Sample MCQ questions for final
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May 3, 2024
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Sample Multiple Choice Questions for parts covered after the midterm
Choose the best answer. (2 marks each)
1. Assuming sticky prices and given expectations of future exchange rates, what is the short-run effect on the exchange rate of the U.S. dollar (purchasing euros) and on domestic and foreign rates of return if there is a temporary increase in the quantity of U.S. dollars? a.
R
ates of return on domestic and foreign assets diverge, as the dollar appreciates. b.
Domestic and foreign rates of return both fall, as the dollar depreciates.
c.
Domestic and foreign rates of return converge, as the dollar depreciation lowers returns for U.S. investors who purchase euro-based assets.
d.
Rates of return on euro assets fall, causing investors to switch into U.S. assets and,
therefore, the U.S. dollar appreciates against the euro.
2. The asset approach basically looks at ____ as the fundamental variable affecting _____
exchange rates. a.
interest rates; short-run b.
interest rates; long-run
c.
the price level; short-run
d.
the price level; long-run
3. The monetary approach basically looks at ____ as the fundamental variable affecting _____ exchange rates. a.
interest rates; short-run b.
interest rates; long-run
c.
the price level; short-run
d.
the price level; long-run
4. When there is a permanent fall in the foreign money supply, the exchange rate: a.
falls in the short run and rises slightly over the long run. b.
falls in the short run and falls more over the long run.
c.
rises in the short run and falls slightly over the long run.
d.
rises in the short run and rises more over the long run.
5. If you observe that the dollar is appreciating because of a permanent change in the U.S.
monetary supply, then the money supply must have:
a.
fallen
. b.
stayed the same.
c.
risen.
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d.
Not enough information is provided to answer the question.
6. When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the foreign money supply has:
a.
temporarily risen. b.
permanently risen.
c.
temporarily fallen.
d.
permanently fallen
.
7. When an increase in the quantity of money is considered to be permanent and prices are sticky, then in the short run the exchange rate depreciates and overshoots because:
a.
domestic nominal returns fall relative to foreign returns, and traders expect a permanent depreciation in future exchange rates. b.
traders do not change their expectations of the exchange rate, and lower domestic rates make it easier to borrow.
c.
inflationary expectations eventually cause a rise in domestic real returns.
d.
traders quickly realize that their expectations of future exchange rates are incorrect and eventually prices will become unstuck.
8. 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.
9. If a country has a $100 million debt and the interest rate on the debt is 5% and the debt is serviced each year, this would result in:
a.
an interest payment of $5 million and a reduction in the debt amount by $10 million each year. b.
an interest payment of $15 million and a reduction in the debt amount by $10 million each year.
c.
an interest payment of $5 million and no change in the debt amount.
d.
an interest payment of $1 million and an increase in the debt amount by $10 million each year.
10. The long-run budget constraint indicates that, in the long run, a country's initial external wealth must be offset by (i.e., equal to):
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a.
the present value of its future trade balances. b.
the future value of its future trade balances.
c.
the current value of its future trade balances.
d.
the present value of its future external wealth.
11. If you are scheduled to receive a $10,000 payment in two years and the interest rate is 10%, then the present value of this payment is:
a.
$9,000. b.
$8,264.
c.
$12,000.
d.
$5,000.
12. Suppose that the present discounted value of a stream of payments is $1,000. If the interest rate is 10%, what is the constant payment per year?
a.
100
b.
10
c.
11
d.
1,000
13. The United States has been experiencing trade deficits on the order of $600–$800 billion during the past several years. Which of the following is an implication of these
trade deficits?
a.
U.S. GDP has been larger than U.S. GNE. b.
U.S. GDP has been smaller than U.S. GNE.
c.
U.S. net external wealth has been increasing.
d.
U.S. exports are greater than U.S. imports.
14. The key lesson from the Long-Run Budget Constraint (LRBC) model is:
a.
nations can safely run trade deficits as long as they can cover the interest each year. b.
nations must balance their current account year by year.
c.
nations must maintain a balance between the present value of deficits and the present value of surpluses that satisfy the LRBC.
d.
nations may lend externally but it is dangerous to borrow.
15. The present value of GDP:
a.
equals GNE. © University of New South Wales
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b.
equals GNE only when the country begins with positive initial wealth.
c.
equals GNE only when the country begins with negative initial wealth.
d.
plus the present value of initial wealth must equal the present value of GNE.
16. If the percentage of change in total spending (C + G) is lower than the percentage change in income, an economy has some degree of:
a.
financial autonomy. b.
consumption smoothing.
c.
imminent recession.
d.
prosperity.
