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________________________ Name: Class: ___________________ Date: __________ ID: A Test 2 Practice Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Italian adult non-institutionalized population was 45.020 million, the labor force was 24.065 million, and the number of people employed was 22.105 million. According to these numbers, the Italian labor-force participation rate and unemployment rate were about a. 45.1%, 8.1% b. 45.1%, 4.4% c. 53.5%, 8.1% d. 53.5%, 4.4% 2. Suppose some country had an adult population of about 50 million, the labor-force participation rate was 60 percent, and the unemployment rate was 5 percent. What were the number of people employed and the number of people in the labor force? a. 27.5 million, 30 million b. 28.5 million, 30 million c. 30 million, 31.5 million d. 30 million, 32.5 million 3. Among teenagers, which group has the highest unemployment rate? a. white males b. black females c. black males d. There are no significant differences in unemployment rates across these groups. 4. Recent entrants into the labor force account for about a. 1/5 of those who are unemployed. b. 1/4 of those who are unemployed. c. 1/3 of those who are unemployed. d. 1/2 of those who are unemployed. 5. Which of the following is correct? a. Short-term unemployment is a more serious problem than long-term unemployment. b. Most spells of unemployment are long term. c. Most of the currently unemployed have been unemployed a long time. d. None of the above is correct. 6. Job search a. explains why firms pay less than the competitive equilibrium wage. b. is due simply to the failure of wages to balance labor supply and labor demand. c. is the process of matching workers with appropriate jobs. d. All of the above are correct. 7. Wages in excess of their equilibrium level help explain a. frictional but not structural unemployment. b. structural but not frictional unemployment. c. frictional and structural unemployment. d. neither frictional or structural unemployment. ____ ____ ____ ____ ____ ____ 8 Name: ________________________ ____ ID: A ____ ____ ____ ____ ____ ____ ____ ____ 8. Suppose that butchers and bakers had no unions. Now suppose the butchers form a union. What does this do the labor supply of and wages of bakers? a. it increases the labor supply and wages of bakers. b. it increases the labor supply and decreases the wages of bakers. c. it decreases the labor supply and increases the wages of bakers. d. it decreases the labor supply and wages of bakers. 9. Efficiency wages a. increase frictional unemployment by keeping wages above equilibrium. b. decrease frictional unemployment by keeping wages at equilibrium. c. increase structural unemployment by keeping wages above equilibrium. d. decrease structural unemployment by keeping wages at equilibrium. 10. You get money for babysitting the neighbors' children. This best illustrates which function of money? a. medium of exchange b. unit of account c. store of value d. liquidity 11. Current U.S. currency is a. fiat money with intrinsic value. b. fiat money with no intrinsic value. c. commodity money with intrinsic value. d. commodity money with no intrinsic value. 12. Fiat money a. has no intrinsic value. b. is backed by gold. c. has intrinsic value equal to its value in exchange. d. is any close substitute for currency such as checkable deposits. 13. The legal tender requirement means that a. people are more likely to accept the dollar as a medium of exchange. b. the government must hold enough gold to redeem all currency. c. people may not make trades with anything else. d. All of the above are correct. 14. Demand deposits are included in a. M1 but not M2. b. M2 but not M1. c. M1 and M2. d. neither M1 nor M2. 15. Savings deposits are included in a. M1 but not M2. b. M2 but not M1. c. M1 and M2. d. neither M1 nor M2. 16. The Board of Governors a. is currently chaired by Paul Volcker. b. are appointed by the president and confirmed by the Senate. c. has twelve members. d. All of the above are correct. 