ECON 5002 – In an open economy under flexible exchange rates where the central bank

| April 14, 2018

QUESTION 1In an open economy under flexible exchange rates where the central bank keeps money supply fixed, a tax cut will cause an increase in which of the following?net exportsthe exchange rate, Eexportsall of the abovenone of the above0.2 points QUESTION 2When the interest parity condition holds, we know that the domestic interest rate must be approximately equal to:the foreign interest rate.the expected rate of depreciation of the domestic currency.the expected rate of appreciation of the domestic currency.the foreign interest rate minus the expected rate of appreciation of the domestic currency.the foreign interest rate plus the expected rate of appreciation of the domestic currency.0.2 points QUESTION 3Which of the following will cause a real depreciation?a reduction in the exchange rate of foreign currency for domestic currency, Ean increase in the foreign price of goods, P*a decrease in the domestic price of goods, Pall of the abovenone of the above0.2 points QUESTION 4Suppose policy makers want to increase output (Y) and increase net exports (NX). Which of the following policies would most likely achieve this?an increase in government spendinga real depreciationan increase in government spending and an increase in the real exchange ratean increase in the real exchange rate0.2 points QUESTION 5Suppose there is a real depreciation of the domestic currency. This real depreciation will cause:an increase in net exports.an increase in imports.a reduction in output.a decrease in government spending.all of the above.0.2 points QUESTION 6Under a fixed exchange rate regime, a tax increase will in the short run:cause a reduction in ouput, Y.require a reduction in the money supply.cause no change in the domestic interest rate.all of the above0.2 points QUESTION 7Suppose the domestic and foreign interest rates are i = 4%, i* = 2%, and that the domestic currency is expected to depreciate by 3% during the coming year. Given this information, we know that:individuals will only hold domestic bonds.individuals will only hold foreign bonds.individuals will be indifferent about holding domestic or foreign bonds.the interest parity condition holds.0.2 points QUESTION 8Assume the interest parity condition holds and that initially domestic and foreign interest rates are equal, i.e., i = i*. A reduction in the domestic interest rate will cause:an increase in the demand for the domestic currency.an immediate increase in the current domestic exchange rate, E.an expected appreciation of the domestic currency over time.all of the above0.2 points QUESTION 9Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is greater than the U.K. interest rate. Given this information, we know that investors expect:the pound to depreciate.the pound to appreciate.the dollar-pound exchange rate to remain fixed.the U.S. interest rate to fall.none of the above0.2 points QUESTION 10Suppose there are two countries that are identical in every way with the following exception. Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime. Suppose government spending in both countries rises by the same amount. Given this information, we know that:the change in output in A will be greater than in B.the change in output in B will be greater than in A.the change in output will be the same in both countries.the relative output effects are ambiguous.0.2 points QUESTION 11Suppose that over the past decade, the Australian inflation is greater than that in Japan. Further assume that during this same period, the Australian dollar appreciates relative to the Japanese yen. Given this information:the real exchange rate remains unchanged.the real exchange rate must decrease.the real exchange rate must increase.the real exchange rate can increase or remain the same, but not decrease.the real exchange rate can decrease or remain the same, but not increase.0.2 points QUESTION 12Under fixed exchange rates and perfect capital mobility, which of the following must occur if the policy to peg the currency is credible?The domestic and foreign interest rates must be equal.The central bank cannot use monetary policy independently to affect domestic output.A contractionary fiscal policy will require that the central bank decrease the money supply.all of the abovenone of the above0.2 points QUESTION 13A nominal appreciation of the Mexican peso against the Australian dollar indicates that:the exchange rate of pesos per dollar, E, has increased.E has decreased.the peso price of the U.K. pound has increased.the number of units of foreign currency that one can obtain with one peso has decreased.0.2 points QUESTION 14For an open economy, which of the following expressions represents private saving (S)?investment plus tax revenues less government expenditure plus net exports, I + T – G + NXI + T – G – NXI + G + NXG – T + NX – Inone of the above0.2 points QUESTION 15Suppose there is a reduction in foreign output, Y*. This reduction in Y* will cause which of the following in the domestic country?a reduction in outputa reduction in consumptiona reduction in net exportsall of the abovenone of the above0.2 points QUESTION 16Assume that the price levels in two countries are constant. In this situation, we know that:neither the real nor the nominal exchange rate can change.the real exchange rate can change, while the nominal exchange rate is constant.the nominal exchange rate can change, while the real exchange rate is constant.the real and nominal exchange rate must move together, changing by the same percentage.the nominal exchange rate will fluctuate more widely than the real exchange rate.0.2 points QUESTION 17A change in which of the following variables will have NO direct effect on domestic demand?domestic incomegovernment spendingtaxesthe interest rate (r)none of the above0.2 points QUESTION 18Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is 4% while the one-year U.K. interest rate is 6%. Given this information, financial markets expect the U.K. pound to:depreciate by 2% today.depreciate by 2% over the next year.appreciate by 2% over the next year.appreciate by 2% today.be unchanged0.2 points QUESTION 19When the Australian dollar appreciates, we know that, other things equal:the dollar is less expensive to foreigners.foreign goods are less expensive to Australians.foreign currency is more expensive to Australians.Australian goods are less expensive to foreigners.none of the above0.2 points QUESTION 20Suppose there is a rise in foreign output, Y*. This rise in Y* will cause which of the following to occur?The domestic country’s output decreases.The domestic country’s consumption increases.The domestic country’s trade balance worsens.all of the abovenone of the above

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