econ423hw7answer

econ423hw7answer - Econ 423, Summer 2009 Lauren Heller...

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Unformatted text preview: Econ 423, Summer 2009 Lauren Heller Homework #7, Due 7—20—09 Nam n Qf‘ "- MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answars the question. 1) 1) The starting point for understanding how exchange rates are determined is a simple idea called which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) purchasing power parity B) the law of one price C) arbitrage D) Gresham‘s law 2) The theory of purchasing power parity states that exchange rates between any two currencies will 2) c} adjust to reflect changes in A) the current account balances of the two countries. B) the trade balances of the two countries. C) the price levels of the two countries. D) fiscal policies of the two countries. 3) If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the US. is 4 percent, then the 3) D theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will A) fall by 10 percent. B) rise by 10 percent. C) rise by 2 percent. D) fall by 2 percent. E) do none of the above. 4) The theory of purchasing power parity cannot fully explain exchange rate movements because 4) A) not all goods are identical in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) both A and C of the above. E) both E and C of the above. 5) If the demand for goods decreases relative to goods, the domestic currency 5) will depreciate. A) domestic; domestic B) foreign; foreign C) domestic; foreign D) foreign; domestic 6) Lower tariffs and quotas cause a country's currency to in the run. 6) U A) depreciate; short B) appreciate; long C) depreciate; long D) appreciate; short Note: All questions are to be completed on your own, without any assistance from others. 7) If the French demand for American exports rises at the same time that US. productivity rises relative to French productivity, then, in the long run, A) the dollar should appreciate relative to the euro. B) the euro should appreciate relative to the dollar. C) the dollar should depreciate relative to the euro. D) it is not clear whether the euro should appreciate 0r depreciate relative to the dollar. 8) When Bono considers the expected return on dollar deposits in terms of foreign Currency, the expected return must be adjusted for A) the interest rates on foreign deposits. B) any expected appreciation or depreciation of the dollar. C) both A and B of the above. D) neither (a) nor (b) of the above. 9) if the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate, A) euro deposits have a higher expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 3 percent. C) the expected return on euro deposits in terms of dollars is 11 percent. D) the expected return on dollar deposits in terms of euros is 1 percent. E) the expected return on dollar deposits equals the expected return on euro deposits. 10) if the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits, and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then A) the Expected return on euro deposits in terms of dollars is 9 percent. B) euro deposits have a lower expected return than dollar deposits. C) the expected return on dollar deposits in terms of euros is 19 percent. D) both A and B of the above will occur. E) none of the abOve will occu r. 11) According to the interest parity condition, if the domestic interest rate is interest rate, then A} above; there is expected appreciation of the foreign currency. B) below; there is expected appreciation of the foreign currency. C) above; there is expected depreciation of the foreign currency. D) below; the interest parity condition is violated. E) above; the interest parity condition is violated. the foreign 12) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected of the foreign currency must be percent. A) appreciation; 2 B) appreciation; 4 C) depreciation; 4 D) depreciation; 2 13) As the relative expected return on dollar deposits increases, A) Americans and foreigners will be indifferent towards holding dollar deposits or foreign deposits. B) Americans will want to hold fewer dollar deposits and more foreign deposits. C) foreigners will want to hold fewer dollar deposits and more foreign deposits. D) Americans will want to hold more dollar deposits and less foreign deposits. Page 2 of 5 Note: All questions are to be completed on your own, without any assistance from others. 14) A fall in the expected future exchange rate shifts the expected return schedule for 14) deposits to the and causes the domestic currency to depreciate. A) domestic; ieft B) domestic; right C) foreign; left D} foreign; right 15) An increase in the domestic interest rate shifts the expected return schedule for deposits 15) to the and causes the domestic currency to appreciate. A) domestic; left B) domestic; right C) foreign; right D) foreign; left 16) In the long run, a one— time percentage increase in the money supply is matched by the same one—time percentage rise in the price level, A) leaving unchanged the real money supply and the nominal exchange rate. This proposition is called money illusion. B) leaving unchanged the real money supply and all other economic variables such as interest rates. This proposition is called money neutrality. C) leaving unchanged the real money supply and all other economic variables such as interest rates. This proposition is called money illusion. D) leaving unchanged the real money supply and the nominal exchange rate. This proposition is called money neutrality. ._| O'\ V e |m it} Me new 17) In the long run affect the exchange rate. A) productivity B) tariffs and quotas C) relative price levels D) all of the above. 