Test Resueltos MAcro

EXERCISES TOPIC 3
Multiple choice
1.-In the income-expenditure model, if there is an increase in any component of autonomous

spending, the expenditure multiplier indicates:
a) That production will increase by more than the increase in autonomous spending because
the marginal propensity to consume and firms’ sales will both increase.
b) That production will increase by more than the increase in autonomous spending because
households’ saving will decrease and firms’ sales will increase.
c) That production will increase by more than the increase in autonomous spending because
of the expansionary effect of greater tax collection
d) That production will increase by more than the increase in autonomous spending because
of the expansionary effect on disposable income and private (household) consumption.
2.- In the income-expenditure model, the variations in production and income caused by an increase
in autonomous spending will be larger:
a) When the marginal propensity to save is larger.

b) When tax rates are lower.
c) When the marginal propensity to consume is lower
d) a) and c) are correct.
3.- When describing equilibrium in the goods market, which of the following variables are
exogenous?
a) Consumption.
b) Disposable income.
c) Saving.
d) None of the above.
4.- Which of the following would cause the multiplier to fall?
a) A fall in transfers from the public sector to households.

b) A rise in the marginal propensity to save.
c) An increase in taxes, assuming taxes are lump-sum (i.e., fixed).
d) A fall in government spending.
5.-If the marginal propensity to consume is 0.7, this implies that:
a) An increase in disposable income of €1m would increase consumption by €700,000.

b) The marginal propensity to save is 0.3.
c) The expenditure multiplier with lump-sum taxes is 10/3.
d) All of the above.
6.- In an economy defined by the income-expenditure model with proportional taxes (𝑇𝑇 = 𝑡𝑡 𝑌𝑌), if
autonomous investment falls by €100m and the government decides to apply an expansionary fiscal
policy consisting of an increase of €100m in government spending:
a) Equilibrium output and income will not change, and the budget deficit will increase.
b) Equilibrium output and income will increase because the expansionary fiscal policy will
cause output to rise.
c) Output will not change, and private consumption will fall by the same amount as the increase
in government spending (i.e., €100m).
d) Private and public saving will fall by the same amount as the fall in investment (i.e., €100m).
7.- In an economy defined by the income-expenditure model with proportional taxes (𝑇𝑇 = 𝑡𝑡 𝑌𝑌), if
the government increases unemployment benefits by €100m while simultaneously reducing
government expenditure by the same amount:
a) The budget balance will not change as the policy is balanced.

b) The budget balance falls because government revenue falls.
c) We do not know what will happen to the budget balance (it could rise, fall or remain the
same).
d) The budget balance rises because government revenue rises.
8.- Automatic stabilisers:
a) Substitute private investment with public investment during periods of economic growth.
b) Magnify the response of income for given changes in aggregate demand.
c) Provoke automatic changes in public expenditure and revenue depending on the level of
economic activity.
d) Increase taxes during economic downturns.
9.-An expansionary fiscal policy could consist of:
a) A reduction in taxes.
b) An increase in government spending.
c) An increase in transfers.
d) All of the above.
10.- In the income-expenditure model, an increase in the marginal propensity to save will lead in the
short run to:
a) A decrease in private saving and investment.

b) A decrease in private consumption and equilibrium output.
c) A decrease in equilibrium output without changing the components of aggregate demand.
d) A decrease in private consumption and a decrease in total savings in the economy.
Exercises
1.- In an economy defined by the income-expenditure model with proportional taxes, explain the
consequences for equilibrium income of:
a) A fall in the marginal propensity to save.
b) An increase in the tax rate.
c) A worsening of business confidence (i.e., firms are more pessimistic about the future).
d) An increase in the budget deficit.
2.- In the absence of any government intervention in the economy, provide a possible reason for a
fall equilibrium income. Propose a fiscal policy to avoid the decrease in income.
3.- What would happen to equilibrium income if the government decided to finance transfers by
increasing taxes by the same amount of money. Would things change if the government decided to
finance the increase in transfers by reducing government spending by the same amount?
4.- In an economy defined by the income-expenditure model. The marginal propensity to save is 0.2
and taxes are lump-sum. What is the change in equilibrium income caused by a unit change in
government spending, taxes and transfers? How would this change if taxes were proportional and
with a rate t = 0.25?
5.- You are given the following equations for a closed economy:
𝑆𝑆 = −100 + 0.25𝑌𝑌𝐷𝐷
𝐼𝐼 = 700
𝑇𝑇 = 400
𝐺𝐺 = 1,000
Write down the consumption function. Determine the equilibrium income and the values of saving
and consumption. If the marginal propensity to save changed to 0.4, find the new values for income,
saving and consumption.
S:
C=100+0,75 YD
Y=6.000 S=1.300 C=4.300
Y=3.900 S=1.300 C=2.200
𝐶𝐶 = 500 + 0 .75 𝑌𝑌𝑌𝑌
𝐼𝐼 = 800
𝐺𝐺 = 2,000
𝑇𝑇 = 400
Calculate equilibrium income and the value of the multiplier. What would happen if government
spending rose by €200? What would happen if, along with the change in government spending, there
was also an increase in taxes of €200?
S:
α=4 Y=12.000 Y´=12.800 Y’’=12.200
𝐶𝐶 = 1.000 + 0.8𝑌𝑌𝑌𝑌
𝐼𝐼 = 2.000
𝑡𝑡 = 0.25
𝐺𝐺 = 2,000
a) Find initial equilibrium income and the value of the multiplier. What would happen income
if government spending fell by €500?
b) Assume that, on top of the fall in government spending, there was an increase in transfers of
€500. Determine the new equilibrium income. What is the variation in income with respect
to its initial level? Calculate the transfer multiplier and explain the results.
S:
Y=12.500 Y´=11.250 (α=2,5)
Y=13.500
8.- In an economy defined by the income-expenditure model with proportional taxes:

𝐶𝐶 = 200 + 0.8 · 𝑌𝑌𝑑𝑑
𝐼𝐼 = 100
𝐺𝐺 = 250
𝑡𝑡 = 0.1
𝑇𝑇𝑇𝑇 = 100
a) Beginning from a situation of equilibrium, the government decides to apply a restrictive
(contractionary) fiscal policy consisting of an increase in the tax rate to 20%. Analyse the
effect this policy would have on the different components of aggregate demand (including
the public sector budget balance) and the output level of the economy.
b) What will the effect of this policy be on the public sector budget balance?
c)
S:
Y=2.250 α= 3,6 Yd =2.125 C=1.900 S=225 DP=125
Y=1.750 α= 2,8 Yd =1.500 C=1.400 S=100 DP=0
TOPIC 4 – FINANCIAL MARKETS
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following is NOT a characteristic of bonds? 1) _______

A) pay zero interest
B) are sold for a price that varies inversely with the interest rate
C) cannot be used for transactions
D) all of the above
E) none of the above
2) Which of the following is a stock variable? 2) _______

A) money
B) saving
C) income
D) all of the above
3) Which of the following is NOT included as a component of money? 3) _______

A) saving
B) reserves
C) bonds
D) income
E) all of the above
4) Which of the following is a NOT component of money? 4) _______

