Sample Multiple Choice Questions for Topics 5 – 10:

1. If the home currency is expected to appreciate, the interest rate on foreign deposits tends to:
A) equal to the interest rate on domestic deposits.
B) greater than the interest rate on domestic deposits.
C) less than the interest rate on domestic deposits.
D) diverging from the interest rate on domestic deposits.

2. An increase in nominal GDP (with sticky prices) results in:

A) an increase in the nominal rate of interest.
B) an increase in the U.S. dollar exchange rate.
C) a decrease in the nominal rate of interest.
D) increased price and wage flexibility.

3. If there is a temporary shock (increase) to the money supply in the Eurozone, other things being
equal, what is the result for Australia in the short run?
A) The money supply in Australia must decrease by the same proportion.
B) The Australian dollar nominal interest rate will increase, as the euro rate is unchanged.
C) Long-run expectations shift to expect a stronger euro.

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 D) The dollar appreciates against the euro.

4. When there is a permanent fall in the domestic money supply, the exchange rate:
A) falls in the short run and rises slightly in the long run.
B) falls in the short run and falls more in the long run.
C) rises in the short run and falls slightly in the long run.
D) rises in the short run and rises more in the long run.

5. Overshooting occurs because:

A) expectations adjust slower than prices.
B) expectations adjust at the same rate as prices.
C) expectations adjust faster than prices.
D) expectations do not adjust.

6. A country with a fixed exchange rate faces:

A) no monetary policy constraints in the long run.
B) no monetary policy constraints in the short run.
C) no monetary policy constraints in the long run and the short run.
D) monetary policy constraints in the long run and the short run

7. When calculating GDP in an open economy, we adjust gross national expenditure (GNE) by:
A) subtracting exports and adding imports.
B) subtracting investment from foreigners and adding foreign investment by residents.
C) subtracting imports and adding exports.
D) subtracting depreciation from GDP.

8. The current account (CA) of the balance of payments (BOP) is calculated as:
A) the sum of imports, exports, and transfers.
B) the sum of national income and national expenditure.
C) the sum of the trade balance, net factor income from abroad, and net unilateral transfers.
D) the difference between GDP and GNE.

Use the following to answer questions 9-11:

Table: Hypothetical U.S. National Income and Product Accounts Data

Category Billions of dollars
Consumption (personal consumption expenditures) 8,000
Investment (gross private domestic investment) 1,300
Government consumption (government expenditures) 2,100
Exports of goods and services 900
Imports of goods and services 1,750
NFIA +45
Net unilateral transfers –20

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9. (Table: Hypothetical U.S. National Income and Product Accounts Data) The GNE is _______.
A) $9,300
B) $3,400
C) $10,550
D) $11,400

10. (Table: Hypothetical U.S. National Income and Product Accounts Data) The trade balance for the
economy provided is ______.
A) $1,750
B) –$900
C) $2,650
D) –$850

11. (Table: Hypothetical U.S. National Income and Product Accounts Data) The GDP for the economy
provided is ______.
A) $11,400
B) $10,575
C) $10,550
D) $10,595

12. GNDI is a superior measure of a nation's welfare because it considers net foreign factor earnings and
other sources of income available to the population. The GNDI identity equation is as follows:
A) Y = GNDI = consumer production + capital goods (business investment) + government + net
exports.
B) Y = GNDI = GNI + net unilateral transfers (NUT).

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 C) Y = GNDI = wages + profits + interest + rental income + net foreign factor income.
D) Y = GNDI = foreign aid + income from outsourcing + returns on foreign investment.

13. Whenever there is a deficit in the current account (CA):

A) GNDI is equal to GNE.
B) GNDI is greater than GNE.
C) GNDI is less than GNE.
D) GNDI is equal to GNE only if there is no domestic investment spending.