18} A central bank of domestic currency and corresponding of foreign assets in 18) the foreign exchange market leads to an equal in its international reserves and the monetary base. ' A) purchase; sale; increase B) purchase; sale; decline C) sale; sale; increase D) sale; purchase; decline 19) A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange 19) market has the same effect as an open market of bonds to the monetary base and the money supply. A) sale; increase B) purchase; increase C) sale; decrease D) purchase; decrease 20) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to 20) A) an increase in the money supply. B) a gain in international reserves. C) an appreciation in the domestic currency. D) all of the above. E) only A and B of the above. 21) A current account indicates that the United States is its claims on foreign 21) wealth. A) deficit; increasing B) surplus; increasing C) surplus; decreasing D) balance; decreasing Page 3 of 5 Note: All questions are to be completed on your own, without any assistance from others. 22) Holding other factors constant, which of the following would decrease the size of the US. current account deficit? A) A increase in the amount of services purchased from foreigners B) An increase in the amount of goods sold to foreigners C) An increase in the amount of goods purchases from foreigners D) Only A and B of the above 23) If the current account balance shows a surplus, and capital account receipts exceed capital account payments, then the net change in government international reserves must be a(n) in US. international reserves. A) negative; decrease C) positive; decrease indicating B) positive; increase D) negative; increase 24) The Bretton Woods agreement set up the which currently provides long—term loans to assist developing countries to build dams, roads, and other physical capital that contributes to economic development. A) World Bank B) International Monetary Fund C) European Exchange Rate Mechanism (ERM) D) Central Settlements Bank E) Bank of International Settlements 25) Which of the following are true statements about the Bretton Woods system? A) The Bretton Woods system was a fixed exchange rate regime, in which central banks bought and sold their own currencies to keep their exchange rates fixed. B) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the IMF would loan deficit countries international reserves contributed by other members. C) The German mark was called a reserve currency because it was used to denominate the securities central banks held as international reserves. D) All of the above are true. E) Only A and B of the above are true. 26) Under a fixed exchange rate regime, when the domestic currency is overvalued, the central bank must the domestic currency to keep the exchange rate fixed and as a result it international reserves. A) Sell; loses B) purchase; loses C) sell; gains D) purchase; gains 27) If a country's central bank eventually runs out of international reserves, it cannot keep its currency from and a must occur in which the par exchange value is reset at a level. A) appreciating; revaluation; higher C) depreciating; devaluation; lower B) appreciating; devaluation; lower D) depreciating; revaluation; higher 28) Under a managed float exchange rate regime, policymakers frequently do not want to see their currencies depreciate because it makes goods more expensive for and contributes to inflation. A) foreign; foreign C) domestic; foreign COHSUIHE 1'5 B) domestic; domestic D) foreign; domestic Page 4 of 5 22) 25) 27) 28) Note: All questions are to be completed on your own, without any assistance from others. 29) is when the domestic currency is backed 100% by a foreign currency and in which the 29) note—issuing authority establishes a fixed exchange rate to this foreign currency and stands ready to exchange domestic currency for the foreign currency at this rate whenever the public requests it. A) Devaluation B) Currency board C) Dollarization D) Revaluation 30) Seigniorage is 30) A) when the par exchange rate is reset at a lower level. B) when a country abandons its currency altogether and adopts that of another country. C) when the domestic currency is backed 100% by a foreign currency. D) when a country loses the revenue that it received by issuing money. Essays and Textbook Problems. Write your answer in the space provided or on a separate sheet of paper. 31) What are the arguments for and against the NF acting as an international lender of last resort? 32) h/[ishkjn and Eakins, p. 334, Question #11 33) Mishkin and Eakins, p.334, Question #13 34) Mishkin and Eakins, p. 334, Quantitative Problem #3 35) Mishkin and Eakins, p. 334, Quantitative Problem #4 36) Mishkin and Eakins, p. 334, Quantitative Problem #8 3'7) Mishkin and Eakins, p. 334, Quantitative Problem #12 38) Mishldn and Eakins, p. 334, Quantitative Problem #14 39) Nlishkin and Eakins, p. 360, Question #2 40) Mishkin and Eakins, p. 360, Question #9 41) Mishkin and Eakins, p. 361, Quantitative Problem #3 42) Mishkin and Eakins, p. 361, Quantitative Problem #5 Page 5 of 5 ...
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econ423hw7answer - Econ 423, Summer 2009 Lauren Heller...

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