University of the Philippines

SCHOOL OF ECONOMICS

Economics 190.2
Monetary, fiscal, and development policy

N. B. Del Castillo 2nd Semester AY 2017-2018

PROBLEM SET # 1

GENERAL INSTRUCTIONS: Answer the following items on yellow sheet/s of paper and submit it on
Thursday, March 8, 2018, 11: 30 AM at SE 127. Don’t forget to write your name, section and the date
of submission on your answer sheets.

I. Choose the letter of the best answer. Each item is equivalent to 1 point.

1. Financial markets promote economic efficiency by

a. channeling funds from investors to savers.
b. creating inflation.
c. channeling funds from savers to investors.
d. reducing investment.
e. None of the above.

2. Everything else held constant, a decline in interest rates will cause spending on housing to
a. fall. c. remain unchanged.
b. rise. d. either rise, fall, or remain unchanged.

3. High interest rates might ___ purchasing a house or car but at the same time high interest rates
might ___ saving.
a. discourage; encourage c. encourage; encourage
b. discourage; discourage d. encourage; discourage
e. Interest rates do not have an impact on consumption behavior.

4. Which of the following is most likely to result from a stronger dollar?

a. U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy
more of them.
b. U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy
more of them.
c. U.S. goods exported abroad will cost more in foreign countries, and so foreigners will
buy fewer of them.
d. Americans will purchase fewer foreign goods.
e. None of the above.

5. Money is
a. anything that is generally accepted in payment for goods and services or in the repayment
of debt.
b. a flow of earnings per unit of time.
c. the total collection of pieces of property that are a store of value.
d. always based on a precious metal like gold or silver.
e. None of the above.
 6. Which of the following statements uses the economistsʹ definition of money?
a. I plan to earn a lot of money over the summer.
b. Betsy is rich – she has a lot of money.
c. I hope that I have enough money to buy my lunch today.
d. The job with New Company gave me the opportunity to earn more money.
e. None of the above.

7. Economists consider the ___ to be the most accurate measure of interest rates.
a. simple interest rate c. yield to maturity
b. current yield d. real interest rate
e. None of the above.

8. According to the liquidity preference theory, the demand for money is ___ related to aggregate
output and ___ related to interest rates.
a. negatively; negatively c. positively; negatively
b. negatively; positively d. positively; positively

9. According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per
pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate
between the Colombian peso and the Brazilian real is:
a. 40 pesos per real. c. 25 pesos per real.
b. 100 pesos per real. d. 0.4 pesos per real.

10. Karl decided to purchase a 400-sq. meter lot in Laguna for P6 million in 2010 because he knows
that the price will only get higher in the future. True enough, the lot he bought is now worth P10
million. His purchase of the lot is an example of the ___ function of money.
money.
a. medium of exchange c. store of value
b. unit of account d. specialization
e. None of the above.

II. Perform as indicated.

1. The government has several policy tools to use in addressing an economic recession. But
in the presence of a liquidity trap, Former US Federal Reserve Chair Ben Bernanke
suggests a substantial devaluation of the currency. Explain what liquidity trap is, then
explain how currency devaluation can address liquidity trap. (5 pts.)

2. What will happen to the value of the US dollar against the Euro if the European Central
Bank decides to pursue an expansionary policy? (5 pts.)