Question 1

A country often delays devaluating its currency since

Accepted Answer

A)  it will reduce domestic living standards
B)  it will increase the level of inflation
C)  it is considered politically unpopular
D)  all of the above
E)  none of the aboveF) A) and E)
G) A) and D) C

Question 2

Which of the following countries had the highest growth rate of real GDP in 2011?

Accepted Answer

A)  Canada
B)  China
C)  Germany
D)  Japan
E)  the United StatesF) B) and E)
G) None of the above

Question 3

In a system of freely floating exchange rates and perfect capital mobility, an increase in tariffs on foreign goods will result in

Accepted Answer

A)  an increase in domestic interest rates in the short run
B)  an increase in the value of the domestic currency in the short run
C)  an increase in the value of the domestic currency in the long run
D)  no change in domestic interest rates or income in the long run
E)  all of the aboveF) C) and E)
G) B) and D)

Question 4

Assume a country lacks technical innovation in its domestic industries and, as a result, experiences a severe decline in exports.What kind of policy should this country employ to get back to a situation of internal and external balance?

Accepted Answer

A)  an increase in government spending
B)  an increase in tariffs on import goods
C)  restrictive monetary policy in combination with expansionary fiscal policy
D)  expansionary monetary policy in combination with restrictive fiscal policy
E)  expansionary fiscal policy in combination with the levying of tariffs on importsF) A) and B)
G) A) and C)

Question 5

"If the inflation rate differs between two countries, the exchange rate will change in such a way as to maintain constant terms of trade." This statement describes

Accepted Answer

A)  synchronization
B)  sterilization
C)  purchasing power parity
D)  comparative advantage
E)  exchange rate overshootingF) None of the above
G) D) and E)

Question 6

If the central bank employs restrictive monetary policy, which of the following will be the most likely sequence of events?

Accepted Answer

A)  higher real domestic interest rates, inflow of funds, appreciation of the domestic currency
B)  lower real domestic interest rates, outflow of funds, appreciation of the domestic currency
C)  lower real domestic interest rates, outflow of funds, depreciation of the domestic currency
D)  lower inflation, lower nominal domestic interest rates, outflow of funds, depreciation of the domestic currency
E)  lower inflation, lower nominal domestic interest rates, inflow of funds, depreciation of the domestic currencyF) B) and E)
G) None of the above A

Question 7

Substantial intervention in foreign exchange markets by a central bank in an attempt to maintain an exchange rate is called

Accepted Answer

A)  sterilization
B)  synchronization
C)  dirty floating
D)  managed neutralization
E)  open market operationsF) A) and E)
G) B) and E)

Question 8

When a country runs a balance of payments deficit under a system of fixed exchange rates, which of the following is NOT part of the automatic adjustment process?

Accepted Answer

A)  a decrease in money supply leads to a lower level of spending
B)  a decrease in aggregate demand lowers domestic prices
C)  a decrease in domestic prices relative to foreign prices reduces the level of imports
D)  an increase in tariffs reduces the level of imports
E)  an increase in unemployment leads to lower wagesF) B) and C)
G) C) and D)

Question 9

The monetary approach to balance of payments problems, often used by the IMF, relies on

Accepted Answer

A)  restricting monetary policy
B)  imposing domestic credit controls
C)  creating a recession
D)  letting interest rates increase
E)  all of the aboveF) B) and D)
G) C) and D)

Question 10

Which of the following arrangements allows for the least amount of discretionary policy?

Accepted Answer

A)  a currency board
B)  a target zone
C)  ad hoc intervention
D)  a dirty floating exchange rate system
E)  a freely floating exchange rate systemF) A) and B)
G) D) and E)

Question 11

Under a system of flexible exchange rates and perfect capital mobility, restrictive monetary policy will in the long run

Accepted Answer

A)  lower inflation and the nominal exchange rate, while leaving real output, relative prices, and the real exchange rate the same
B)  increase the real interest rate
C)  lower inflation, the exchange rate, and the real interest rate
D)  leave output the same, while lowering the real interest rate and the real exchange rate
E)  reduce real money balances, domestic prices, and the real exchange rateF) B) and D)
G) A) and E)

Question 12

Which of the following is NOT a good reason for a central bank to intervene in foreign exchange markets?

Accepted Answer

A)  lowering of domestic inflation by currency appreciation
B)  prevention of domestic currency depreciation
C)  offsetting a temporary change in trade patterns
D)  achieving an internal balance
E)  smoothing unstable exchange rate expectationsF) A) and B)
G) A) and E)

Question 13

A currency board

Accepted Answer

A)  regulates how much a central bank can intervene in foreign exchange rate markets
B)  controls how much money the central bank can print to finance large budget deficits
C)  provides 100% backing for the domestic currency in foreign reserves or gold
D)  allows for more discretionary monetary policy than target zones
E)  has to be established when the domestic currency is replaced with a stable, generally accepted currency such as the U.S. dollar or the EuroF) A) and B)
G) A) and C)

Question 14

The real exchange rate is defined as

Accepted Answer

A)  the nominal exchange rate divided by the domestic price level
B)  the nominal exchange rate divided by the foreign price level
C)  the nominal exchange rate divided by the ratio of the foreign price level to the domestic price level
D)  the nominal exchange rate multiplied by the ratio of the foreign price level to the domestic price level
E)  the nominal exchange rate multiplied by the domestic price levelF) All of the above
G) B) and E)