A) coins and bills held by banks
B) checkable deposits
C) coins and bills held by the nonbank public
D) none of the above
5) We know that the amount of money that individuals want to hold will: 5) _______
A) increase as the interest rate increases. B) increase as income decreases.
C) decrease as the interest rate increases. D) none of the above
6) Which of the following will cause a rightward shift in the money demand curve? 6) _______
A) a reduction in income
B) an increase in the money supply
C) a reduction in the interest rate
D) all of the above
7) Which of the following will cause a leftward shift in the money demand curve? 7) _______
A) an open market sale of bonds by the central bank
B) an increase in the interest rate
C) a reduction in income
D) a reduction in the interest rate
8) Which of the following is NOT included as a component of the M1 definition of money? 8) _______
A) bonds
B) coins and bills held by the nonbank public
C) checkable deposits
D) all of the above
9) At the current interest rate, suppose the supply of money is greater than the demand for money. 9) ______
Given this information, we know that:
A) the goods market is also in equilibrium.
B) the supply of bonds also equals the demand for bonds.
C) the price of bonds will tend to fall.
D) production equals demand.
E) the price of bonds will tend increase.
10) The interest rate will decrease as a result of which of the following events? 10) ______
A) an open market purchase of bonds by the central bank
B) an decrease in income
C) an increase in income
D) all of the above
11) Which of the following is a liability on a bank's balance sheet? 11) ______
A) Checkable deposits
B) Loans
C) Reserves
D) all of the above
12) Which of the following is a liability for the central bank? 12) ______
A) bonds
B) currency
C) checkable deposits
D) savings accounts
E) loans
13) Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950. 13) ______
Given this information, we know that the interest rate on the bond is:
A) 5.3%. B) 9.5%. C) 10%. D) 90%. E) 110%.
14) Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% 14) ______
interest rate. Given this information, we know that the bond's price must be:
A) $1150.
B) $850.
C) $869.56.
D) $950.
15) Which of the following generally occurs when a central bank pursues expansionary monetary 15) ______
policy?
A) the central bank purchases bonds and the interest rate decreases
B) the central bank sells bonds and the interest rate increases
C) the central bank purchases bonds and the interest rate increases
D) the central bank sells bonds and the interest rate decreases
16) Which of the following generally occurs when a central bank pursues contractionary monetary 16) ______
policy?
A) the central bank purchases bonds and the interest rate increases
B) the central bank sells bonds and the interest rate decreases
C) the central bank purchases bonds and the interest rate decreases
D) the central bank sells bonds and the interest rate increases
17) Which of the following is a component of high powered money? 17) ______
A) the sum of currency in circulation, bank reserves, and checkable deposits
B) currency in circulation plus bank reserves
C) bonds held by banks, loans, and bank reserves
D) currency in circulation plus checkable deposits
E) bonds held by banks plus checkable deposits
18) For this question, assume that individuals do NOT hold currency (i.e., c = 0). If the ratio of 18) ______
reserves to deposits is .20, the money multiplier is:
A) .2. B) 1.25. C) 4. D) 5. E) 10.
19) Which of the following events will most likely cause an increase in the money supply? 19) ______
A) a decrease in the ratio of reserves to deposits
B) a central bank sale of bonds
C) a shift in public preferences away from checkable deposits toward currency
D) all of the above
20) Which of the following events will cause the interest rate to increase? 20) ______
A) an increase in income
B) an open market sale of bonds
C) an increase in the reserve deposit ratio (i.e., q)
D) all of the above
21) The federal funds rate is determined in which of the following markets? 21) ______
A) the bond market B) the market for central bank money
C) the market for reserves D) the money market
22) For this question, assume that individuals do NOT hold currency (i.e., c = 0). The money 22) ______
multiplier is equal to:
A) 1.
B) 1/(1- θ).
C) θ.
D) 1/(1 - c).
23) For this question, assume that individuals do NOT hold currency (i.e., c = 0). The money 23) ______
A) 1/[c + θ(1-c)].
B) 1/θ.
C) [c + θ(1-c)].
D) 1/(1-c).
24) For this question, assume that individuals hold both currency and checkable deposits. The money 24) ______
A) [c + θ(1-c)].
B) 1/[c + θ(1-c)].
C) 1/(1-c).
D) 1/c.
E) 1/θ.
25) We would expect which of the following to occur when the central bank pursues expansionary 25) ______
monetary policy?
A) an increase in bond prices and an increase in the interest rate (i)
B) a reduction in bond prices and an increase in i
C) an increase in bond prices and a reduction in i
D) a reduction in bond prices and a reduction in i
26) We would expect which of the following to occur when the central bank pursues contractionary 26) ______
monetary policy?
27) Based on our understanding of the determinants of the interest rate and bond prices, we know 27) ______
that a reduction in income will cause:
28) We would expect which of the following to occur when the central bank conducts an open 28) ______
market sale of bonds?
A) an increase in the money multiplier
B) a reduction in the monetary base (H)
C) an increase in H
D) a reduction in the money multiplier
E) both C and D
29) We would expect which of the following to occur when the central bank conducts an open 29) ______
market purchase of bonds?
A) a reduction in the monetary base (H) B) a reduction in the money multiplier
C) an increase in the money supply D) an increase in the money multiplier
30) An increase in the reserve ratio, q, will cause: 30) ______

A) an increase in the money multiplier.
B) an increase in the monetary base (H).
C) a reduction in the money multiplier.
D) a reduction in H.
31) A reduction in the reserve ratio, q, will cause: 31) ______

A) a reduction in H and a reduction in the money multiplier.
B) an increase in the monetary base (H).
C) an increase in the money multiplier.
D) a reduction in the money multiplier.
32) An increase in the parameter c, the proportion of money individuals wish to hold as currency, 32) ______
will tend to cause which of the following?
A) a reduction in H B) an increase in the monetary base (H)
C) a reduction in the money multiplier D) an increase in the money multiplier
33) A reduction in the parameter c, the proportion of money individuals wish to hold as currency, 33) ______
will tend to cause which of the following?
A) an increase in the monetary base (H) B) a reduction in the money multiplier
C) a reduction in H D) an increase in the money multiplier
34) An increase in income will tend to cause which of the following? 34) ______
A) an increase in the interest rate
B) a reduction in H
C) an increase in the monetary base (H)
D) a reduction in the money multiplier
35) If individuals do not hold currency, we know that: 35) ______

A) H = R. B) the money multiplier is 1/q.
C) M = D. D) all of the above
36) If individuals do not hold checkable deposits, we know that: 36) ______
A) M = CU. B) the money multiplier is 1.
C) H = CU. D) all of the above
37) An increase in the interest rate will cause: 37) ______

A) a reduction in the supply of central bank money.
B) a reduction in the demand for reserves.
C) a reduction in the demand for currency.
D) all of the above
E) both B and C
38) An increase in income will cause: 38) ______

A) a reduction in the demand for reserves.
B) a reduction in the supply of central bank money.
C) a reduction in the demand for currency.
E) both B and C
39) An increase in income will cause: 39) ______

A) an increase in the demand for reserves.
B) a reduction in the demand for currency.
C) a reduction in the supply of central bank money.
40) An open market sale of securities will tend to cause: 40) ______
A) a reduction in the demand for currency.
B) a reduction in the supply of central bank money.
C) a reduction in the demand for reserves.
ANSWERS
1) A
2) A
3) E
4) A
5) C
6) E
7) C
8) E
9) A
10) C
9) E
10) A
13) D
11) A
12) B
13) A
14) C
18) D
15) A
16) D
21) E
17) B
18) D
24) D
19) A
20) D
21) C
22) E
23) E
24) B
25) C
26) B
27) C
28) B
29) C
36) C
30) C
31) C
32) C
33) D
34) A
35) D
36) D
37) E
38) D
39) A
40) B
CHAPTER 5 – GOODS AND FINANCIAL MARKETS: THE IS-LM MODEL
1) Which of the following is the correct definition of the IS curve? 1) _______

A) The IS curve represents the combinations of output and the interest rate where the goods
market is in equilibrium.
B) The IS curve represents the single level of output where the goods market is in equilibrium.
C) The IS curve represents the single level of output where financial markets are in equilibrium.
D) The IS curve represents the combinations of output and the interest rate where the money
market is in equilibrium.
2) Which of the following will cause a shift of the IS curve? 2) _______

A) an increase in taxes
B) an increase in government spending
C) an increase in consumer confidence
D) all of the above
3) Which of the following statements is consistent with a given (i.e., fixed) IS curve? 3) _______
A) A reduction in the interest rate causes investment spending to increase.
B) An increase in government spending causes an increase in demand for goods.
C) An increase in taxes causes a reduction in demand for goods.
D) A reduction in the interest rate causes an increase in the money supply.
E) A reduction in the interest rate causes money demand to decrease.
4) Which of the following is true for a given point on the LM curve? 4) _______
A) No inventory investment equals zero.
B) Production is equal to demand.
C) The goods market is in equilibrium.
D) all of the above
5) Which of the following will cause a shift in the LM curve? 5) _______

