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Name: ____________________________________________

Economics Dr. Sauer

Homework #6 (30 points) Please indicate your answers on a scantron sheet. It is okay to work on your homework in groups, but each person must submit answers individually. 1. TRUE or FALSE If the exchange rate is 1 Icelandic krona for 0.00786 US dollars then equivalently 1 US dollar is equal to around 127 kronas. 2. In July 2008, the exchange rate between the dollar and krona was 1 USD = 76.8903 ISK. In September 2008, the exchange rate between the dollar and krona was 1 ISK = 0.00764. Over this time period, a. the dollar appreciated versus the krona. b. the krona appreciated versus the dollar. c. both currencies appreciated versus each other. d. both currencies depreciated versus each other. 3. TRUE or FALSE The current problems with the krona stem from the recession in the early 1980s. 4. Some economists argue that Iceland should give up its currency because a. the Icelandic central bank is not politically independent. b. Iceland was previously using the Canadian dollar and the economy was doing better at that time. c. the krona isnt fulfilling its function as a medium of exchange. d. all of the above. 5. Which currency was NOT mentioned as one that Iceland is considering adopting? a. The US dollar. b. The Canadian dollar. c. The euro. d. The British pound. 6. Which of the following is NOT an impact of the weak krona? a. Icelands fishing industry is able to export at low prices. b. Tourism in Iceland is booming. c. All the goods that are imported into Iceland are more expensive. d. all of the above are correct impacts of a weak krona. 7. TRUE or FALSE The Big Mac Index is based on the theory of Keynesian Liquidity Preference. Refer to the following information to answer questions 8 10: Suppose the average price of a Big Mac in Indonesia is 22,780 rupiahs. The average price of a Big Mac in the US is $3.73. The exchange rate is 9,063 rupiahs per US dollar. 8. If you purchased a Big Mac in Indonesia, it would cost you __________ in terms of US dollars. a. $2.51. b. $3.90. c. $0.251. d. $0.390. 9. The PPP implied exchange rate between the rupiah and dollar is a. 9,075.7 rupiahs per dollar. b. 6,107.2 rupiahs per dollar. c. 2,429.8 rupiahs per dollar. d. 3,610.8 rupiahs per dollar. 10. The rupiah is _________ versus the dollar by _____% so wed expect the rupiah to _________ versus the dollar in the future. a. overvalued; 33%; depreciate. b. overvalued; 48%; appreciate. c. undervalued; 48%; depreciate. d. undervalued; 33%; appreciate.

11. TRUE or FALSE The main reason that producers of worsted fabrics in Germany in the late 1500s formed a guild was to improve the quality of the fabrics that they sold. 12. TRUE or FALSE Little innovation took place before the worsted fabric guild was formed.

13. The guild had strict rules about how much yarn spinners could be paid for their yarn. Which of the following is NOT correct? a. Since spinners were paid a fixed rate, they had an incentive to take their time and spin slowly to ensure quality yarn was produced. b. If a member of the guild wanted to pay a spinner more (for high quality yarn) they would be breaking the rules and would have to pay a fine to the guild. c. High profit margins could be enjoyed by some of the guild members. d. Some guild members wanted to be allowed to pay more for quality yarn. 14. Markets tended to be highly segmented at the time of the worsted guild. This meant the customers who purchase worsted fabrics didnt have many options except what was produced locally. Reasons for the segmented markets include all EXCEPT which of the following? a. warfare. b. high transportation costs. c. trade barriers. d. government regulations. 15. The situation where a guild is formed and is beneficial for members but has negative impacts on consumers and on other producers can happen because a. the benefits are diffuse but the costs are concentrated. b. the benefits and costs are diffuse. c. the benefits are concentrated but the costs are diffuse. d. the benefits and costs are concentrated. 16. TRUE or FALSE In more modern terminology, wed classify the guild as a special interest group.