2 Name: ________________________ ID: A ____ 17. Which of the following has a four-year term? a. the members of the Board of Governors b. the Chair of the Board of Governors c. the members of the FOMC d. All of the above are correct. ____ 18. The Fed can increase the price level by conducting open market a. sales and raising the discount rate. b. sales and lowering the discount rate. c. purchases and raising the discount rate. d. purchases and lowering the discount rate. ____ 19. Suppose that banks desire to hold no excess reserves and that the Fed has set a reserve requirement of 10%. If you deposit $3,000 into First Hawkeye Bank, a. Hawkeye's required reserves increase by $300. b. Hawkeye will be able to lend out $2,700. c. Hawkeye's assets and liabilities will both increase by $3,000. d. All of the above are correct. ____ 20. If the reserve ratio is 5 percent, $1,000 of additional reserves can create a. $200 of new money. b. $2,000 of new money. c. $20,000 of new money. d. None of the above is correct. Tazian Banking Statistics The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million Tazes of required reserves, 75 million Tazes of excess reserves, have issued 7,500 million Tazes of deposits, and hold 225 million Tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all currency is on deposit at the bank. ____ 21. Refer to Tazian Banking Statistics. Suppose that the Bank of Tazi loaned the banks of Tazi 10 million Tazes. Suppose also that both the required reserve ratio and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change? a. 250 million Tazes b. 200 million Tazes c. 125 million Tazes d. None of the above is correct. ____ 22. Which of the following lists two things that both increase the money supply? a. the Fed buys bonds and lowers the discount rate b. the Fed buys bonds and raises the discount rate c. the Fed sells bonds and lowers the discount rate d. the Fed sells bonds and raises the discount rate ____ 23. When the Fed decreases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases. b. borrow more from the Fed and lend less to the public. The money supply decreases. c. borrow less from the Fed and lend more to the public. The money supply increases. d. borrow less from the Fed and lend less to the public. The money supply decreases. 3 Name: ________________________ ID: A ____ 24. If the public decides to hold less currency and more deposits in banks, bank reserves a. decrease and the money supply eventually decreases. b. decrease but the money supply does not change. c. increase and the money supply eventually increases. d. increase but the money supply does not change. ____ 25. If people decide to hold more currency relative to deposits, the money supply a. falls. The Fed could lessen the impact of this by buying Treasury bonds. b. falls. The Fed could lessen the impact of this by selling Treasury bonds. c. rises. The Fed could lessen the impact of this by buying Treasury bonds. d. rises. The Fed could lessen the impact of the by selling Treasury bonds. ____ 26. When the money market is drawn with the value of money on the vertical axis, if the value of money is below the equilibrium level, a. the price level will rise. b. the value of money will rise. c. money demand will shift left. d. money demand will shift right. ____ 27. When the money market is drawn with the value of money on the vertical axis, the price level increases if a. either money demand or money supply shifts right. b. either money demand or money supply shifts left. c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right. Use the figure below for the following questions. Figure 30-1 ____ 28. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, a. the value of money is less than its equilibrium level. b. the price level is higher than its equilibrium level. c. the quantity of money demanded is greater than the quantity of money supplied. d. the quantity of money supplied is greater than the quantity of money demanded. ____ 29. Refer to Figure 30-1. If the current money supply is located at MS1, a. there is no excess supply or excess demand if the value of money is 2. b. the equilibrium is at point C. c. there is an excess supply of money if the value of money is 1. d. None of the above is correct. 