17. Investment will occur in an open economy more often than in a closed economy because:
a.
investment decisions have fewer constraints because investors and borrowers will compare the marginal product of capital in any nation with the world real interest rate. b.
without information, investors often make poor investment decisions.
c.
governments like to subsidize overseas investment for domestic firms.
d.
international financial organizations prefer to lend for international investments rather than domestic ones. 18. If the long-run budget constraint is upheld, an investment expenditure will increase the present value of consumption only if:
a.
the present value of debt is equal to zero. b.
the present value of output is greater than the present value of the investment expenditure.
c.
the present value of exports is greater than the present value of imports.
d.
output is increasing faster than the growth of population.
19. If capital flows freely throughout the world, one would expect it would flow:
a.
from the rich nations, where it is abundant and cheap, to the poor nations, where it
is scarce and dear.
b.
from the poor nations, where it has less value, to the rich nations, where it has more value.
c.
from the savers to financial institutions.
d.
from international lenders to international borrowers.
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20. If production functions are identical, low-income nations have a ____ capital per worker than high-income nations, _____ labor productivity, and a ____ marginal product of capital.
a.
lower; lower; higher. b.
lower; higher; higher.
c.
lower; lower; lower.
d.
higher; higher; lower.
21. If the production functions of rich and poor nations are NOT identical, resulting in lower marginal products of capital for poor nations, then:
a.
capital markets are basically dysfunctional. b.
it must mean the labor productivity for poor nations is higher.
c.
capital markets cannot be relied on to bring about convergence.
d.
capital markets may be functioning efficiently and correctly after all.
22. When poor nations cannot compete with rich nations to attract capital because of their
lower overall productivity, it creates:
a.
convergence. b.
long-run divergence.
c.
externalities.
d.
opportunities for cross-border investment.
23. As long as at least some output shocks are asymmetric, it is possible to:
a.
avoid all risk. b.
lower the volatility of income by international diversification of capital assets.
c.
lower the risk of default.
d.
avoid any consumption declines as a result of the shocks.
24. Two nations each own 50% of the capital of the other nation (diversification). What is
the situation when labor comprises over 50% of available resources?
a.
In order to achieve perfect diversification, labor must move from one nation to the
other. b.
No gain will occur from the diversification.
c.
The risk from economic shock will be eliminated by the diversification of assets.
d.
Some risk from economic shocks can be eliminated, but not all.
25. A result of an exchange rate depreciation, would occur as the spending patterns © University of New South Wales
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change in response to a change in the exchange rate.
a.
expenditure switching from domestic to foreign products
b.
expenditure switching from foreign to domestic products
c.
expenditure switching from rural to urban producers
d.
terms-of-trade deterioration
26. Data on the relationship between the U.S. multilateral real exchange rate and the U.S. trade balance shows
a.
a surprising result that the decrease in the trade balance is correlated with
an increase (depreciation) of the U.S. dollar multilateral real exchange rate.
b.
a predictable result that the increase in the trade balance is correlated with
an increase (depreciation) of the U.S. dollar multilateral real exchange rate.
c.
a correlation that is so weak it cannot be used to support the theory that the trade balance is related to the real effective exchange rate of the U.S. dollar.
d.
a surprising result that the increase in the U.S. trade balance occurs with a decrease (appreciation) in the real effective exchange rate of the dollar. 27. The devaluation of a currency results in a(n):
a.
initial increase in trade balance, but an eventual decline in trade balance.
b.
permanent decline in trade balance.
c.
permanent increase in trade balance.
d.
initial decrease in trade balance, but an eventual increase in trade balance.
28. The J-curve effect means that import prices are higher, thus revenues paid out increase while export prices are lower and incoming revenues decrease. Therefore, after a currency depreciation:
a.
the trade balance will improve, then decline, then improve, and then decline, appearing to be a series of J shapes.
b.
the trade balance will increase, then decrease, then jump higher, which economists call the J-curve effect.
c.
the nation will cut back on imports immediately causing the trade balance to improve, which gives the curve an inverted J shape.
d.
the trade balance decreases and then increases over time giving the curve a J shape.
29. The trade balance component of aggregate demand is a function of all the following EXCEPT
:
a.
foreign disposable income.
b.
domestic disposable income.
c.
the real exchange rate.
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i alsoo translated pic attach
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Suppose the yen is expected to appreciate by 4% against the pound in one year. If the nominal interest in Japan is 6%, and uncovered interest parity holds, the nominal interest rate in the UK. must be (hint: use the simpler/linear formula) (a) 2%. (b) 5%. (c) 10%.