A) an open market purchase of bonds
B) an increase in consumer confidence
C) a reduction in taxes
D) an increase in output
E) all of the above
6) Which of the following statements is consistent with a given (i.e., fixed) LM curve? 6) _______
A) An increase in output causes an increase in money demand.
B) A reduction in the interest rate causes money demand to decrease.
C) An increase in output causes an increase in demand for goods.
D) A reduction in the interest rate causes an increase in the money supply.
E) A reduction in the interest rate causes investment spending to increase.
7) Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the 7) _______
following is true for this economy?
A) Production equals demand.
B) The quantity supplied of bonds equals the quantity demanded of bonds.
C) Financial markets are in equilibrium.
D) The money supply equals money demand.
E) all of the above
8) Suppose the economy is operating on the LM curve but not on the IS curve. Given this 8) _______
information, we know that:
A) the money market and bond markets are in equilibrium and the goods market is not in
equilibrium.
B) neither the money, bond, nor goods markets are in equilibrium.
C) the goods market is in equilibrium and the money market is not in equilibrium.
D) the money, bond and goods markets are all in equilibrium.
E) the money market and goods market are in equilibrium and the bond market is not in
equilibrium.
9) Suppose the current level of output and the interest rate are such that the economy is operating on 9) _______
neither the IS nor LM curve. Which of the following is true for this economy?
A) The quantity supplied of bonds does not equal the quantity demanded of bonds.
B) Production does not equal demand.
C) Financial markets are not in equilibrium.
D) The money supply does not equal money demand.
E) all of the above
10) Which of the following will occur if there is a reduction in consumer confidence? 10) ______
A) The LM curve will shift up.
B) The IS curve will shift rightward.
C) The IS curve will shift leftward.
D) The LM curve will shift down.
E) The IS curve will shift rightward, and the LM curve will shift up.
11) Which of the following will occur if there is an increase in taxes? 11) ______
A) The IS curve shifts and the economy moves along the LM curve.
B) Both the IS and LM curves shift.
C) Output will change causing a change in money demand and a shift of the LM curve.
D) Neither the IS nor the LM curve shifts.
E) The LM curve shifts and the economy moves along the IS curve.
12) Suppose the central bank decides to conduct an open market purchase of bonds. Which of the 12) ______
following will occur as a result of this monetary policy action?
A) The LM curve shifts down.
B) The IS curve shifts rightward as the interest rate falls.
C) The IS curve shifts leftward as the interest rate increases.
D) The LM curve shifts up.
13) Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on 13) ______
the IS-LM model, we know with certainty that the following will occur as a result of this fiscal
policy action.
A) Investment spending will increase.
B) Investment spending will decrease.
C) There will be no change in investment spending.
D) Investment spending may increase, decrease, or not change.
14) For this question, assume that investment spending depends only on the interest rate and no longer 14) ______
depends on output. Given this information, an increase in government spending:
A) may cause investment to increase or to decrease.
B) will have no effect on output.
C) will cause an increase in output and have no effect on the interest rate.
D) will cause investment to increase.
E) will cause investment to decrease.
15) Suppose investment spending is NOT very sensitive to the interest rate. Given this information, we 15) ______
know that:
A) the LM curve should be relatively steep.
B) the LM curve should be relatively flat.
C) neither the IS nor the LM curve will be affected.
D) the IS curve should be relatively steep.
E) the IS curve should be relatively flat.
16) Suppose the demand for money is NOT very sensitive to the interest rate. Given this information, 16) ______
we know that:
A) the LM curve should be relatively flat.
B) neither the IS nor the LM curve will be affected.
C) the IS curve should be relatively flat.
D) the IS curve should be relatively steep.
E) the LM curve should be relatively steep.
17) Which of the following is the definition for the real supply of money? 17) ______
A) the stock of money measured in terms of goods, not dollars
B) the ratio of the real GDP to the nominal money supply
C) the actual quantity of money, rather than the officially reported quantity
D) the real value of currency in circulation only
E) the stock of high powered money only
18) A reduction in the money supply will cause a reduction in which of the following variables? 18) ______
A) consumption
B) investment
C) output
D) all of the above
19) Suppose there is an increase in consumer confidence. Which of the following represents the 19) ______
complete list of variables that must increase in response to this increase in consumer confidence?
A) consumption and output
B) consumption, investment and output
C) consumption
D) consumption and investment
E) consumption, output and the interest rate
20) Suppose there is a fiscal contraction. Which of the following is a complete list of the variables that 20) ______
must decrease?
A) consumption, output and the interest rate
B) consumption and investment
C) consumption, output and investment
D) consumption
E) consumption and output
21) Suppose there is a simultaneous tax cut and open market purchase of bonds. Which of the 21) ______
following must occur as a result of this?
A) the interest rate decreases
B) both output and the interest rate increase
C) output decreases
D) the interest rate increases
E) output increases
22) Suppose there is a simultaneous tax increase and open market purchase of bonds. Which of the 22) ______
following must occur as a result of this?
A) output increases
B) output decreases
C) the interest rate decreases
D) both output and the interest rate increase
E) the interest rate increases
23) For this question, assume that investment spending depends only on output and no longer depends 23) ______
on the interest rate. Given this information, an increase in government spending:
A) will cause investment to increase.
B) may cause investment to increase or to decrease.
C) will have no effect on output.
D) will cause an increase in output and have no effect on the interest rate.
24) A reasonable dynamic assumption for the IS-LM model is that: 24) ______
A) the economy is always on the LM curve, but moves only slowly to the IS curve.
B) the economy is always on both the IS and LM curves.
C) the economy is always on the IS curve, but moves only slowly to the LM curve.
D) the money market is quick to adjust, but the bond market adjusts more slowly.
E) adjustment to the new IS-LM equilibrium is instantaneous after an LM shift, but not after an
IS shift.
25) Under the reasonable dynamic assumptions discussed in the text, a monetary contraction should 25) ______
result in:
A) no change in the interest rate initially, and then a sudden rise to its new equilibrium value.
B) an immediate rise in the interest rate, and no further interest rate changes.
C) an immediate rise in the interest rate, and then a further rise over time.
D) an immediate rise in the interest rate, and then a fall in the interest rate over time.
E) a very gradual but steady rise in the interest rate to its new equilibrium level.
26) For this question, assume that investment spending depends only on the interest rate and no longer 26) ______
depends on output. Given this information, a reduction in the money supply:
A) will have no effect on output.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will cause investment to decrease.
E) will cause a reduction in output and have no effect on the interest rate.
27) Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that 27) ______
this combination of policies must cause:
A) an increase in the interest rate (i). B) a reduction in i.
C) an increase in output (Y). D) a reduction in Y.
28) Suppose there is a simultaneous Fed sale of bonds and increase in government spending. We know 28) ______
with certainty that this combination of policies must cause:
29) Suppose there is a simultaneous central bank purchase of bonds and increase in taxes. We know 29) ______
with certainty that this combination of policies must cause:
30) Suppose there is a simultaneous central bank sale of bonds and tax increase. We know with 30) ______
certainty that this combination of policies must cause:
31) We know with certainty that a tax increase must cause which of the following? 31) ______
A) an increase in investment B) no change in investment
C) a reduction in investment D) none of the above
32) We know with certainty that a tax increase must cause which of the following? 32) ______
A) an increase in the interest rate and an upward shift in the LM curve
B) no change in output if the Fed simultaneously pursues expansionary monetary policy
C) an increase in the interest rate and a reduction in investment
D) an increase in the interest rate and an ambiguous effect on investment
33) An increase in the money supply must cause which of the following? 33) ______
A) a leftward shift in the IS curve
B) no change in the interest rate if investment is independent of the interest rate
C) no change in output if investment is independent of the interest rate
D) a reduction in the interest rate and ambiguous effects on investment
E) an increase in investment and a rightward shift in the IS curve
34) A reduction in government spending will cause: 34) ______

A) a rightward shift in the IS curve. B) an upward shift in the LM curve.
C) a leftward shift in the IS curve. D) a downward shift in the LM curve.
35) Assume that investment does NOT depend on the interest rate. A reduction in government 35) ______
spending will cause which of the following for this economy?
A) no change in the interest rate
B) an increase in investment
C) no change in output
D) no change in investment
36) Assume that investment does NOT depend on the interest rate. A reduction in the money supply 36) ______
will cause which of the following for this economy?
A) no change in the interest rate B) no change in output
C) an increase in investment D) a reduction in investment
37) For this question, assume that investment spending depends only on output and no longer depends 37) ______
on the interest rate. Given this information, an increase in the money supply:
A) will have no effect on output or the interest rate.
B) will cause a reduction in the interest rate.
C) will cause investment to increase.
D) will cause an increase in output and have no effect on the interest rate.
38) A reduction in consumer confidence will likely have which of the following effects? 38) ______
A) a rightward shift in the IS curve B) a leftward shift in the IS curve
C) an upward shift in the LM curve D) a downward shift in the LM curve
39) An increase in the reserve deposit ratio, q, will most likely have which of the following effects? 39) ______
40) A Fed purchase of securities will most likely have which of the following effects? 40) ______
41) A reduction in the aggregate price level, P, will most likely have which of the following effects? 41) ______
42) An increase in the aggregate price level, P, will most likely have which of the following effects? 42) ______
43) The IS curve will NOT shift when which of the following occurs? 43) ______
A) a reduction in government spending
B) a reduction in consumer confidence
C) a reduction in the interest rate
D) all of the above
44) Which of the following best defines the IS curve? 44) ______
A) the combinations of i and Y that maintain equilibrium in the goods market
B) the combinations of i and Y that maintain equilibrium in financial markets
C) illustrates the effects of changes in i on desired money holdings by individuals
D) illustrates the effects of changes in i on investment
45) Which of the following best defines the LM curve? 45) ______
A) the combinations of i and Y that maintain equilibrium in financial markets
B) the combinations of i and Y that maintain equilibrium in the goods market
C) illustrates the effects of changes in i on investment
D) illustrates the effects of changes in i on desired money holdings by individuals
46) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a 46) ______
reduction in the money supply will cause:
A) an immediate increase in i and no initial change in Y.
B) an immediate drop in Y and immediate increase in i.
C) a gradual increase in i and gradual reduction in Y.
47) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a 47) ______
reduction in government spending will cause:
A) a gradual reduction in i and gradual reduction in Y.
B) an immediate reduction in i and no initial change in Y.
C) a gradual reduction in i and an immediate reduction in Y.
D) an immediate drop in Y and immediate increase in i.
ANSWERS
1) A
2) D
3) A
4) E
5) A
6) A
7) E
8) A
9) E
10) B
11) A
12) A
13) D
14) E
15) D
16) E
17) A
18) D
19) E
20) E
21) E
22) C
23) A
24) A
25) D
26) D
27) C
28) A
29) B
30) D
31) D
32) D
33) C
34) C
35) E
36) B
37) B
38) B
39) C
40) D
41) D
42) C
43) C
44) A
45) A
46) A
47) A
TOPIC 6 - OPENNESS IN GOODS AND FINANCIAL MARKETS
1) The ratio of a country's exports to its GDP must: 1) _______