4 Name: ________________________ ID: A ____ 30. Suppose that velocity rises while the money supply stays the same. It follows that a. P x Y must rise. b. P x Y must fall. c. P x Y must be unchanged. d. the effects on P x Y are uncertain. ____ 31. The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate? a. 6 percent b. 5 percent c. 1.5 percent d. 1 percent ____ 32. As inflation rises, people will tend to a. go to the bank more often. This is known as menu costs. b. go to the bank more often. This is known as shoeleather costs. c. go to the bank less often. This is known as the inflation fallacy. d. go to the bank less often. This is known as redistribution costs. ____ 33. You buy a stock and its price rises less than the price level. Before taxes you made a. a nominal and real gain, and you pay taxes on the nominal gain. b. a nominal gain and a real loss, and you don't have to pay taxes since you gained less than the change in the price level. c. a nominal and a real gain, and you pay taxes on the real gain. d. a nominal gain and a real loss, and you pay taxes on the nominal gain. ____ 34. Given a nominal interest rate of 6 percent, in which case would you earn the highest after-tax real rate of interest? a. Inflation is 4 percent; the tax rate is 25 percent. b. Inflation is 3 percent; the tax rate is 20 percent. c. Inflation is 2 percent; the tax rate is 15 percent. d. The after-tax real interest rate is the same for all of the above. ____ 35. High and unexpected inflation has a greater cost a. for those who save than those who borrow. b. for those who hold a little money than for those who hold a lot of money. c. for those whose wages increase by as much as inflation, than those who are paid a fixed nominal wage. d. for savers in low income tax brackets than for savers in high income tax brackets. ____ 36. When Dee, a U.S. citizen, purchases a designer dress made in Milan, the purchase is a. both a U.S. and Italian import. b. a U.S. export and an Italian import. c. a U.S. import and an Italian export. d. neither an export nor an import for either country. ____ 37. Juan lives in Ecuador and purchases a motorcycle manufactured in the United States. The motorcycle is a. both a U.S. and Ecuadorian export. b. both a U.S. and Ecuadorian import. c. a U.S. import and an Ecuadorian export. d. a U.S. export and an Ecuadorian import. ____ 38. Net exports measures the difference between a country's a. income and expenditures. b. sale of goods and services abroad and purchase of foreign goods and services. c. sale of domestic assets abroad and purchase of foreign assets. d. All of the above are correct. 5 Name: ________________________ ID: A ____ 39. An appreciation of the U.S. real exchange rate induces U.S. consumers to buy a. fewer domestic goods and fewer foreign goods. b. more domestic goods and fewer foreign goods. c. fewer domestic goods and more foreign goods. d. more domestic goods and more foreign goods. ____ 40. When the yen gets "stronger" relative to the dollar, a. the U.S. trade deficit with Japan will rise. b. the U.S. trade deficit with Japan will fall. c. the U.S. trade deficit with Japan will be unchanged. d. None of the above necessarily happens. ____ 41. If the quantity of loanable funds supplied is greater than the quantity demanded, then a. there is a shortage of loanable funds and the interest rate will fall. b. there is a shortage of loanable funds and the interest rate will rise. c. there is a surplus of loanable funds and the interest rate will fall. d. there is a surplus of loanable funds and the interest rate will rise. ____ 42. In the open-economy macroeconomic model, which of the following would make India's net capital outflow decrease? a. a decrease in U.S. interest rates. b. a decrease in Indian interest rates. c. an appreciation of the Indian rupee. d. None of the above is correct. ____ 43. Suppose that the government of Syria raises its budget deficit. The real exchange rate of the Syrian pound would a. depreciate and Syrian net exports would rise. b. depreciate and Syrian net exports would fall. c. appreciate and Syrian net exports would rise. d. appreciate and Syrian net exports would fall. ____ 44. In the 1980s, the U.S. government budget deficit rose. At the same time the U.S. trade deficit grew larger, the real exchange rate of the dollar appreciated, and U.S. net capital outflow