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(i)
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Country
Local
dollar
Implied PPP Actual
of the dollar
price
1
United States
China
Indonesia
Switzerland
Ukraine
Taiwan
5
20
30000
6.5
54
69
exchange rate
1
6.8
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0.9
28
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Current Account
(1) Goods Exports
+$80
(2) Goods Imports
−70
(3) Exports of Services
+20
(4) Imports of Services
−25
(5) Net Investment Income
+5
(6) Net Transfers
−5
Financial Account
(7) Foreign Purchases of Assets in the United States
+13
(8) US Purchases of Foreign Assets Abroad
-23
Capital Account
(9) Balance on Capital Account
+5
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Multiple Choice
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Question Completion Status:
300
QUESTION 15
Consider the following scenario:
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Country A
30'000
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20'000
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1
Country B
10
5
Suppose that w,-Peso 3000 and e=1 (e is the exchange rate). What is the maximum level of w, (expressed in $) such that
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Exchange Rate
(USD BZD)
2.00
1.00
0.50
D
Quantity of Belize dollars traded per day
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ariants/950245/take/9/
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currency.
An increase in the rate of a country's
charges for loans results in apprecia-
tion of its currency on the interna-
tional market.
This results in loss of income and
usually lower interest rates, leading
to a depreciation in the value of a
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stable is more attractive to foreign
investors, resulting in an apprecia-
tion of the stable country's currency.
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estions Answered
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b. interest rate
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Q @ ✩ ✦
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You have the following table.
USD/Euro
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Yen/Euro
Euro/Yen
International Economics: Problem Set 4
Table 1: Exchange Rates
12/31/2015 12/31/2016 percent change (%)
1.08.59
1.0552
116.78
-2.8271
-2.9018
(a) Fill in the blanks. You need to show the formula you use.
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Debit
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850
FA
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China
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status with China
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Use a payoff matrix to depict this problem.
a. Players.
b. Strategy.
с. Рау-off.
d. What is the dominant strategy?
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(c) the price level in China would have to move in tandem with the U.S. price
level.
(d) the law of one price would have to hold for at least one good.
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a) $50
4
b) $72
c) $48
d) $720
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(a) 10
(b) 8
(c) 1
(d) 12
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market? Use appropriate
graphical illustrations to analyze the
impact of relative inflation rates and relative
interest rates on
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sterling in terms of the U.S. dollar.
(b)Šuppose the exchange rate for the Iraqi
Dinar moves from $0.00069 to $0.00072.
Which currency
has appreciated and by what percentage?
Which currency depreciated and by what
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Che price of one currency in terms of another is
known as
(b) Trade ratou
(d) Balance of payment
ate
a) Foreign exchange rate
:) Interest 'rate
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Question 5
(a) Can you identify any implications of purchasing power parity?
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(c) Do you think LOOP really works? Give a reason for your answer?
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D2
The Steel was sold $650 / ton in the U.S.; the same type of steel was sold for Euro 400/ton. If the nominal exchange rate between Euro and dollar is $1.12/Euro, what is the real exchange rate between U.S. steel and European Steel? Which currency is overvalued (given a brief reason for your thought based on purchasing power parity)?
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What is meant by the balance of trade?
10
13
16
V
19
22
25
14
17
20
23
12
15
18
21
24
a It is the measurement of the barter of products for products.
b) It is the relative value of one currency to that of another.
( c) It is a measure of the total flow of money into or out of a country.
) d) It is a measure of the difference between exports and imports.
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6. How is the United States net foreign wealth affected by a depreciation of the US Dollar?
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IN US$
PER US$
FRI
THURS
FRI
THURS
Americas
Argentina
0.0172
0.0172 58.278 58.2427
peso
Brazil real
0.2431
0.2401
4.1127
4.1655
Canada dollar
0.7619
0.7612
1.3126
1.3138
Chile peso
0.001407 0.001404
710.7
712
The above table shows U.S.-dollar foreign-exchange rates in New York trading
(Oct. 19, 2019). Source: Wall Street Journal. Which currency depreciated from
Thursday to Friday? Which currency appreciated?
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N
N
QUESTION 3
Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+ e bln dollars per week and the demand curve is 140-e bln dollars per
week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates by more than
20%, the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142-e and the supply of dollars falls to 99+ e
How should the central
'N'
bank of Mexico react to this change?
N
O A. start selling U.S. dollars to support the exchange rate
O B. start buying U.S. dollars to support the exchange rate
O C. reduce money supply in the economy
O D. do nothing
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The interest rate in Eastlandia is 15% and the interest rate in USA is 11%. If the exchange rate of Eastlandia depreciates by 3%, what is the adjusted interest rate differential?