A) be less than one.
B) be greater than one.
C) equal the ratio of imports to GDP.
D) be larger than the ratio of imports to GDP.
2) Which of the following best defines the real exchange rate? 2) _______
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 domestic goods in terms of foreign goods
D) the price of foreign bonds in terms of domestic bonds
3) Which of the following, all else fixed, will cause the real exchange rate to decrease? 3) _______
A) a decrease in E
B) an increase in the domestic price level
C) a reduction in the foreign price level
D) all of the above
4) When the dollar appreciates, we know that: 4) _______

A) American goods are less expensive to foreigners.
B) foreign goods are less expensive to Americans.
C) the dollar is less expensive to foreigners.
D) foreign currency is less expensive to Americans.
5) When the dollar depreciates relative to the pound, the pound price of the dollar: 5) _______
A) changes in the next period.
B) decreases.
C) increases or decreases, depending on the amount of the depreciation.
D) does not change.
E) increases.
6) Suppose there is a real appreciation of the dollar. Which of the following may have occurred? 6) _______
A) Foreign currency has become less expensive in dollars.
B) The foreign price level has increased relative to the U.S. price level.
C) Foreign goods have become more expensive to Americans.
D) all of the above
7) Suppose that over the past decade, U.S. inflation is greater than that in Japan. Further assume that 7) ______
during this same period, the dollar appreciates relative to the Japanese yen. Given this information:
A) the real exchange rate must decrease.
B) the real exchange rate remains unchanged.
C) the real exchange rate can increase or remain the same, but not decrease.
D) the real exchange rate can decrease or remain the same, but not increase.
E) the real exchange rate must increase.
8) Because the U.S. traditionally gives more foreign aid than it receives, the U.S. traditionally has a 8) ______
negative value for:
A) the trade balance.
B) the capital account balance.
C) investment income.
D) net transfers received.
E) all of the above
9) When the U.S. has a current account surplus, we know that it is also: 9) ______
A) running a balanced trade account.
B) borrowing from the rest of the world.
C) suffering from negative investment income.
D) lending to the rest of the world.
10) The difference between net capital flows and the current account deficit is called the: 10) ______
0A) missing number.
B) international error.
C) statistical discrepancy.
D) capital account surplus.
E) capital account deficit.
11) In a country like Saudi Arabia, which earns substantial income from holding the stocks and bonds 11) ______
of other countries, we would expect:
A) GDP to be larger than GNP.
B) a current account surplus larger than GDP.
C) GNP to be larger than GDP.
D) a current account surplus larger than GNP.
E) a current account deficit.
12) If the exchange rate between the dollar and the pound (the pound price of the dollar) is currently 12) ______
1.50, and is expected to be 1.65 in one year, then the expected rate of:
A) appreciation of the dollar is 15%.
B) appreciation of the dollar is 10%.
C) depreciation of the dollar is 15%.
D) depreciation of the dollar is 10%.
13) Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate 13) ______
is greater than the U.K. interest rate. Given this information, we know that investors expect:
A) the dollar-pound exchange rate to remain fixed.
B) the U.S. interest rate to fall.
C) the pound to depreciate.
D) the pound to appreciate.
14) Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected to 14) ______
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.
15) Suppose two countries make a credible commitment to fix their bilateral exchange rate. In such a 15) ______
situation, we know that:
A) each country can freely allow its interest rate to diverge from that of the other country.
B) the real exchange rate must be constant as well.
C) the interest rate in the two countries must be equal.
D) neither country will run a trade deficit.
E) the uncovered interest parity condition no longer holds.
16) 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 16) ______
dollar, then the real exchange rate between the U.S. and Japan is:
A) 50. B) 200. C) 20. D) 2. E) 5.
17) Year-to-year movements in real exchange rates between industrialized countries like the U.S. and 17) ______
Canada are caused mostly by:
A) changes in relative rates of inflation.
B) changes in quotas or tariffs.
C) changes in relative growth rates of output.
D) changes in nominal exchange rates.
E) changes in capital controls.
18) Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year 18) ______
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) greater than 5%.
C) less than 2%.
D) greater than 2%.
E) less than 5%.
19) The nominal exchange rate (E) as defined in the text represents: 19) ______
A) the number of units of foreign currency you can obtain with one unit of domestic currency.
B) the number of units of domestic goods you can obtain with one unit of foreign goods.
C) the price of domestic currency in terms of foreign currency.
E) both A and C
20) Suppose E increases by 4%. Which of the following will have occurred as a result of this increase 20) ______
in E?
A) real depreciation if P also increases by 4%
B) real appreciation if P decreases by 4%
C) nominal depreciation
D) nominal appreciation
21) Suppose E decreases by 2%. Which of the following will have occurred as a result of this reduction 21) ______
in E?
A) nominal appreciation B) real depreciation if P increases by 2%
C) nominal depreciation D) real appreciation if P also falls by 2%
22) A nominal depreciation of the Mexican peso (against all currencies) indicates that: 22) ______
A) the Mexican real exchange rate will not change if the price level in Mexico falls.
B) the peso price of foreign currency has fallen.
C) the peso price of, for example, the U.K. pound has increased.
D) the number of units of foreign currency that one can obtain with one peso has decreased.
23) A nominal appreciation of the Japanese yen (against all currencies) indicates that: 23) ______
A) the number of units of foreign currency that one can obtain with one yen has increased.
B) the yen price of the U.S. dollar has increased.
C) the yen price of the U.K. pound has increased.
D) all of the above
24) Which of the following expressions represents the real exchange rate (ε)? 24) ______
A) EP*/P
B) E
C) EP*
D) E/P
25) Which of the following expressions represents the dollar price of foreign currency? 25 ______
A) EP/P*
B) EP*/P
C) 1/E
D) E
26) Assume that the nominal exchange rate decreases by 4%. If prices (both domestic and foreign do 26) ______
not change), we know that:
A) foreign goods are now relatively more expensive.
B) domestic goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both A and C
27) Assume that the nominal exchange rate increases by 2%. If prices (both domestic and foreign do 27) ______
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
28) A reduction in the real exchange rate indicates that: 28) ______
A) domestic goods are now relatively more expensive.
C) foreign goods are now relatively more expensive.
D) both A and C
29) An increase in the real exchange rate indicates that: 29) ______
A) domestic goods are now relatively cheaper.
C) domestic goods are now relatively more expensive.
D) both B and C
30) Which of the following will cause a real appreciation? 30) ______
A) a decrease in P B) a reduction in E
C) a reduction in P* D) none of the above
31) Which of the following will cause a real depreciation? 31) ______
A) an increase in P
B) a reduction in P*
C) a reduction in E
D) all of the above
32) Which of the following events will cause the smallest change in the real exchange rate (ε)? 32) ______
A) a 6% drop in E and a 6% reduction in P*
B) a 2% increase in E and a 2% increase in P
C) a 6% increase in the domestic price level (P) and a 6% reduction in P*
D) a 6% drop in E and a 6% increase in the foreign price level (P*)
E) a 3% increase in E
33) Which of the following events will cause the largest real depreciation for the domestic economy? 33) ______
A) a 6% reduction in E and a 6% reduction in P*
B) a 6% increase in the domestic price level (P) and a 6% reduction in P*
C) a 6% reduction in E and a 6% increase in the foreign price level (P*)
D) a 2% increase in E and a 2% increase in P
E) a 3% increase in E
34) Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in 34) ______
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) (1 + i*)Eet+1/Et
B) i
C) (1 + i*)Et/Eet+1
D) 1 + i*
35) Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in 35) ______
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*)Et/Eet+1
C) (1 + i*)Eet+1/Et
D) 1 + i*
36) Which of the following expressions represents the amount of foreign currency you can obtain with 36) ______
one U.S. dollar?
A) Eet+1
B) Et
C) εt
D) 1/ Eet+1
37) For this question, assume the interest parity conditions holds. Also assume that the domestic 37) ______
interest rate is 5% and that the foreign interest rate is 9%. Given this information, we would expect
that:
A) individuals will only hold domestic bonds.
B) the domestic currency is expected to appreciate by 4%.
C) the domestic currency is expected to depreciate by 4%.
D) individuals will only hold foreign bonds.
38) For this question, assume the interest parity conditions holds. Also assume that the domestic 38) ______
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 depreciate by 3%.
B) individuals will only hold foreign bonds.
C) the domestic currency is expected to appreciate by 3%.
D) individuals will only hold domestic bonds.
39) Assume the interest parity condition holds and that individuals expect the dollar to appreciate by 39) ______
5% during the coming year. Given this information, we know that:
A) i < i*.
B) the interest rate differential between the two countries is less than 5%.
C) individuals will only hold foreign bonds .
D) i = i*.
40) ______
40) Which of the following conditions will occur when two countries are engaged in a credible, fixed
exchange rate regime?
A) E > 1 B) E = 1 C) i = i* D) E < 1
41) For this question, assume that the domestic interest rate is 8% and that the foreign interest rate is 41) ______
6%. And finally, assume that the domestic currency is expected to depreciate by 3% during the
coming year. Given this information, we know that:
B) the interest parity condition holds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) individuals will only hold foreign bonds.
42) For this question, assume that the domestic interest rate is 6% and that the foreign interest rate 4%. 42) ______
And finally, assume that the domestic currency is expected to appreciate by 3% during the coming
year. Given this information, we know that:
A) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
43) For this question, suppose the domestic interest rate is 4% and that the foreign interest rate is 7%. 43) ______
And finally, assume that the domestic currency is expected to depreciate by 3% during the coming
year. Given this information, we know that:
C) individuals will only hold foreign bonds.
D) individuals will be indifferent about holding domestic or foreign bonds.
44) Suppose the domestic interest rate is 3% and that the foreign interest rate is 6%. And finally, 44) ______
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.
ANSWERS
(To be consulted AFTER you have attempted the questions!!)
1) E
2) C
3) A
4) B
5) B
6) A
7) E
8) D
9) D
10) C
11) C
12) C
13) D
14) C
15) C
16) B
17) D
18) C
19) E
20) D
21) C
22) C
23) D
24) E
25) C
26) A
27) D
28) C
29) D
30) C
31) C
32) A
33) C
34) C
35) D
36) B
37) B
38) A
39) A
40) C
41) D
42) D
43) C
44) D
TOPIC 6 (CONTINUED)- THE GOODS MARKET IN AN OPEN ECONOMY
1) Which of the following represents the demand for domestic goods? 1) _______
A) C + I + G + X - IM/ε
B) C + I + G + X
C) C + I + G + X + εIM
D) C + I + G
E) C + I + G - εIM
2) Which of the following represents the domestic demand for goods? 2) _______
A) C + I + G + X - εM/ε
B) C + I + G + X + εIM
C) C + I + G + X
D) C + I + G
E) C + I + G - IM/ε
3) The expression, IM, represents the value of imports in terms of: 3) _______
A) foreign currency.
B) exports.
C) domestic goods.
D) domestic currency.
E) foreign goods.
4) Which of the following would cause a reduction in the quantity of imports? 4) _______
A) an increase in domestic output
B) a reduction in the real exchange rate
C) an increase in foreign output
D) all of the above
5) Which of the following would cause an increase in exports? 5) _______