decreased. Which of these events is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit? a. The U.S. trade deficit grew. b. The real exchange rate of the dollar appreciated. c. U.S. net capital outflow fell. d. None of the above is contrary to the predictions of the model. ____ 45. If the U.S. were to impose restrictions on imports a. the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange would both increase. b. nether the demand for loanable funds nor the demand for dollars in the market for foreign-currency exchange would increase. c. the demand for loanable funds would increase, but the demand for dollars in the market for foreign-currency exchange would not. d. the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not. ____ 46. If the United States imposes an import quota on clothing, U.S. exports a. increase, U.S. imports increase, and U.S. net exports are unchanged. b. increase, U.S. imports decrease, and U.S. net exports increase. c. decrease, U.S. imports increase, and U.S. net exports decrease. d. decrease, U.S. imports decrease, and U.S. net exports are unchanged. 6 Name: ________________________ ID: A ____ 47. Suppose that the U.S. imposes an import quota on automobiles. The quota makes the real exchange rate of U.S. dollars a. appreciate but does not change the real interest rate in the United States. b. appreciate and the real interest rate in the United States increase. c. depreciate and the real interest rate in the United States decrease. d. depreciate but does not change the real interest rate in the United States. ____ 48. When Mexico suffered from capital flight in 1994, Mexico's net exports a. decreased. b. did not change. c. increased. d. decreased until the peso appreciated, then increased. ____ 49. Which of the following is most likely to result if foreigners decide to withdraw the funds that they have loaned to the United States over the past two decades? a. U.S. net exports rise. will b. U.S. saving will rise. c. U.S. domestic investment will rise. d. the dollar will appreciate. ____ 50. Which of the following would cause the real exchange rate of the U.S. dollar to depreciate? a. the U.S. government budget deficit increases b. capital flight from the United States c. the U.S. imposes import quotas d. None of the above is correct. Short Answer 51. Why have labor-force participation rates for women in the United States increased since World War II while labor-force participation rates for men have decreased? 52. If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show your work. 53. During the early 1930s there were a number of bank failures in the United States. What did this do to the money supply? The New York Federal Reserve Bank advocated open market purchases. Would these purchases have reversed the change in the money supply and helped banks? Explain. 54. Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent? 55. List and define any two of the costs of high inflation. 56. What is the logic behind the theory of purchasing-power parity? 57. Suppose that a U.S. dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen? 58. Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate? 59. Suppose the U.S. government institutes a "Buy American" campaign, in order to encourage spending on domestic goods. What effect will this have on the U.S. trade balance? 7 Name: ________________________ ID: A 60. Illustrate the Loanable Funds Diagram in the Open Economy Framework. Label the intial equilibrium as (r0,LF0). How do the two components of net capital outflows enter the demand curve and supply curve? What is the impact on the loanable funds market when the country is running a trade deficit? Explain intuitively and show graphically. 61. Suppose that the labor market is in equilibrium and unemployment is at UEn. Iluustrate and label (W0,L0=Ln) where W is the real wage? What happens when the economy goes into a recession in the short-run? What happens to W, L, Ln, UE, and UEn? 62. Describe the Equilibrium in the Foreign Currency Exchange (FX) Market between Hippoland and Sheepistan. The respective currencies are Rands and Scots. Assume that Sheepistan is your domestic economy. Illustrate and label the diagram for the FX market showing the equilibrium real exchange rate (E= you fill in) and equilibrium quantity of Scots. Suppose the Central Bank of Hippoland blows a lot of hot air, rapidly expanding the money supply and increasing inflation. Explain and illustrate what happens in the FX. Does the Scot appreciate or depreciate? 