Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following has occurred for the United States since 1960? 1) _______
A) X/Y has decreased and IM/Y has decreased.
B) X/Y has increased while IM/Y has decreased.
C) The ratio of exports to GDP (X/Y) and the ratio of imports to GDP (IM/Y) have both
increased.
D) X/Y has decreased and IM/Y has increased.

2) The ratio of a country's exports to its GDP must: 2) _______

A) be larger than the ratio of imports to GDP.
B) be less than one.
C) be greater than one.
D) equal the ratio of imports to GDP.
E) none of the above

3) Year-to-year movements in real exchange rates between industrialized countries like the U.S. 3) _______
and Canada are caused mostly by:
A) changes in capital controls.
B) changes in quotas or tariffs.
C) changes in nominal exchange rates.
D) changes in relative growth rates of output.
E) changes in relative rates of inflation.

4) For this question, assume the interest parity conditions holds. Also assume that the domestic 4) _______
interest rate is 10% and that the foreign interest rate is 7%. Given this information, we would
expect that:
A) the domestic currency is expected to appreciate by 3%.
B) individuals will only hold domestic bonds.
C) individuals will only hold foreign bonds.
D) the domestic currency is expected to depreciate by 3%.

5) Suppose the domestic interest rate is 3% and that the foreign interest rate is 6%. And finally, 5) _______
assume that the domestic currency is expected to appreciate by 4% during the coming year.
Given this information, we know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold foreign bonds.
C) the interest parity condition holds.
D) individuals will only hold domestic bonds.

6) Which of the following expressions represents the real exchange rate ()? 6) _______
A) E
B) EP*
C) EP*/P
D) E/P
 E) none of the above

7) Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in 7) _______
period t. Which of the following expressions represents the amount of U.K. pounds you will
receive in one year (i.e., period t+1) from purchasing U.K. bonds in period t?
A) i
B) (1 + i*)Eet+1/Et
C) 1 + i*
D) (1 + i*)Et/Eet+1
E) none of the above

8) Which of the following expressions represents the dollar price of foreign currency? 8) _______
A) 1/E
B) EP/P*
C) E
D) EP*/P
E) none of the above

9) For this question, assume that the domestic interest rate is 8% and that the foreign interest rate is 9) _______
6%. And finally, assume that the domestic currency is expected to depreciate by 3% during the
coming year. Given this information, we know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold domestic bonds.
C) individuals will only hold foreign bonds.
D) the interest parity condition holds.

10) Which of the following events will cause the largest real depreciation for the domestic economy? 10) ______
A) a 2% increase in E and a 2% increase in P
B) a 6% increase in the domestic price level (P) and a 6% reduction in P*
C) a 3% increase in E
D) a 6% reduction in E and a 6% reduction in P*
E) a 6% reduction in E and a 6% increase in the foreign price level (P*)

11) If the price level in Japan is 3.0, the price level in the U.S. is 6.0, and it costs 100 Yen to buy one 11) ______
dollar, then the real exchange rate between the U.S. and Japan is:
A) 5. B) 20. C) 2. D) 50. E) 200.

12) When the U.S. has a current account surplus, we know that it is also: 12) ______
A) lending to the rest of the world.
B) suffering from negative investment income.
C) running a balanced trade account.
D) borrowing from the rest of the world.
E) none of the above
13) Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in 13) ______
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*)Et/Eet+1
D) (1 + i*)Eet+1/Et
E) none of the above

14) Which of the following best defines the real exchange rate? 14) ______
A) the price of domestic currency in terms of foreign currency
B) the price of foreign currency in terms of domestic currency
C) the price of foreign bonds in terms of domestic bonds
D) the price of domestic goods in terms of foreign goods
E) none of the above

15) In 2003, which of the following countries had the lowest ratio of exports to GDP? 15) ______
A) Canada B) Mexico
C) Western Europe D) China

16) Assume the interest parity condition holds and that individuals expect the dollar to appreciate 16) ______
by 5% during the coming year. Given this information, we know that:
A) i < i*.
B) i = i*.
C) the interest rate differential between the two countries is less than 5%.
D) individuals will only hold foreign bonds .
E) none of the above

17) An increase in the real exchange rate indicates that: 17) ______
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

18) For this question, assume that the domestic interest rate is 6% and that the foreign interest rate 18) ______
4%. And finally, assume that the domestic currency is expected to appreciate by 3% during the
coming year. Given this information, we know that:
A) the interest parity condition holds.
B) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) individuals will only hold domestic bonds.

19) Assume that the nominal exchange rate increases by 2%. If prices (both domestic and foreign do 19) ______
not change), we know that:
A) domestic goods are now relatively cheaper.
B) foreign goods are now relatively cheaper.
 C) domestic goods are now relatively more expensive.
D) both B and C

20) Assume that the nominal exchange rate decreases by 4%. If prices (both domestic and foreign do 20) ______
not change), we know that:
A) domestic goods are now relatively more expensive.
B) foreign goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both A and C

21) A nominal appreciation of the Japanese yen (against all currencies) indicates that: 21) ______
A) the yen price of the U.K. pound has increased.
B) the yen price of the U.S. dollar has increased.
C) the number of units of foreign currency that one can obtain with one yen has increased.
D) all of the above

22) Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected 22) ______
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.

23) A reduction in the real exchange rate indicates that: 23) ______
A) domestic goods are now relatively more expensive.
B) foreign goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both A and C

24) In 2003, which of the following countries had the highest ratio of exports to GDP? 24) ______
A) Mexico B) Japan C) Canada D) China

25) For this question, suppose the domestic interest rate is 4% and that the foreign interest rate is 7%. 25) ______
And finally, assume that the domestic currency is expected to depreciate by 3% during the
coming year. Given this information, we know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold foreign bonds.
C) individuals will only hold domestic bonds.
D) the interest parity condition holds.

26) Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year 26) ______
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 1%.
B) less than 2%.
C) greater than 2%.
D) less than 5%.
 E) greater than 5%.

27) When the dollar appreciates, we know that: 27) ______

A) foreign currency is less expensive to Americans.
B) American goods are less expensive to foreigners.
C) foreign goods are less expensive to Americans.
D) the dollar is less expensive to foreigners.
E) none of the above

28) America's largest trading partner is: 28) ______

A) Germany.
B) Mexico.
C) Japan.
D) France
E) none of the above

29) For this question, assume the interest parity conditions holds. Also assume that the domestic 29) ______
interest rate is 5% and that the foreign interest rate is 9%. Given this information, we would
expect that:
A) the domestic currency is expected to appreciate by 4%.
B) the domestic currency is expected to depreciate by 4%.
C) individuals will only hold domestic bonds.
D) individuals will only hold foreign bonds.

30) In 2003, exports or imports as a percentage of GDP for the United States are approximately: 30) ______
A) between 1% and 5%.
B) between 10% and 20%.
C) between 20% and 40%.
D) between 40% and 75%.
E) between 75% and 90%.
 1) C

2) E

3) C

4) D

5) D

6) E

7) C

8) A

9) C

10) E

11) E

12) A

13) C

14) D

15) D

16) A

17) D

18) D

19) D

20) B

21) D

22) C

23) B

24) C

25) B

26) B
27) C

28) E

29) A

30) B