A) an increase in domestic output
C) a reduction in foreign output
D) all of the above
6) Which of the following occurs when the goods market is in equilibrium? 6) _______
A) Y equals the domestic demand for goods.
B) Domestic output (Y) equals the demand for domestic goods.
C) Y equals the domestic demand for domestic goods.
D) Demand for domestic goods equals the domestic demand for goods.
E) Net exports equals 0.
7) Suppose there is a reduction in taxes. In an open economy, a tax cut will cause: 7) _______
A) a reduction in net exports.
B) a reduction in domestic output.
C) a reduction in imports.
D) all of the above
8) Assume the domestic economy is an open economy. Which of the following will make the 8) _______
government spending multiplier smaller?
A) a reduction foreign output
B) an increase in the marginal propensity to consume
C) a reduction in the marginal propensity to import
D) all of the above
9) Suppose there is an increase in foreign output (Y*). This increase in Y* will cause which of the 9) _______
following in the domestic country?
A) an increase in net exports
B) an increase in consumption
C) an increase in output
D) all of the above
10) Which of the following will always cause a reduction in net exports? 10) ______
A) a decrease in the real exchange rate
B) an increase in domestic output
C) a reduction in government spending
D) a reduction in investment
E) all of the above
11) Assume the Marshall-Lerner condition holds. Which of the following will cause an increase in net 11) ______
exports?
A) a real depreciation
B) an increase in government spending
C) an increase in investment
D) a reduction in foreign output
E) all of the above
12) Suppose policy makers pass a budget that results in a tax cut. This tax cut will have a greater 12) ______
impact on net exports when:
A) the economy is closed.
B) the sensitivity of investment to income is smaller.
C) the marginal propensity to import is smaller.
D) all of the above
13) Which of the following will occur in a small country with a high marginal propensity to import? 13) ______
A) Changes in government spending will cause large changes in output.
B) A depreciation will cause only small changes in the trade balance.
C) Changes in government spending will cause large changes in the trade balance.
D) There is no combination of policies that can eliminate the trade deficit.
E) all of the above
14) Which of the following would make the spending multiplier smaller? 14) ______
A) a larger marginal propensity to import
B) a real depreciation
C) a marginal propensity to save
D) a real appreciation
E) a small initial trade deficit
15) For this question, assume the Marshal-Lerner condition holds. Which of the following would 15) ______
occur as a result of an increase in the real exchange rate?
A) an improvement of the trade balance
B) an increase in domestic output
C) a reduction in the quantity of imports
D) all of the above
16) Suppose there is a real appreciation. This real appreciation is more likely to cause a reduction in 16) ______
net exports when:
A) imports are not at all sensitive to price changes.
B) domestic output is relatively low.
C) foreign output is relatively high.
D) exports and imports are relatively sensitive to price changes.
E) the Marshall-Lerner condition does not hold.
17) For this question, assume that the J-curve effect exists. Which of the following will occur after a 17) ______
real appreciation?
A) The trade deficit will worsen temporarily before it improves.
B) The real exchange rate will rise temporarily before it falls.
C) The real exchange rate will fall temporarily before it rises.
D) The trade deficit will improve temporarily before it worsens.
18) The Marshall-Lerner condition is less likely to hold when: 18) ______
A) the trade deficit is large.
B) the marginal propensity to consume if very small.
C) imports and exports are very price-sensitive.
D) the marginal propensity to consume is very large.
19) The evidence suggests that in rich countries, a depreciation: 19) ______
A) has no effect on the trade balance.
B) eventually improves the trade balance.
C) first improves, but then worsens the trade balance.
D) immediately improves the trade balance.
20) A real depreciation will initially cause a reduction in output when which of the following holds? 20) ______
A) Net exports are initially negative.
B) Net exports are initially zero.
C) the J-Curve effect
D) the Marshall-Lerner condition
E) Net exports are initially positive.
21) Suppose that the rest of the world experiences a recession causing a reduction in foreign output 21) ______
(Y*). This reduction in Y* will NOT cause which of the following to occur?
A) the domestic country's trade balance to improve
B) the domestic country's consumption to decrease
C) the domestic country's output to decrease
D) all of the above
22) In an open economy, net exports will be equal to which of the following? 22) ______
A) T - G
B) Z
C) X - IM
D) S + T - G + I
E) DD
23) Assume that policy makers pass a budget that calls for an increase in government spending. In an 23) ______
open economy, which of the following will occur as a result of this fiscal policy action?
A) the trade balance worsens
B) private saving increases
C) investment decreases
D) either B or C occurs
E) either A, B, or C occurs
24) An open economy with a low saving rate (private and public) must have: 24) ______
A) low investment or a trade surplus.
B) a trade surplus only.
C) low investment or a trade deficit.
D) high investment only.
E) low investment only.
25) Policy coordination is difficult because each country: 25) ______

