Low investment only B) High investment only C) A trade surplus only D) Low investment or a trade deficit E) Low investment or a trade surplus 19. an increase in government spending will cause A) An increase in domestic output B) An increase in imports C) A reduction in net exports D) All of the above E) None of the above 18.1% The domestic currency is expected to depreciate by 5.in the net exports A) a real appreciation.15.5% The domestic currency is expected to appreciate by 5.5% 16. If the Marshall-Lerner condition holds then ---------------------in the exchange rate leads to ---------------. Also assume that the domestic interest rate is 6. no change B) a real depreciation.2%. assume the interest rate parity condition holds. a decrease 4 .

A) The exchange rate would appreciate and output would increase B) The exchange rate would appreciate and output would decrease C) The exchange rate would depreciate D) The exchange rate would depreciate and output would increase E) None of the above 5 . ii and v only D) ii. A) i only B) i. This change in policy is called. ii and iii only C) i. Suppose the rest of the world experiences a recession that causes a reduction in foreign income (Y*).21. An increase in the budget deficit can be reflected in A) An increase in private saving B) A reduction in investment C) A reduction in net exports D) All of the above E) None of the above 24. Suppose a country with a fixed exchange rate decides to reduce the price of its currency. For this question. Which of the following impacts will be found in the domestic economy as it adjusts to the drop in Y*? A) A reduction in income and a reduction in imports B) A reduction in imports and an increase in exports C) The net exports line to shift up D) An ambiguous effect on net exports E) An increase in income and an increase in imports 23. If taxes and the money supply increase simultaneously then. The J-curve illustrates the effects of A) changes in Y* on net exports B) changes in Y on net exports C) changes in the real exchange rate on net exports D) changes in Y on imports E) none of the above 22. iii and iv only E) ii only 26. under flexible exchange rates. A) An appreciation B) A depreciation C) A peg D) A revaluation E) A devaluation 25. we know with certainty that. which of the following will occur? i) The domestic and foreign interest rates must be equal ii) The central bank cannot use monetary policy to affect domestic output iii) An expansionary fiscal policy will require the central bank to increase the money supply iv) The domestic and foreign interest rates need not be equal v) A contractionary fiscal policy will require the central bank to increase the money supply. Given this information. assume that the economy is operating in the short run and in a fixed exchange rate regime and that perfect capital mobility exists.

E) the poorer countries have had positive growth rates. A reduction in the capital stock will cause which of the following? A) an increase in output per capita B) no change in output C) a reduction in output D) increase the capital-labour ratio E) none of the above 29. E) none of the above 30. C) output per capita will increase by 6%. Given this information. D) purchasing power parity methods. To do so. C) the richer countries have had higher growth rates than the poorer ones. B) the procedures for measuring output per capita have been changing. Suppose the stock of capital increases by 2% and employment increases by 2%. we know that A) output will increase by 4%. B) output per capita will increase by less than 4% and more than 2%. and constant returns to scale.27. one would convert Saudi Arabian Gross Domestic Product per capita into dollars using A) the current nominal exchange rate. decreasing returns to labor. D) output will increase by less than 4% and more than 2%. THE END 6 . while the richer ones have had negative growth rates. Suppose individuals wish to obtain the most accurate comparison of living standards between the Canada and Saudi Arabia. "Convergence" has been occurring among the OECD countries because A) the richer countries give away more of their output than the poorer ones. For this question. B) the prior year's real exchange rate. 28. C) an average of the last five years' exchange rates. E) the current real exchange rate. assume that there are decreasing returns to capital. D) the poorer countries have had higher growth rates than the richer ones.