Typed and correct answer please. I ll rate
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- i alsoo translated pic attacharrow_forwardAnswer the question Suppose the yen is expected to appreciate by 4% against the pound in one year. If the nominal interest in Japan is 6%, and uncovered interest parity holds, the nominal interest rate in the UK. must be (hint: use the simpler/linear formula) (a) 2%. (b) 5%. (c) 10%.arrow_forwardQuestion 1 (i) The UK inflation rate is predicted to be 10% and the Eurozone inflation rate is predicted to be 6%. The current euro per pound exchange rate is €1.20/£1. What is the forecast $/£ rate in one year's time according to Purchasing Power Parity? Is the euro expected to appreciate or depreciate and by approximately what percentage? (ii) The euro per pound spot rate is €1.20/£1. The UK interest rate is 4% and the Eurozone interest rate is 6%. Calculate the six-month forward rate using the covered interest parity formula. State if the pound is at a forward discount or at a forward premium.arrow_forward
- 2. Analyze the data from China, Japan, Switzerland, Indonesia, Ukraine, and Taiwan (6 countries), and fill in the table as follow showing overvalued and undervalued currencies. (10%) Write a conclusion stating why PPP doesn't hold true according to the actual data. (10%) Country Local dollar Implied PPP Actual of the dollar price 1 United States China Indonesia Switzerland Ukraine Taiwan 5 20 30000 6.5 54 69 exchange rate 1 6.8 14000 0.9 28 30 Under/over against the dollar 0% valuationarrow_forwardWhich of the following will dcrease the supply of US dollars in the foreign exchange market? (A) US consumer demand fewer imports (B) Foreigners increase their demand for US goods ©) US residents increase their travel abroad Foreign Investors see increased investment opportunities in the USarrow_forwardQuestion 5 (c) Do you think LOOP really works? Give a reason for your answer? (d) If a can of spam costs $2 in the US and 6 pesos in Mexico, what would be the peso/dollar exchange rate if PPP holds? 5. If inflation is 3.5% in US and 7% in Mexico. What will happen to the peso/dollar exchange rate?arrow_forward
- Current Account (1) Goods Exports +$80 (2) Goods Imports −70 (3) Exports of Services +20 (4) Imports of Services −25 (5) Net Investment Income +5 (6) Net Transfers −5 Financial Account (7) Foreign Purchases of Assets in the United States +13 (8) US Purchases of Foreign Assets Abroad -23 Capital Account (9) Balance on Capital Account +5 The table contains balance of payments data (+ and −) for the hypothetical nation of Zabella. All figures are in billions of dollars. Zabella has a balance of trade (goods) Multiple Choice deficit of $10 billion. surplus of $5 billion. surplus of $10 billion. deficit of $5 billion.arrow_forwardThe Australian dollar was floated by the Australian Government in 1983.(a) Since it was floated, what is the highest value obtained by the Australian dollar against the UnitedStates dollar and on which day did this occur? Give reasons for this high value. What was thevalue of the United States dollar against the Australian dollar at that time?arrow_forwardQuestion 1 (i) The UK inflation rate is predicted to be 15% and the Euroland inflation rate is predicted to be 5%. The current Euro/£ exchange rate is 1.60 Euros per pound. What is the expected Euro/£ rate in one year’s time according to PPP? (ii) The $/£ spot rate is $1.60/£1. The UK interest rate is 4% and the US interest rate is 9%. Calculate the one year forward rate using the covered interest parity formula. State if the pound is at a forward discount or at a forward premium.arrow_forward
- Remaining Time: 30 minutes, 21 seconds. Question Completion Status: 300 QUESTION 15 Consider the following scenario: Soybeans Textiles Country A 30'000 25'000 20'000 3 1 Country B 10 5 Suppose that w,-Peso 3000 and e=1 (e is the exchange rate). What is the maximum level of w, (expressed in $) such that these 2 countries trade according to Comparative Advantage? Click Save and Submit to save and submit. Click Save All Answers to save all answers.arrow_forwardWhat is the impact of each of the following changes (other variables remaining unchanged) on the real exchange rate. (a) The Consumer Price Index (which measures the price level) in the United States rises by 4 percent. (b) The Consumer Price Index in Jamaica rises by 9 percent. (c) The two Consumer Price Index changes above occur at the same time. (d) The nominal exchange rate moves from 86 to 90 for a U.S. dollar. (e) The nominal exchange rate depreciates by 10 percent at the same time that local inflation is 10 percent and the U.S. price level is stable.arrow_forwardThe Central American country of Belize is one of approximately 14 Caribbean community countries that pegs its currency to the U.S. dollar. The pegged rate is 2 Belize dollars equal 1 U.S. dollar (2 BZD = 1 USD or 1 BZD = 0.50 USD). This is illustrated in the figure below. Exchange Rate (USD BZD) 2.00 1.00 0.50 D Quantity of Belize dollars traded per day How will the actions of speculators affect this market? O The Belize dollar supply curve will shift to the right and the Belize dollar demand curve will shift to the left. O The Belize dollar supply curve and the Belize dollar demand curve will shift to the right. O The Belize dollar supply curve will shift to the left and the Belize dollar demand curve shift to the right. The Belize dollar supply curve and the Belize dollar demand curve will shift to the left.arrow_forward
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