A) prefers to be the one to increase demand.
B) prefers to be the one to appreciate its currency.
C) prefers that other countries increase taxes.
D) prefers to be the one to increase taxes.
E) prefers that other countries increase their demand.
26) Which of the following conditions must be satisfied for the demand for domestic goods to be equal 26) ______
to the domestic demand for goods?
A) S = I B) X = IM/ε C) G - T = 0 D) X = εIM E) X = 0
27) Which of the following is true when a country is experiencing a trade surplus (NX > 0)? 27) ______
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is less than the domestic demand for goods.
C) Demand for domestic goods is greater than the domestic demand for goods.
D) A budget surplus exists.
28) Which of the following is true when a county is experiencing a trade deficit (NX < 0)? 28) ______
A) A budget deficit exists.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is equal to the domestic demand for goods.
D) Demand for domestic goods is less than the domestic demand for goods.
29) Which of the following is true when a country's trade position is balanced (i.e., NX = 0)? 29) ______
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Neither a budget surplus nor deficit exists (i.e., G - T = 0).
C) Demand for domestic goods is greater than the domestic demand for goods.
D) Demand for domestic goods is less than the domestic demand for goods.
30) An increase in which of the following variables will cause an increase in domestic demand? 30) ______
A) the nominal exchange rate
B) foreign income
C) the real exchange rate
D) domestic income
E) all of the above
31) A change in which of the following variables will have NO direct effect on the level of domestic 31) ______
demand?
A) government spending
B) the real exchange rate
C) the interest rate (r)
D) domestic income
32) A change in which of the following variables will have NO direct effect on domestic demand? 32) ______
A) foreign income
B) the interest rate (r)
C) domestic income
D) government spending
33) Assume a country is closed. Given this information, which of the following must occur? 33) ______
A) Demand for domestic goods will be less than the domestic demand for goods.
B) S = I
C) Demand for domestic goods will be greater than the domestic demand for goods.
D) A budget surplus exists.
E) S + T = I + G
34) Assume a country is open. Given this information, which of the following must occur? 34) ______
A) Demand for domestic goods will be greater than the domestic demand for goods.
B) Demand for domestic goods will be less than the domestic demand for goods.
C) Demand for domestic goods will be equal to the domestic demand for goods.
D) S + T = I + G
35) An increase in domestic demand will have which of the following effects in an open economy? 35) ______
A) a smaller effect on output than in a closed economy and a negative effect on the trade balance
B) a larger effect on output than in a closed economy and a positive effect on the trade balance
C) a smaller effect on output than in a closed economy and a positive effect on the trade balance
D) a larger effect on output than in a closed economy and a negative effect on the trade balance
36) An increase in the marginal propensity to import will cause: 36) ______
A) the ZZ line to become flatter and a given change in government spending (G) to have a larger
effect on domestic output.
B) the ZZ line to become flatter and a given change in government spending (G) to have a
smaller effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending (G) to have a
larger effect on domestic output.
D) the ZZ line to become steeper and a given change in government spending (G) to have a
37) A reduction in the marginal propensity to import will cause: 37) ______
A) the ZZ line to become flatter and a given change in government spending (G) to have a larger
B) the ZZ line to become flatter and a given change in government spending (G) to have a
C) the ZZ line to become steeper and a given change in government spending (G) to have a
larger effect on domestic output.
D) the ZZ line to become steeper and a given change in government spending (G) to have a
38) An increase in the marginal propensity to import will cause: 38) ______
A) the multiplier to increase and a given change in government spending (G) to have a larger
B) the multiplier to increase and a given change in government spending (G) to have a smaller
C) the multiplier to decrease and a given change in government spending (G) to have a larger
D) the multiplier to decrease and a given change in government spending (G) to have a smaller
39) A reduction in the marginal propensity to import will cause: 39) ______
A) the multiplier to increase and a given change in government spending (G) to have a larger
B) the multiplier to increase and a given change in government spending (G) to have a smaller
C) the multiplier to decrease and a given change in government spending (G) to have a larger
D) the multiplier to decrease and a given change in government spending (G) to have a smaller
40) In a large country, the effect of a given change in government spending: 40) ______
A) on output is large and the effect on the trade balance is small.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is small.
D) on output is small and the effect on the trade balance is large.
41) In a small country, the effect of a given change in government spending: 41) ______
A) on output is large and the effect on the trade balance is small.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is small.
D) on output is small and the effect on the trade balance is large.
42) We will generally observe that the more open an economy: 42) ______
A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the
trade position.
C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
D) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on
the trade position.
43) We will generally observe that the less open an economy: 43) ______
A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the
trade position.
C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the
trade position.
D) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on
the trade position.
44) For an open economy, which of the following expressions represents saving (S)? 44) ______
A) G - T + NX - I
B) I + T - G + NX
C) I + G - T + NX
D) I + T - G - NX
45) For an open economy, which of the following expressions represents net exports (NX)? 45) ______
A) S + G - T - I
B) S + T - G + I
C) G - T + I - S
D) S + G - T + I
46) For this question, assume that equilibrium output is determined in the ZZ-Y diagram. Further 46) ______
assume that policy makers' goals are: (1) to achieve balanced trade (i.e., NX = 0); and (2) to
achieve a target level of output, say YT. Now, suppose that the initial level of equilibrium output is
equal to YT (i.e., Y = YT) and that a trade deficit exists at this initial level of output. Which of the
following policy actions would most likely enable the policy makers to achieve their two goals
simultaneously?
A) convince the country's trading partners to pursue policies that will cause an increase in
foreign income (Y*)
D) a reduction in taxes
47) For this question, assume that the Marshall-Lerner condition does NOT hold. An increase in the 47) ______
real exchange rate will tend to cause which of the following to occur?
A) an increase in NX and a reduction in Y B) an increase in NX and an increase in Y
C) a reduction in NX and a reduction in Y D) a reduction in NX and an increase in Y
48) For this question, assume that the Marshall-Lerner condition does NOT hold. A reduction in the 48) ______
real exchange rate will tend to cause which of the following to occur?
A) a reduction in NX and a reduction in foreign output (Y*)
B) an increase in NX and an increase in Y
C) a reduction in NX and an increase in domestic output (Y)
D) an increase in NX and a reduction in Y
49) The J-curve illustrates the effects of: 49) ______

A) changes in the real exchange rate on NX. B) changes in Y* on NX.
C) changes in Y on NX. D) changes in Y on imports.
50) Suppose policy makers want to reduce Y and reduce NX. Which of the following policies would 50) ______
most likely achieve this?
A) a reduction in government spending
B) an increase in the real exchange rate
C) an increase in taxes and an increase in the real exchange rate
D) a real appreciation
51) Suppose policy makers want to reduce Y and keep NX constant. Which of the following policies 51) ______
would most likely achieve this?
A) a real appreciation
B) an increase in the real exchange rate
C) a reduction in government spending and a reduction in the real exchange rate
D) encourage the country's trading partners to implement policies that will cause a reduction in
foreign income (Y*)
E) a reduction in government spending
52) Suppose policy makers want to reduce NX and keep Y constant. Which of the following policies 52) ______
would most likely achieve this?
A) a real appreciation
B) a reduction in the real exchange rate and a tax cut
D) a reduction in government spending and a reduction in the real exchange rate
53) Suppose the rest of the world experiences an expansion that causes an increase in foreign income 53) ______
(Y*). From the domestic economy's perspective, this increase in foreign income will cause which
of the following as the domestic economy adjusts to the rise in Y*?
A) an increase in net exports
B) an increase in imports
C) an increase in domestic income
D) all of the above
E) both A and C
54) Suppose the rest of the world experiences a recession that causes a reduction in foreign income 54) ______
(Y*). From the domestic economy's perspective, this reduction in foreign income will cause which
of the following as the domestic economy adjusts to the drop in Y*?
A) a reduction in imports and an increase in net exports
B) an ambiguous effect on net exports
C) a reduction in income and a reduction in imports
D) the NX line to shift up
55) A reduction in the budget deficit can be reflected in: 55) ______
A) an increase in net exports.
B) an increase in investment.
C) a reduction in saving.
D) all of the above
56) A reduction in private saving (S) can be reflected in: 56) ______
A) a reduction in net exports. B) an increase in the budget deficit.
C) an increase in investment. D) all of the above
57) The existence of the J-curve suggests that a real depreciation will cause: 57) ______
A) an initial increase in net exports.
B) an initial reduction in the demand for domestic goods.
C) an initial increase in economic activity.
D) a final reduction in net exports.
ANSWERS
1) A
2) D
3) E
4) A
5) B
6) B
7) D
8) C
9) D
10) B
11) A
12) E
13) C
14) A
15) E
16) D
17) D
18) E
19) B
20) C
21) A
22) D
23) E
24) C
25) E
26) B
27) C
28) D
29) A
30) D
31) B
32) A
33) E
34) E
35) C
36) B
37) C
38) D
39) A
40) A
41) D
42) C
43) B
44) C
45) E
46) E
47) B
48) E
49) A
50) D
51) C
52) B
53) D
54) C
55) D
56) A
57) B
TOPIC 7- IS-LM MODEL IN AN OPEN ECONOMY
A) Multiple choice questions

