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EXAM 3 - International Finance Spring 2009 - Cutler

    MULTIPLE-CHOICE Please, select the letter which best answers each question, and enter it

    into the space provided in front of each question number. Each multiple-choice question is worth

    1.5 points.

1. The J-curve illustrates which of the following?

    (a) The effects of depreciation on the home country’s economy

    (b) The immediate increase in current account caused by a currency depreciation

    (c) The gradual adjustment of home prices to a currency depreciation

    (d) The short-term effects of depreciation on the current account

    (e) The Keynesian view of international trade dynamics

    Answer: D

    2. If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause

    (a) An increase in exchange rate, E

    (b) A decrease in exchange rate, E

    (c) An increase in output, Y

    (d) A decrease in output, Y

    (e) Shifting of the AA curve up and to the right

    Answer: B

    3. In the long-run equilibrium, after a permanent money-supply increase there follows:

    (a) An increase in exchange rate, E

    (b) A decrease in exchange rate, E

    (c) An increase in output, Y

    (d) A decrease in output, Y

    (e) Both (b) and (d)

    Answer: A

    4. The current account balance is

    (a) The supply of a country’s exports less the country’s own demand for imports.

    (b) The demand for a country’s exports plus the country’s own demand for imports.

    (c) The country’s own demand for imports less the demand for a country’s exports.

    (d) The demand for a country’s exports less the country’s own demand for imports.

    (e) None of the above.

    Answer: D

    5. The real exchange rate, q, is defined as

    (a) E

    (b) E times P *(c) E times P *(d) (E times P)/P *(e) P/(E times P)

Answer: D

    */P rises, 6. When EP

    (a) IM will rise.

    (b) IM will fall.

    (c) IM may rise or fall.

    (d) IM is not affected.

    (e) None of the above.

    Answer: B

    7. Which one of the following statements is the most accurate?

    (a) An increase in disposable income improves the current account.

    (b) An increase in disposable income does not affect the current account. (c) An increase in disposable income worsens the current account.

    (d) An increase in income worsens the current account.

    (e) An increase in income improves the current account.

    Answer: C

    8. In the short-run, a temporary increase in fiscal policy causes

    (a) A shift of the DD curve to the left, output increases and the currency appreciates (b) A shift of the DD curve to the right, output decreases and the currency appreciates (c) A shift of the DD curve to the right, output increases and the currency depreciates (d) A shift of the DD curve to the left, output decreases and the currency depreciates (e) A shift of the DD curve to the right, output increases and the currency appreciates Answer: E

    9. Using the DD-AA framework, which one of the following statements is the most accurate? (a) Only monetary policy can bring the economy to full employment.

    (b) Only fiscal policy can bring the economy to full employment.

    (c) Only both monetary and fiscal policies can bring the economy to full employment. (d) Neither policy is capable of bringing the economy to full employment. (e) Monetary policy by itself or fiscal policy by itself can bring the economy to full

    employment.

    Answer: E

    10. In the short run, a permanent increase in the domestic money supply

    (a) Has stronger effects on the exchange rate and output than an equal temporary increase (b) Has stronger effects only on the exchange rate but not on output than an equal temporary

    increase

    (c) Has weaker effects on the exchange rate and output than an equal temporary increase (d) Has stronger effects on output, but lower effect the exchange rate than an equal temporary

    increase

    (e) None of the above.

    Answer: A

    11. The DD schedule shows all combinations of which 2 variables so that the output market is in equilibrium?

    (a) Imports and exports.

(b) Exports and the exchange rate.

    (c) Foreign prices and the exchange rate.

    (d) Output and the exchange rate.

    (e) Output and exports.

    Answer: D

    12. Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is true:

    (a) The economy will stay at this level in the short run.

    (b) The exchange rate will first drop to a point on the AA schedule. (c) The exchange rate will first move to a point on the DD schedule. (d) The AA-DD equilibrium will shift to the position of the economy. (e) None of the above.

    Answer: B

    13. The domestic currency price of a representative foreign expenditure basket is (a) P, the domestic price level

    (b) E, the nominal exchange rate

    (c) P times E, the domestic price level times the domestic price level *(d) P, the foreign price level *(e) P times E, the foreign price level times the nominal exchange rate Answer: E

    14. In the short-run, a reduction in the exchange rate, i.e. currency appreciation, (a) Raises aggregate demand and raises output

    (b) Raises aggregate demand and lowers output

    (c) Raises aggregate demand and does not affect output

    (d) Lowers aggregate demand and raises output

    (e) Lowers aggregate demand and lowers output

    Answer: E

    15. In the short-run, any rise in the nominal exchange rate, E, will cause (a) An upward shift in the aggregate demand function and an expansion of output (b) An upward shift in the aggregate demand function and a reduction in output (c) A downward shift in the aggregate demand function and an expansion of output (d) An downward shift in the aggregate demand function and a reduction in output (e) An upward shift in the aggregate demand function but leaves output intact Answer; A

    16. Disposable income is defined as:

    (a) Y-C.

    (b) Y-T.

    (c) C-T.