63. Illustrate the Loanable Funds Diagram in the Open Economy Framework. Label the intial equilibrium as (r0,LF0). There has been turmoil, increased uncertainty, defaults by borrowers in the credit markets Loanable Funds markets. Explain illustrate what is happening be sure to label any shifts in curves and the new equilibrium. 64. This is a follow on to the previous question about a domestic credit crisis. Now we link the loanable funds market to the Foreign Exchange Currency (FX) Market. a) Given the intial equilibrium (r0,LF0), you can map this to a real interest rate and NCO relationship. Based on your previous answer is there a movement along the NCO curve or a shift in the curve? Illustrate and explain. b) Given the intial equilibrium (r0,LF0), there is a mapping to the NCO - r relation AND the real exchange rate (E) and quantity of domestic currency in the FX market. Illustrate the intial equilibrium (E0,$0). Based on your answer in part a) what happens in the FX market, Explain and illustrate and shift and new equilibrium. c) What has been the impact of any change in E on exports, imports, and net exports? Explain why? 8 ID: A Test 2 Practice Answer Section MULTIPLE CHOICE 1. Register to View AnswerDIF: 2 REF: 28-1 TOP: Labor-force participation rate, Unemployment rate 2. Register to View Answer. DIF: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: TOP: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: ANS: MSC: MSC: Applicative 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 3 REF: 28-1 TOP: Labor-force participation rate, Unemployment rate Analytical C DIF: 1 REF: 28-1 TOP: Labor-force demographics Definitional C DIF: 2 REF: 28-1 TOP: Labor-force demographics Definitional C DIF: 2 REF: 28-1 TOP: Unemployment spells Definitional C DIF: 1 REF: 28-1 TOP: Job search Definitional B DIF: 1 REF: 28-3 Structural unemployment, Frictional unemployment MSC: Interpretive B DIF: 1 REF: 28-4 TOP: Unions Applicative C DIF: 2 REF: 28-5 TOP: Efficiency wages Interpretive A DIF: 1 REF: 29-1 TOP: Medium of exchange Definitional B DIF: 1 REF: 29-1 TOP: Commodity money, Fiat money Definitional A DIF: 1 REF: 29-1 TOP: Fiat money Definitional A DIF: 1 REF: 29-1 TOP: Legal tender requirement Definitional C DIF: 1 REF: 29-1 TOP: M1, M2 Definitional B DIF: 1 REF: 29-1 TOP: M1, M2 Definitional B DIF: 1 REF: 29-2 TOP: Federal Reserve Definitional B DIF: 1 REF: 29-2 TOP: Federal Reserve Definitional D DIF: 3 REF: 29-2 TOP: Open-market operations Definitional D DIF: 2 REF: 29-2 TOP: Reserves Applicative 1 ID: A 20. ANS: MSC: 21. ANS: MSC: 22. ANS: MSC: 23. ANS: MSC: 24. ANS: TOP: 25. ANS: TOP: 26. ANS: MSC: 27. ANS: MSC: 28. ANS: MSC: 29. ANS: MSC: 30. ANS: MSC: 31. ANS: TOP: 32. ANS: MSC: 33. ANS: MSC: 34. ANS: MSC: 35. ANS: TOP: 36. ANS: MSC: 37. ANS: MSC: 38. ANS: MSC: 39. ANS: MSC: 40. ANS: MSC: 41. ANS: MSC: 42. ANS: TOP: MSC: C DIF: 1 REF: 29-3 TOP: Applicative B DIF: 2 REF: 29-3 TOP: Applicative A DIF: 2 REF: 29-3 TOP: Applicative A DIF: 2 REF: 29-3 TOP: Interpretive C DIF: 2 REF: 29-3 Money multiplier and currency holdings MSC: A DIF: 3 REF: 29-3 Money multiplier and currency holdings MSC: B DIF: 1 REF: 30-1 TOP: Analytical D DIF: 2 REF: 30-1 TOP: Applicative D DIF: 2 REF: 30-1 TOP: Analytical A DIF: 1 REF: 30-1 TOP: Applicative A DIF: 2 REF: 30-1 TOP: Applicative D DIF: 1 REF: 30-1 Nominal interest rate, Real interest rate MSC: B DIF: 2 REF: 30-2 TOP: Analytical D DIF: 2 REF: 30-2 TOP: Analytical C DIF: 2 REF: 30-2 TOP: Applicative A DIF: 2 REF: 30-2 Redistributional effects of unexpected inflation MSC: C DIF: 1 REF: 31-1 TOP: Definitional D DIF: 1 REF: 31-1 TOP: Definitional B DIF: 1 REF: 31-1 TOP: Definitional C DIF: 1 REF: 31-2 TOP: Applicative B DIF: 2 REF: 31-2 TOP: Applicative C DIF: 2 REF: 32-1 TOP: Analytical A DIF: 2 REF: 32-2 Net capital outflow, Open-economy macroeconomic model Applicative Money multiplier Reserve ratio Reserves Discount rate Applicative Applicative Money