B) Longer (essay-style) questions
C) Solutions to multiple choice questions
D) Solutions to longer (essay-style) questions
A. MULTIPLE CHOICE. Choose one alternative that best completes the statement or answers the question.
1) Assume that the price levels in two countries are constant. In this situation, we know that: 1) _______
A) neither the real nor the nominal exchange rate can change.
B) the real and nominal exchange rate must move together, changing by the same percentage.
C) the real exchange rate can change, while the nominal exchange rate is constant
D) the nominal exchange rate will fluctuate more widely than the real exchange rate.
E) the nominal exchange rate can change, while the real exchange rate is constant.
2) Suppose there is a reduction in the real exchange rate. Which of the following will occur as a result 2) _______
of this change in the real exchange rate?
A) an increase in imports
B) a decrease in government spending
C) an increase in net exports
D) a reduction in output
E) all of the above
3) An individual will be indifferent between holding foreign or domestic bonds when which of the 3) _______
following conditions holds?
A) the foreign and domestic interest rates are equal
B) the Marshall-Lerner condition holds
C) the expected rate of depreciation of the domestic currency is zero
4) When the interest parity condition holds, we know that the domestic interest rate must be equal to: 4) _______
A) the expected rate of depreciation of the domestic currency.
B) the expected rate of appreciation of the domestic currency.
C) the foreign interest rate minus the expected rate of appreciation of the foreign currency.
D) the foreign interest rate minus the expected rate of appreciation of the domestic currency.
E) the foreign interest rate.
5) Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 6% while 5) _______
the U.K. interest rate is 8%. Given this information, financial markets expect the pound to:
A) appreciate by 6%.
B) depreciate by 2%.
C) depreciate by 14%.
D) appreciate by 4%.
E) appreciate by 2%.
6) Assume that the interest parity holds and that the dollar is expected to appreciate against the 6) _______
pound. Given this information, we know that:
A) the U.S. interest rate exceeds the U.K. interest rate.
B) individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K.
interest rate.
C) the U.K. interest rate exceeds the U.S. interest rate.
D) U.S. and U.K. interest rates are equal.
7) In an open economy, we know that individuals must choose between which of the following? 7) _______
A) foreign goods and domestic currency
B) domestic goods and foreign currency
C) domestic and foreign bonds
D) domestic bonds and foreign currency
8) For this question, assume that all price levels are fixed. Now suppose that there is a real 8) _______
depreciation. This real depreciation will cause which of the following to occur?
A) a reduction in demand for domestic output
B) an increase in imports
C) a reduction in exports
D) a reduction in net exports
9) As the economy moves down and to the right along the IS curve, which of the following will occur 9) _______
when exchange rates are flexible?
A) consumption increases
B) the domestic currency depreciates
C) investment spending increases
D) all of the above
10) In an open economy under flexible exchange rates, an increase in the interest rate will cause an 10) ______
increase in which of the following?
A) the exchange rate, E
B) net exports
C) investment
D) all of the above
11) In an open economy under flexible exchange rates and represented by the IS-LM-IP model, a tax 11) ______
increase will cause a reduction in which of the following?
A) the exchange rate, E
B) exports
C) net exports
D) all of the above
12) In an open economy under flexible exchange rates, an increase in wealth that causes an increase in 12) ______
consumption will cause which of the following?
A) a reduction in the exchange rate, E
B) an appreciation of the domestic currency
C) an increase in net exports
D) all of the above
13) In an open economy under flexible exchange rates, a reduction in the money supply will always 13) ______
cause:
A) a reduction in output.
B) an increase in the exchange rate, E.
C) an increase in the interest rate.
D) all of the above
E) only A and B
14) Assume that the interest parity condition holds and that both the expected exchange rate and 14) ______
foreign interest rate are constant. Given this information, a reduction in the domestic interest rate
will cause:
A) greater depreciation of the domestic currency expected in the future.
B) a reduction in the current exchange rate.
C) a reduction in the exchange rate expected in the future.
D) all of the above
15) The exchange rate policy of the United States is: 15) ______
A) a float.
B) the EMS.
C) a fixed rate within a band.
D) a crawling peg.
16) Suppose a country with a fixed exchange rate decides to reduce the price of its currency. This 16) ______
change in policy is called:
A) a peg.
B) a devaluation.
C) a revaluation.
D) a depreciation.
E) an appreciation.
17) Under a "crawling peg" system, a country's exchange rate: 17) ______
A) is fixed except for small, surprise changes.
B) can fluctuate within a narrow band.
C) is determined by the central bank of another country.
D) can change, but the changes are kept secret from the public.
E) changes at a predetermined rate against the dollar or some other major currency.
18) In 2005, China increased the price of its currency while continuing to pursue a fixed exchange rate. 18) ______
This change in policy is called:
A) a peg.
B) an appreciation.
C) a revaluation.
D) a devaluation.
E) a depreciation.
19) For this question, assume that the economy is operating in a fixed exchange rate regime and that 19) ______
perfect capital mobility exists. Given this information, which of the following will occur?
A) The central bank cannot use monetary policy to affect domestic output.
B) The domestic and foreign interest rates must be equal.
C) An expansionary fiscal policy will require that the central bank increase the money supply.
D) all of the above
20) Suppose a country switches from a fixed to a flexible exchange rate. Which of the following will 20) ______
occur as a result of this change?
A) A given change in government spending will now have a greater effect on output.
B) Both fiscal and monetary policy will become completely ineffective in changing GDP.
C) Monetary policy will become a less effective tool for changing output.
D) Both fiscal and monetary policy will become more effective in changing GDP.
21) A common argument for fixed exchange rates is that they: 21) ______
A) forever free the central bank from have to adjust the exchange rate to fundamental changes in
the economy.
B) give central banks greater freedom in adjusting their economy's level of output.
C) make trade more costly, and thus encourage domestic citizens to buy domestically produced
output.
D) all of the above
22) In practice, under the EMS, a member country: 22) ______

A) could change its interest rate only if other countries changed theirs as well.
B) could never change its interest rate.
C) had complete freedom in choosing its interest rate only if it is a very small country.
D) had complete freedom in choosing the interest rate it wanted.
E) must apply to a special European Commission in order to change its interest rate.
23) In the early 1990s, which nation took the lead in driving up European interest rates? 23) ______
A) France
B) Spain
C) Germany
D) England
24) In the early 1990s, European unemployment rose largely because of: 24) ______
A) high inflation.
B) reductions in stock prices.
C) undervalued currencies.
D) overvalued currencies.
25) Assume that the current exchange rate between U.K. pound and the U.S. dollar is 2 (E = 2.0). If 25) ______
interest parity holds, and the U.S. interest rate is 6% while the U.K. interest rate is 8%, the
expected exchange rate in one year is:
A) 1.98. B) 1.99. C) 2.01. D) 2.02. E) 2.04.
26) For this question, assume that there is a simultaneous tax cut and monetary contraction. In a 26) ______
flexible exchange rate regime, we know with certainty that:
A) the exchange rate would decrease and output would increase.
B) the exchange rate would increase and output would decrease.
C) the exchange rate and output would both increase.
D) the exchange rate would increase.
27) For this question, assume that there is a simultaneous increase in government spending and 27) ______
monetary contraction. In a flexible exchange rate regime, we know with certainty that such a
policy mix will cause which of the following?
A) a reduction in net exports
B) an increase in the domestic interest rate
C) an increase in the exchange rate
D) all of the above
E) only A and C
28) Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a higher 28) ______
level. This is called:
A) a depreciation. B) a revaluation.
C) a devaluation. D) an appreciation.
29) Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a lower 29) ______
level. This is called:
A) a revaluation. B) a depreciation.
C) an appreciation. D) a devaluation.
30) The European Monetary System represented a(n): 30) ______