    (d) I-C.

    (e) Y-I.

Answer: B

    17. Which of the following compete to determine whether the current account improves or

    worsens following a rise in the real exchange rate: (a) Appreciation and depreciation.

    (b) Crowding Out effect and producers effect. (c) Volume effect and value effect.

    (d) Volume effect and inflation.

    (e) Producers effect and value effect.

    Answer: C

    18. Which of the following do not affect the position of the DD curve? (a) Monetary policy.

    (b) Government spending.

    (c) Taxes.

    (d) Export Demand.

    (e) Price levels.

    Answer: A

    19. With the resurgence of patriotism following the September 11th attacks, a “Buy American”

    campaign would:

    (a) Shift the DD-curve right.

    (b) Shift the DD-curve left.

    (c) Shift the AA-curve right.

    (d) Shift the AA-curve left.

    (e) (a) and (c)

    Answer: A

    20. Temporary tax cuts would cause:

    (a) the AA-curve to shift left.

    (b) the AA-curve to shift right.

    (c) the DD-curve to shift left.

    (d) the DD-curve to shift right.

    (e) a shift in the AA-curve, although the direction is ambiguous.

    Answer: D

    21. What is the best way to describe aggregate demand? (a) Quantity required to satisfy equilibrium. (b) Exports decrease; imports increase.

    (c) Amount of a country’s goods and services demanded by household and firms throughout

    the world.

    (d) Individual’s demand.

    (e) None of the above.

    Answer: C

    22. By fixing the exchange rate, the central bank gives up its ability to

    (a) adjust taxes

    (b) increase government spending

    (c) influence the economy through fiscal policy

    (d) depreciate the domestic currency

    (e) influence the economy through monetary policy

    Answer: E.

    23. Fiscal Expansion under a fixed exchange has what effect(s) on the economy:

    (a) The money supply decreases.

    (b) Output decreases.

    (c) The exchange rate increases.

    (d) The exchange rate decreases initially but then returns to its original point.

    (e) Output is unchanged.

    Answer: D.

24. Bulgaria

    (a) pegs its exchange rate to the French franc

    (b) pegs its exchange rate to the British pound

    (c) pegs its exchange rate to the Euro

    (d) pegs its exchange rate to the German DM

    (e) Does not peg its currency

    Answer: C

    25. The liabilities side of a central bank include

    (a) deposits held by the private banks

    (b) currency in circulation

    (c) deposits held by the private banks and currency in circulation

    (d) deposits held by the private banks, foreign assets and currency in circulation

    (e) None of the Above

    Answer: C

    26. Which one of the following statements is the most accurate?

    (a) Fiscal policy has the same effect on employment under fixed and flexible exchange

    rate regimes.

    (b) Fiscal policy affects employment less under fixed than under flexible exchange rate

    regimes.

    (c) Fiscal policy affects employment more under fixed than under flexible exchange rate

    regimes.

    (d) Fiscal policy cannot affect employment under fixed exchange rate but does affect

    output under flexible exchange rate regimes.

    (e) None of the above statements are true.

    Answer: C

    27. Which one of the following statements is the most accurate?

    (a) A devaluation occurs when the central bank lowers the domestic currency price of

    foreign currency, E, and a revaluation occurs when the central bank raises E.

    (b) A devaluation occurs when the central bank raises the domestic currency price of

    foreign currency, E, and a revaluation occurs when the central bank lowers E. (c) Devaluation occurs when the domestic currency price of foreign currency, E, raises and

    a revaluation occurs when E is lowered.

    (d) A devaluation occurs when the central bank of the foreign country raises the domestic

    currency price of foreign currency, E, and a revaluation occurs when the central bank

    of the foreign country lowers E.

    (e) None of the above statements is true.

    Answer: B

    28. The main reason(s) why governments sometimes chose to devalue their currencies is (are): (a) Devaluation allows the government to fight domestic unemployment despite the lack of

    effective monetary policy.

    (b) Devaluation improves in the current account.

    (c) Devaluation increases foreign reserves held by the central bank.

    (d) All of the above.

    (e) None of the above.

    Answer: D

    29. Under fixed exchange rate, which one of the following statements is the most accurate? (a) Devaluation causes a reduction of the money supply.

    (b) Devaluation has no effect on the stock of money.

    (c) Devaluation causes an expansion of the money supply.

    (d) Devaluation causes a reduction in output.

    (e) Devaluation causes a reduction in official reserves.

    Answer: C

    30. The expectation of future devaluation causes a balance of payments crisis marked by (a) a sharp rise in reserves and a fall in the home interest rate below the world interest rate (b) a sharp fall in reserves and an even bigger fall in the home interest rate below the world

    interest rate

    (c) a sharp fall in reserves and a rise in the home interest rate above the world interest rate (d) a sharp rise in reserves and an even greater rise in the home interest rate above the

    world interest

    (e) None of the above

    Answer: C

    NAME________________________________________________________________

    ANSWER KEY

    For each multiple-choice question, please, include a check in the box under the

    chosen letter answer.

    Question # A B C D E 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

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