market Money market Money market Money market Velocity Applicative Shoeleather costs Inflation-induced tax distortions After-tax real interest rate Interpretive Imports, Exports Exports, Imports Net exports Appreciation, Real exchange rate Depreciation, Real exchange rate Market for loanable funds 2 ID: A 43. ANS: TOP: 44. ANS: TOP: 45. ANS: TOP: 46. ANS: TOP: 47. ANS: TOP: 48. ANS: MSC: 49. ANS: TOP: 50. ANS: TOP: D DIF: 2 REF: 32-3 Budget deficit, Open-economy macroeconomic model D DIF: 3 REF: 32-3 Open-economy macroeconomic model, U.S. trade D DIF: 3 REF: 32-3 Trade policy, Open-economy macroeconomic model D DIF: 2 REF: 32-3 Trade policy, Open-economy macroeconomic model A DIF: 3 REF: 32-3 Trade policy, Open-economy macroeconomic model C DIF: 2 REF: 32-3 Definitional A DIF: 3 REF: 32-3 Capital flight, Open-economy macroeconomic model B DIF: 3 REF: 32-3 Open-economy macroeconomic model MSC: Analytical MSC: Analytical MSC: Applicative MSC: Analytical MSC: Analytical TOP: Capital flight MSC: Analytical MSC: Analytical SHORT ANSWER 51. ANS: Labor-force participation rates for women have increased largely as a result of a change in the attitude of society toward women working outside the home and the concomitant increase in educational and vocational opportunities for women. Advances in birth control have made it possible for women to stay in the labor force longer. Labor-force participation rates for men have decreased because young men now stay in school longer than they used to, older men now retire earlier and live longer, and more fathers now stay at home to raise their children. DIF: 2 REF: 28-1 MSC: Definitional 52. ANS: (1/.20) $100 = $500. TOP: Labor-force demographics DIF: 1 REF: 29-3 TOP: Money multiplier MSC: Applicative 53. ANS: Bank failures cause people to lose confidence in the banking system so that deposits fall and banks have less to lend. Further, under these circumstances banks are probably more cautious about lending. Both of these reactions would tend to decrease the money supply. Open market purchases increase bank reserves and so would have at least made the decrease smaller. The increase in reserves would also have provided banks with greater liquidity to meet the demands of customers who wanted to make withdrawals. In short, while the actions of depositors and banks lowered the money supply, the Fed could have increased it by buying bonds. DIF: 3 REF: 29-3 TOP: Monetary policy, Open-market operations MSC: Analytical 54. ANS: Inflation and nominal interest rates each increase by 5 percent points. There is no change in the real interest rate or any other real variable. DIF: 1 REF: 30-1 TOP: Inflation 3 MSC: Analytical ID: A 55. ANS: The costs include: Shoeleather costs: the resources wasted when inflation induces people to reduce their money holdings. Menu costs: the cost of more frequent price changes at higher inflation rates. Relative Price Variability: because prices change infrequently, higher inflation causes relative prices to vary more. Decisions based on relative prices are then distorted so that resources may not be allocated efficiently. Inflation Induced Tax Distortions: the income tax is not completely indexed for inflation; an increase in nominal income created by inflation results in higher real tax rates that discourage savings. Confusion and Inconvenience: inflation decreases the reliability of the unit of account making it more complicated to differentiate successful and unsuccessful firms thereby impeding the efficient allocation of funds to alternative investments. Unexpected Inflation: inflation decreases the real value of debt thereby transferring wealth from creditors to debtors. DIF: 1 REF: 30-2 TOP: Inflation costs MSC: Definitional 56. ANS: The logic behind purchasing-power parity is the law of one price, which asserts that a good must sell for the same price in all locations. If the price for a good is higher in one market than in another, someone can make a profit by purchasing the good where it is relatively cheap, and selling the good where it is relatively expensive. This process of arbitrage leads to an equalization of prices for the good in all locations. If purchasing power parity holds the amount of dollars it takes