A) crawling peg. B) a flexible exchange rate regime.
C) exchange rate regime with "bands." D) none of the above
31) Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system with perfect 31) ______
capital mobility, an open market purchase of domestic bonds by the domestic central bank will
eventually result in:
A) a permanent increase in the monetary base.
B) a change in the composition of the monetary base.
C) a permanent reduction in the monetary base.
D) a gradual reduction in the domestic interest rate.
32) Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system with perfect 32) ______
capital mobility, an open market sale of domestic bonds by the domestic central bank will
eventually result in:
A) a gradual reduction in the domestic interest rate.
B) a change in the composition of the monetary base.
C) a permanent reduction in the monetary base.
D) a permanent increase in the monetary base.
33) Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility. The 33) ______
ability of that country to move its domestic interest rate while maintaining its exchange rate will
depend on:
A) the degree of development of its financial markets.
B) the amount of foreign exchange it holds.
C) the degree of capital controls.
D) all of the above
E) both A and B
34) Under a fixed exchange rate regime, the central bank must act to keep: 34) ______
A) i = i*.
B) the real exchange rate fixed.
C) E = 1.
D) P = P*.
35) For this question, assume that policy makers are pursuing a fixed exchange rate regime. Now 35) ______
suppose that a fiscal contraction is implemented. Such a policy will tend to cause which of the
following to occur?
A) no change in the domestic interest rate B) a reduction in the money supply
C) a reduction in Y D) all of the above
suppose that households decide to decrease consumption because of, for example, a reduction in
consumer confidence. Given this information, we would expect which of the following to occur?
A) a reduction in investment
B) an increase in E
C) a reduction in the domestic interest rate
D) a reduction in E
suppose a budget is passed that calls for a reduction in government spending. This reduction in
government spending will cause which of the following to occur?
A) a reduction in i and an increase in E
B) no change in output
C) no change in net exports
D) an increase in imports
E) a reduction in investment
38) Under a fixed exchange rate regime, we know that an increase in stock market wealth that 38) ______
increases consumption will cause:
A) a reduction in net exports.
B) an increase in investment.
C) an increase in imports.
D) all of the above
39) Under a fixed exchange rate regime, we know that a tax increase will cause which of the 39) ______
following?
A) an increase in investment B) an increase in imports
C) an increase in net exports D) all of the above
40) In a flexible exchange rate regime, an increase in the foreign interest rate (i*) will cause: 40) ______
A) neither a shift nor movement along the IP curve.
B) a movement along the IP curve.
C) the IP curve to shift to the left/up.
D) the IP curve to shift to the right/down.
41) In a flexible exchange rate regime, a reduction in the foreign interest rate (i*) will cause: 41) ______
A) the IP curve to shift to the left/up.
B) neither a shift nor movement along the IP curve.
C) a movement along the IP curve.
D) the IP curve to shift to the right/down.
42) In a flexible exchange rate regime, an increase in the expected future exchange rate will cause: 42) ______
A) the IP curve to shift to the right/down.
B) the IP curve to shift to the left/up.
C) neither a shift nor movement along the IP curve.
D) a movement along the IP curve.
43) In a flexible exchange rate regime, a reduction in the expected future exchange rate will cause: 43) ______
A) neither a shift nor movement along the IP curve.
B) a movement along the IP curve.
C) the IP curve to shift to the right/down.
D) the IP curve to shift to the left/up.
44) Assume the interest parity condition holds and that initially i = i*. A reduction in the domestic 44) ______
interest rate will cause:
A) a reduction in E.
B) an increase in the demand for the domestic currency.
C) an expected depreciation of the domestic currency.
D) all of the above
45) Assume the interest parity condition holds and that initially i = i*. A reduction in the foreign 45) ______
interest rate (i*) will cause:
A) an increase in E.
B) an increase in the demand for the domestic currency.
C) an expected depreciation of the domestic currency.
D) all of the above
46) An increase in the money supply in a flexible exchange rate regime will cause: 46) ______
A) a shift of the IP curve. B) a depreciation of the domestic currency.
C) no change in E. D) an increase in E.
47) Suppose there are two countries that are identical in every way with the following exception. 47) ______
Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange
rate regime. Suppose taxes are increased in both countries rises by the same amount. Given this
information, we know that:
A) the change in output in B will be greater than in A.
B) the change in output in A will be greater than in B.
C) the change in output will be the same in both countries.
D) the relative output effects are ambiguous.
B. LONGER (ESSAY-STYLE) REVISION QUESTIONS.
48) In an economy operating under flexible exchange rates, explain why the IS curve is downward sloping.
49) Explain what the IP curve is and why it is upward sloping.
50) Suppose the domestic and foreign interest rates are both initially equal to 3%. Now suppose the domestic
interest rate rises to 5%. Explain what effect this will have on the exchange rate. Also explain what must occur
for the interest parity condition to be restored.
51) Suppose the domestic and foreign interest rates are both initially equal to 4%. Now suppose the foreign interest
rate rises to 6%. Explain what effect this will have on the exchange rate. Also explain what must occur for the
interest parity condition to be restored.
52) Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime:
(1) an increase in foreign output; (2) a reduction in the foreign interest rate; and (3) an increase in the domestic
interest rate.
53) Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and
explain what effect a reduction in taxes will have on the domestic economy. In your graphs, clearly label all
curves and equilibria.
explain what effect monetary contraction will have on the domestic economy. In your graphs, clearly label all
curves and equilibria.
explain what effect an increase in foreign output (Y*) will have on the domestic economy. In your graphs,
clearly label all curves and equilibria.
56) For a country pursuing a fixed exchange rate regime, what does the interest parity condition imply about
domestic and foreign interest rates? Explain.
57) To what extent can monetary policy be used to affect output in a fixed exchange rate regime? Explain.
58) Assume the exchange rate is fixed. Using the IS-LM model, graphically illustrate and explain what effect a
reduction in consumer confidence will have on the domestic economy. In your graphs, clearly label all curves
and equilibria.
59) Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that the foreign interest
rate increases. Discuss what policy makers must do to maintain the pegged exchange rate. Also discuss what
effect this will have on domestic output and net exports.
C: Solutions to multiple choice questions
1) B
2) C
3) B
4) C
5) B
6) A
7) C
8) E
9) D
10) D
11) B
12) B
13) D
14) B
15) A
16) C
17) E
18) D
19) D
20) E
21) E
22) A
23) E
24) B
25) C
26) D
27) D
28) C
29) A
30) C
31) B
32) B
33) D
34) D
35) D
36) A
37) E
38) D
39) C
40) D
41) A
42) A
43) D
44) D
45) C
46) B
47) B
D: Solutions to longer (essay-style) questions
48) A reduction in i (assume zero inflation) will cause investment to increase for reasons discussed before. This causes an
increase in Z and Y. There is a second effect now embedded in the IS curve. As i falls, the demand for the domestic
currency drops causing a depreciation. This depreciation causes NX to rise and demand to rise even more. So, there
are two components of demand that now change as i changes: I and NX.
49) The IP curve represents the combinations of i and E that maintain the interest parity condition. As i falls, foreign
bonds will have a higher expected return. The demand for the dollar will fall causing an immediate depreciation. So,
the drop in i causes E to fall. E will fall until all of the drop in i is offset by the expected appreciation of the dollar.
50) Domestic bonds will have a higher return causing the demand for the domestic currency to rise. The dollar will
appreciate. It will continue to appreciate as long as the return on domestic bonds exceeds the return on foreign bonds.
This immediate appreciation will equal an expected depreciation of the domestic currency that equates the expected
returns. So, the dollar will appreciate by 2%.
51) Similar to #3. Dollar will depreciate by 2%.
52) An increase in Y* causes X to rise, Z to rise, and the IS curve to shift to the right. A reduction in i* will cause an
appreciation of the domestic currency, a reduction in NX, and a leftward shift in the IS curve. A change in i will only
cause a movement along the IS curve.
53) A decrease in T will cause C and Z to increase and the IS curve to shift right. As demand increases, Y will rise causing
an increase in money demand. The increase in money demand will cause an increase in i. As i rises, the demand for the
domestic currency will increase causing an appreciation. This appreciation will cause a drop in NX. Any drop in I and
the reduction in NX only partially offset the effects of the tax cut on demand and output.
54) A reduction in M will cause the LM curve to shift up and the domestic interest rate to rise. As i rises, the return on
domestic bonds is greater than foreign bonds. This causes an appreciation and a reduction in NX. So, the demand for
goods falls via the drop in I and NX. We will observe a higher domestic interest rate, an increase in E, a drop in I, a
reduction in NX, and a reduction in Y.
55) A rise in Y* will cause an increase in X and NX. This causes the IS curve to shift to the right. As demand rises,
production will rise. The rise in Y will cause an increase in money demand. As money demand increases, i will rise
causing an appreciation. So, some of the effects of Y* on NX will be offset by the reduction in NX caused by the
appreciation. We will observe an increase in NX, an increase in Y, an increase in i, and an increase in E.
56) As long as the fixed exchange rate regime is credible, the interest rates must be equal. If the exchange rate regime is
credible, we know that there will be no expected appreciation or depreciation so i = i*.
57) It cannot. To peg the exchange rate, the central bank must keep the domestic interest rate equal to the exogenous
foreign interest rate. The domestic central bank cannot independently change its interest rate.
58) A reduction in consumer confidence will cause a drop in C and will cause demand to fall and the IS curve to shift to
the left. As Y falls, money demand will fall and the domestic interest rate will tend to fall. If i falls, there will be
tremendous pressure on the domestic currency to depreciate as demand falls. The central bank cannot let this occur.
To prevent this, it must reduce the money supply so that i does not fall. We will observe a drop in Y, no change in i, a
reduction in I (via the drop in I), and an increase in NX caused by the drop in imports.
59) If i* increases, there will be pressure on the domestic currency to depreciate. To prevent this, the domestic central
bank must raise its interest rate so that it rises by the same amount as i*. In this case, the LM curve will shift up so that
the new equilibrium interest rate is equal to the now higher foreign interest rate. As i rises, E does not change.
However, I will fall causing a reduction in demand and output. As Y falls, imports will fall and NX will increase.

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EXERCISES TOPIC 3

1.-In the income-expenditure model, if there is an increase in any component of autonomous

a) When the marginal propensity to save is larger.

4.- Which of the following would cause the multiplier to fall?

a) A fall in transfers from the public sector to households.

5.-If the marginal propensity to consume is 0.7, this implies that:

a) An increase in disposable income of €1m would increase consumption by €700,000.

a) The budget balance will not change as the policy is balanced.

8.- Automatic stabilisers:

9.-An expansionary fiscal policy could consist of:

a) A decrease in private saving and investment.

8.- In an economy defined by the income-expenditure model with proportional taxes:

1) Which of the following is NOT a characteristic of bonds? 1) _______

2) Which of the following is a stock variable? 2) _______

3) Which of the following is NOT included as a component of money? 3) _______

4) Which of the following is a NOT component of money? 4) _______

30) An increase in the reserve ratio, q, will cause: 30) ______

31) A reduction in the reserve ratio, q, will cause: 31) ______

35) If individuals do not hold currency, we know that: 35) ______

37) An increase in the interest rate will cause: 37) ______

38) An increase in income will cause: 38) ______

39) An increase in income will cause: 39) ______

1) Which of the following is the correct definition of the IS curve? 1) _______

2) Which of the following will cause a shift of the IS curve? 2) _______

5) Which of the following will cause a shift in the LM curve? 5) _______

34) A reduction in government spending will cause: 34) ______

1) The ratio of a country's exports to its GDP must: 1) _______

4) When the dollar appreciates, we know that: 4) _______

5) Which of the following would cause an increase in exports? 5) _______

25) Policy coordination is difficult because each country: 25) ______

49) The J-curve illustrates the effects of: 49) ______

A) Multiple choice questions

22) In practice, under the EMS, a member country: 22) ______

30) The European Monetary System represented a(n): 30) ______

49) Explain what the IP curve is and why it is upward sloping.

51) Similar to #3. Dollar will depreciate by 2%.

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