Ch.

18
 Test your understanding
1) When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S.
dollar has ________.
A) appreciated; appreciated B) depreciated; appreciated
C) appreciated; depreciated D) depreciated; depreciated

2) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory
of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican
pesos will
A) rise by 6 percent. B) rise by 2 percent.
C) fall by 6 percent. D) fall by 2 percent.

3) As the relative expected return on EGP assets increases, foreigners will want to hold more ________ assets
and less ________ assets, everything else held constant.
A) foreign; foreign B) foreign; EGP
C) EGP; foreign D) EGP; EGP
Ch. 19
 Test your understanding
1) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign
exchange market leads to an equal increase in its international reserves and the monetary base, everything else
held constant.
A) sale; purchase B) sale; sale
C) purchase; sale D) purchase; purchase

2) Everything else held constant, if a central bank makes a ________ of foreign assets, then the domestic money
supply will increase and the domestic currency will ________.
A) purchase; appreciate B) purchase; depreciate
C) sale; appreciate D) sale; depreciate

3) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below pegged
rate, the central bank must intervene to purchase the ________ currency by selling ________ assets.
A) domestic; foreign B) domestic; domestic
C) foreign; foreign D) foreign; domestic
Ch. 22 & 23
 Test your understanding
1) If the interest rate falls, other things being equal, investment spending will
A) rise B) not be affected
C) fall D) uncertain

2) A shift in tastes toward Egyptian goods ________ net exports in Egypt and
causes the AD curve to shift to the ________ in Egypt, everything else held
constant.
A) increases; right B) decreases; left
C) decreases; right D) increases; left

3) In deriving the aggregate demand curve a ________ inflation rate leads the
central bank to ________ real interest rates, thereby ________ the level of
equilibrium aggregate output.
A) higher; lower; lowering B) higher; lower; raising
C) higher; raise; lowering D) lower; raise; lowering
 Test your understanding
4) In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of
Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three
years later, once the refining capacity was restored, these prices came back down. The
restoration of refining capacity should
A) shift the SRAS curve to the left. B) shift the SRAS curve to the right.
C) move the economy up along a stationary SRAS curve. D) move the economy down along a stationary SRAS
curve.

5) Suppose a developing country receives more machinery and capital equipment as

foreign entrepreneurs increase the amount of investment in the economy. As a result
A) the LRAS curve will shift to the right. B) the LRAS curve will shift to the left.
C) the economy will move up along the LRAS curve. D) the economy will move down along the LRAS curve.

6) The short-run aggregate supply curve has a(n) ________ slope because as prices of
________ rise, prices of ________ rise more slowly.
A) positive; final goods and services; inputs B) infinite; final goods and services; inputs
C) positive; inputs; final goods and services D) infinite; inputs; final goods and services
 Test your understanding
7) When the price of oil rises unexpectedly, the equilibrium price level ________
and the unemployment rate ________ in the short run.
A) rises; falls B) rises; rises
C) falls; falls D) falls; rises

8) A decrease in investment causes the price level to ________ in the short run and
________ in the long run.
A) increase; increase further
B) increase; decrease
C) decrease; decrease further
D) decrease; increase
Ch. 24
 Test your understanding
1) When a temporary negative supply shock hits the economy, then in the short-run ________.
A) if the central bank focuses on stabilizing output, it cannot stabilize inflation
B) if the central bank focuses on stabilizing inflation, it cannot stabilize output
C) there will be trade-off between inflation and unemployment
D) all of the above
E) none of the above

2) A negative shock in aggregate demand will likely result in ________.

A) a short run decrease in output
B) a permanently lower equilibrium inflation rate if the central bank does not respond by lowering interest rates
C) an eventual increase in aggregate supply for any inflation rate if the central bank does not respond by lowering
interest rates
D) all of the above
E) none of the above

3) If most shocks to the economy are ________ shocks, then ________.

A) aggregate demand; there is a tradeoff between the dual objectives in the short-run
B) temporary aggregate supply; inflation stabilization policy will not stabilize economic activity in the short-run
C) temporary aggregate supply; output stabilization policy is consistent with no change in inflation in the long-run
D) all of the above
E) none of the above