to buy a good in the U.S. should buy enough foreign currency to buy the same good in a foreign country. DIF: 2 REF: 31-3 TOP: Arbitrage, Purchasing-power parity MSC: Analytical 57. ANS: People can make a profit by buying gold in Australia and selling it in Russia. Purchases in Australia drive down the amount of gold a dollar can buy there. Sales in Russia drive up the amount of gold a dollar can buy there. Purchasing-power parity theory claims that this should continue until the dollar can buy the same amount of gold anywhere. DIF: 2 REF: 31-3 TOP: Arbitrage, Purchasing-power parity MSC: Analytical 58. ANS: Purchasing-power parity works well in helping us explain long-term trends in exchange rates, and in explaining what happens to exchange rates during hyperinflation. It is not completely accurate because (1) not all goods are easily traded, and (2) even tradable goods are not always perfect substitutes when they are produced in different countries. DIF: 2 MSC: Interpretive REF: 31-3 TOP: Purchasing-power parity 4 ID: A 59. ANS: Such a campaign will increase the demand for domestically produced goods and hence decrease the demand for imports. This increases the demand for dollars in the market for foreign currency. The real exchange rate of the U.S. dollar will appreciate, and the net effect will be no change in the trade balance. The level of net exports ultimately depends upon domestic saving and investment, neither of which are affected by the campaign. DIF: 2 REF: 32-3 TOP: Trade policy, Open-economy macroeconomic model MSC: Analytical 60. ANS: Use the LF definition LFs = Sp + Sg + Sw or Sp + Sg + CI and LFd = I + CO Sn = I + NX = I + NCO and provide the intuition Draw the graph, show the equilibrium points. Then conduct your analyses. 61. ANS: Ask yourself which curve shifts and in which direction? Show the shift and label the new equilibrium. Note the question suggests this is a short-run situtation. 62. Register to View Answer= e * (Pdom / Pfor) = Rand(s) / Scot * (PSheepistan / PHippoland ) NX = Demand for Scots = NCO = Supply of Scots What happens to E when there is inflation in Hippoland? Which curve does this affect? What happens to E, NX, and NCO from the initial equilibrium? 63. ANS: Recall that we can define LFs = Sp + Sg + CI (Sw) = I + CO = LFd Lenders are concerned about the riskiness of their loans. They will be more cautious and require a higher risk premium from the borrowers. Sp declines at every r. Also, foreigners are less likely to invest in the economy. this leads to a fall in CI and a rise in NCO. The LFs shifts back to (r1,LF1) where r1 > r0 and LF1 < LF0. There is a "credit crunch"; it is harder to obtain loanable funds. 64. Register to View AnswerShow the inverse relationship between NCO and r. That is a rise in r leads to a decline in quantity "demanded" of capital outflows. Link this to the equilibrium r0 from the previous question to find (r0,NCO0). b) There is a shift in NCO because factors affecting the LF curve(s) have changed causing them to shift. In this case NCO increased primarily because CI has fallen. Thus there is a shift out in the supply curve of domestic currency in the FX market. The excess supply causes a depreciation in E. c) In the short run a decline in E may cause NX to fall. Ultimately (most important) the decline in E makes exports more competitive x increases. Imports call as foreign goods become more expensive and domestic goods relatively cheaper. This leads to an improvement in NX. 5 Test 2 Practice [Answer Strip] B _____ 8. B _____ 17. C _____ 24. A _____ 30. ID: A C _____ 1. D _____ 18. C _____ 9. A _____ 25. D _____ 31. D _____ 19. A _____ 10. B _____ 2. B _____ 26. B _____ 32. D _____ 33. B _____ 11. C _____ 20. D _____ 27. C _____ 3. A _____ 12. C _____ 34. C _____ 4. A _____ 13. A _____ 35. B _____ 21. C _____ 5. C _____ 14. C _____ 36. C _____ 6. B _____ 15. A _____ 22. D _____ 28. D _____ 37. B _____ 7. B _____ 16. A _____ 23. A _____ 29. B _____ 38. Test 2 Practice [Answer Strip] C _____ 39. A _____ 47. ID: A B _____ 40. C _____ 48. C _____ 41. A _____ 49. A _____ 42. B _____ 50. D _____ 43. D _____ 44. D _____ 45. D _____ 46. ... View Full Document

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