14. Which of the following would cause a financial account (FA) surplus?
A) the sale of heavy trucks used in construction by a domestic seller to a foreign buyer
B) the purchase of stock in an Australian corporation by an Australian buyer
C) the purchase of stock in an Australian corporation by a foreign buyer
D) the sale of stock in an Australian corporation held by a foreign owner to a domestic buyer

15. Suppose that an Australian buys a car from Germany with cash. For Australia, this counts as a:
A) current account credit, financial account debit.

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 B) current account debit, financial account credit.
C) current account debit, capital account credit.
D) current account credit, financial account credit.

16. When there are capital gains, such as in the real estate or stock markets, or there are exchange rate
changes, we see a change in the external wealth calculation. These are known as:
A) financial flows.
B) investment flows.
C) valuation effects.
D) capital flows.

17. If the marginal propensity to consume for a nation is 0.8, it means:

A) consumers save 80% of their incomes.
B) consumers spend 80% of their incomes.
C) consumers pay 20% tax on their earnings.
D) consumers decrease their spending by $0.80 for each $1 of a decrease in their income.

18. An increase in the home country's income will result in a(n) _____ in the home country trade
balance, and an increase in foreign income will result in a(n) _____ in the home country trade
balance.
A) fall; fall
B) increase; increase
C) increase; fall
D) fall; increase

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19. The open-economy IS curve slopes down because any change in the foreign or home interest rate
will inversely affect demand, along with a secondary effect from a change in:
A) the rate of depreciation of assets.
B) the exchange rate and the trade balance.
C) the real interest rate.
D) the growth rate of money.

20. A shift to the left by the IS curve can be achieved by all of the following except:
A) a decrease in government spending.
B) an increase in taxes.
C) an increase in the foreign interest rate.
D) a decrease in the expected exchange rate.

21. If we start from long-run general equilibrium of goods, forex, and the money markets, and there is a
temporary expansion of the money supply, what will be the outcome under floating exchange rates?
A) GDP rises, the interest rate falls, and the exchange rate rises (depreciation).
B) GDP rises, the interest rate rises, and the exchange rate falls (appreciation).
C) GDP falls, the interest rate falls, and the exchange rate rises (depreciation).
D) GDP falls, the interest rate rises, and the exchange rate rises (depreciation).

22. Consider a country under floating exchange rates. All else being equal, an increase in government
spending would shift the ______ line to the ______, causing interest rates to _______ and the trade
balance to _______.
A) LM; right; fall; fall

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 B) IS; right; rise; fall
C) LM; left; rise; rise
D) IS; right; fall; rise

23. If Britain allows the pound–DM (deutsche mark, now became euro) exchange rate to float, and there
is an increase in the foreign (German) interest rate, it:
A) has no effect on home rates.
B) will cause a monetary contraction and a higher interest rate in Britain.
C) will eventually decrease if trade is affected.
D) always shifts out the home IS curve (Britain), all else equal.

Use the following to answer questions 24-26:

SCENARIO: ARGENTINE PESO

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100
billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion
pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1.

24. (Scenario: Argentine Peso) What is the peso value of Argentina's total external wealth?
A) –60 billion pesos
B) –150 billion pesos
C) –0 billion pesos
D) –90 billion pesos

25. (Scenario: Argentine Peso) Suppose that Argentina changes its exchange rate to P3 = $US1. Now
what is the peso value of Argentina's total external wealth?
A) –270 billion pesos
B) –150 billion pesos
C) 0 billion pesos
D) –210 billion pesos

26. (Scenario: Argentine Peso) What is the likely effect of the change in Argentina's external wealth in
Q25 on Argentine aggregate demand?
A) It will increase Argentine aggregate demand.
B) It will decrease Argentine aggregate demand.
C) It will neither increase nor decrease Argentine aggregate demand.
D) It will first increase, then decrease Argentine aggregate demand.

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ANSWERS:

1. B
2. A
3. D
4. A
5. C
6. D
7. C
8. C
9. D
10. D
11. C
12. B
13. C
14. C
15. B
16. C
17. D
18. D
19. B
20. C
21. A
22. B
23. D
24. D
25. A
26. B

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