17. From an article that you read, there are 4 economies that the US should avoid becoming like. With that in mind, which of the following is correct? a. In France, high government spending has lead to high inflation. b. In Greece, the government has abandoned the euro and is printing too much of the new currency. c. In Japan, the government was too worried about inflation and has implemented policies that stagnated the economy. d. In Zimbabwe, the governments fiscal situation is imbalanced and debt is piling up. 18. TRUE or FALSE 19. TRUE or FALSE Germany has thriving manufacturing and services sectors. Germanys professional labor markets are relatively open and competitive.

20. From an article you read, policymakers in the US and in Europe are working on new regulations to prevent situations like the financial crisis from happening again. What that in mind, which of the following is NOT correct? a. The Dodd-Frank Act is a broad law that directs individual government agencies to create more detailed regulations for the financial sector. b. In the EU, there isnt one broad law, but regulations are being passed for each sector one by one. c. Some experts believe that the USs approach to this type of regulation is superior to the European approach. d. The European debt crisis isnt being factored in to the regulations in Europe. 21. In which of the following instances is the present value of the future payment the largest? a. You will receive $1,000 in 5 years and the annual interest rate is 5 percent. b. You will receive $1,000 in 10 years and the annual interest rate is 3 percent. c. You will receive $2,000 in 10 years and the annual interest rate is 10 percent. d. You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

22. Refer to the graph. Which of the following scenarios would result in the graph depicted?
price

a. In the market for computers, computer processing chips have gotten faster and cheaper.
S S'

b. In the market for typewriters, many manufactures have gone out of business due to competition from laptop computers.
Pe Pe'

c. In the market for lemonade, many consumers increase their purchases of lemonade due to warmer weather.
D

d. In the market for textbooks, it is summer vacation so fewer college students are buying textbooks.
quantity

Qe

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23. The following is historical data on the US Consumer Price Index. Year CPI Year 1980 82.7 1985 1981 90.9 1986 1982 96.5 1987 1983 99.6 1988 1984 103.9 1989 Calculate the inflation rate between 1984 and 1994. a. 29.9% b. 42.6% c. 48.2% d. There is not enough information to answer the question. 24. Refer to the table for the nation of Hartlandia. Year 2004 2005 Adult population 2000 3000 Number of employed 1400 1300 Number of unemployed 200 600

CPI 107.6 109.6 113.6 118.3 124.0

Year 1990 1991 1992 1993 1994

CPI 130.7 136.2 140.3 144.5 148.2

2006 3200 1600 200

The unemployment rate for 2006 is: a. 6.3%. b. 11.1%. c. 12.5%. d. There is not enough information to answer the question 25. At issue in a particular Front-Range city is how many acres of open space to set aside. 30% of the voters want no additional open space set aside, 15% want 100 acres set aside, 25% want 200 acres set aside, 20% want 300 acres set aside, and 10% want 500 acres set aside. If the median voter theorem is correct, what will be the winning outcome? a. no acres because it receives 30% of the vote, which is the most. b. 200 acres because it is the amount preferred by the median voter. c. 300 acres because it is the amount preferred by the median voter. d. there is not enough information to answer the question 26. If the reserve requirement ratio is 5 percent and a bank has $100 million in deposits, it is allowed to lend out _____ if it wants to. a. $5 million. b. $95 million. c. $100 million. d. $500 million. 27. TRUE or FALSE purchased bonds. When you hear that the Fed has cut interest rates it has lowered the discount rate and has also

28. If the exchange rate changes from 35 Thai bhat per dollar to 40 Thai bhat per dollar, the dollar has a. appreciated and so buys more Thai goods. b. appreciated and so buys fewer Thai goods. c. depreciated and so buys more Thai goods. d. depreciated and so buys fewer Thai goods. 29. Suppose a Starbucks tall latte costs 3.20 euros in the Euro area. If the exchange rate is 0.75 euros per dollar , then how much does the latte cost in US dollars? a. $2.40. b. $3.20. c. $4.27. d. There is not enough information to answer the question. 30. TRUE or FALSE The opportunity cost of something is what you give up to get it.