Question 15

The central bank of a country with a balance of payments deficit may intervene in foreign exchange markets by selling some of its foreign currency holdings.If it wants to sterilize the intervention the central bank must also

Accepted Answer

A)  purchase government bonds from domestic banks
B)  sell government bonds to domestic banks
C)  impose ceilings on domestic credit
D)  restrict money supply
E)  none of the aboveF) A) and D)
G) C) and E)

Question 16

Under a system of flexible exchange rates, the long-run outcome of expansionary monetary policy will be

Accepted Answer

A)  a depreciation of the domestic currency
B)  an appreciation of the domestic currency
C)  a lower level of frictional unemployment
D)  lower real interest rates
E)  a higher level of real outputF) All of the above
G) B) and D)

Question 17

If the yield on a Japanese government security is 6%, the yield on a U.S.government security of the same maturity is 4%, and the exchange rate of the dollar to the Japanese yen is expected to depreciate by 3%, then

Accepted Answer

A)  Americans are likely to buy Japanese government securities
B)  Japanese people are likely to buy American government securities
C)  the Fed is likely to intervene in the foreign exchange market by buying Japanese yen
D)  the Japanese central bank is likely to intervene in the foreign exchange market by selling U.S. dollars
E)  both 
C)  and 
D)  F) A) and B)
G) None of the above

Question 18

The J-curve effect states that

Accepted Answer

A)  appreciation of a currency always worsens the trade balance unless it is accompanied by an expenditure-reducing policy
B)  depreciation of a currency immediately improves the trade balance
C)  depreciation of a currency may initially worsen the trade balance but will ultimately improve it
D)  in the short run the physical volume of trade is affected by a currency depreciation, but in the long run the change in trade is offset by the change in relative prices
E)  large exchange rate changes may lead to changes in trade patterns that persist even after exchange rates return to their initial levelF) A) and B)
G) C) and D)

Question 19

Under flexible exchange rates, if the domestic currency depreciates, net exports will most likely

Accepted Answer

A)  increase in both the short run and the long run
B)  decrease in both the short run and the long run
C)  increase in the short run but decrease in the long run
D)  decrease in the short run but increase in the long run
E)  increase in the short run, but remain unchanged in the long runF) None of the above
G) A) and B) D

Question 20

The hysteresis effect suggests that after a long and persistent overvaluation of the U.S.dollar

Accepted Answer

A)  foreign central banks are likely to intervene in the foreign exchange market in an effort to depreciate the dollar again
B)  there will be a change in trade patterns that will last even after the value of the dollar has come down
C)  foreign firms will initially gain market shares from U.S. firms but will lose them as soon as the dollar starts to depreciate again
D)  a depreciation of the dollar will initially lower net exports but the trend will soon reverse and the trade balance will ultimately improve
E)  none of the aboveF) A) and B)
G) A) and C)

Exam 23: International adjustment and interdependence

A country often delays devaluating its currency since

Correct AnswerverifiedC

Which of the following countries had the highest growth rate of real GDP in 2011?

Correct AnswerverifiedShow Answer

In a system of freely floating exchange rates and perfect capital mobility, an increase in tariffs on foreign goods will result in

Correct AnswerverifiedShow Answer

Assume a country lacks technical innovation in its domestic industries and, as a result, experiences a severe decline in exports.What kind of policy should this country employ to get back to a situation of internal and external balance?

Correct AnswerverifiedShow Answer

"If the inflation rate differs between two countries, the exchange rate will change in such a way as to maintain constant terms of trade." This statement describes

Correct AnswerverifiedShow Answer

If the central bank employs restrictive monetary policy, which of the following will be the most likely sequence of events?

Correct AnswerverifiedA

Substantial intervention in foreign exchange markets by a central bank in an attempt to maintain an exchange rate is called

Correct AnswerverifiedShow Answer

When a country runs a balance of payments deficit under a system of fixed exchange rates, which of the following is NOT part of the automatic adjustment process?

Correct AnswerverifiedShow Answer

The monetary approach to balance of payments problems, often used by the IMF, relies on

Correct AnswerverifiedShow Answer

Which of the following arrangements allows for the least amount of discretionary policy?

Correct AnswerverifiedShow Answer

Under a system of flexible exchange rates and perfect capital mobility, restrictive monetary policy will in the long run

Correct AnswerverifiedShow Answer

Which of the following is NOT a good reason for a central bank to intervene in foreign exchange markets?

Correct AnswerverifiedShow Answer

A currency board

Correct AnswerverifiedShow Answer

The real exchange rate is defined as

Correct AnswerverifiedShow Answer

The central bank of a country with a balance of payments deficit may intervene in foreign exchange markets by selling some of its foreign currency holdings.If it wants to sterilize the intervention the central bank must also

Correct AnswerverifiedShow Answer

Under a system of flexible exchange rates, the long-run outcome of expansionary monetary policy will be

Correct AnswerverifiedShow Answer

If the yield on a Japanese government security is 6%, the yield on a U.S.government security of the same maturity is 4%, and the exchange rate of the dollar to the Japanese yen is expected to depreciate by 3%, then

Correct AnswerverifiedShow Answer

The J-curve effect states that

Correct AnswerverifiedShow Answer

Under flexible exchange rates, if the domestic currency depreciates, net exports will most likely

Correct AnswerverifiedD

The hysteresis effect suggests that after a long and persistent overvaluation of the U.S.dollar

Correct AnswerverifiedShow Answer

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C

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A

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D

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