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Unformatted text preview: Econ 434 Professor Ickes Fall 2009 Midterm Exam II: Answer Sheet Instructions: Read the entire exam over carefully before beginning. The value of each question is given. Allocate your time e ﬃ ciently given the price schedule that is imposed. There are no trick questions. Cheating in this exam will result in failure of the course Part I: Multiple Choice (36%) circle the correct answer 1. If the US interest rate is 4% per year and the UK interest rate is 9% per year, which of the following is true: (a) The dollar will depreciate 5% in one year. (b) The pound will appreciate 9% in one year. (c) The pound will depreciate 5% in one year. (d) The dollar will appreciate 9% in one year. 2. In equilibrium, if both uncovered and covered interest parity holds, what condition should exist? (a) World interest rates will be equal. (b) Rates of in f ation will be equalize. (c) The forward rate will equal the expected spot rate. (d) The forward rate will decrease as the spot rate rises. 3. Country A is experiencing productivity growth. When compared to other countries with lower productivity growth, we expect to see: (a) wages and incomes falling in country A and its exchange rate appreciating. (b) wages and incomes rising in country A and its exchange rate appreciating. (c) wages and incomes falling in country A and its exchange rate depreciating. (d) wages and incomes rising in country A and its exchange rate depreciating. 4. Current account adjustment requires a larger change in the real exchange rate if: (a) production in the economy is biased towards non-traded goods. (b) production in the economy is biased towards traded goods. (c) households are indi f erent between traded goods and non-traded goods. (d) the economy is very open. 1 5. If Macrodonia has a f xed exchange rate, then an unexpected rise in the demand for its exports will: (a) the Central Bank’s holdings of international reserves to fall. (b) the domestic money supply to rise. (c) the domestic money supply to fall. (d) domestic interest rates to fall. 6. If Macrodonia has a f xed exchange rate and the Central Bank (CB) engages in sterilization, then: (a) if Macrodonia loses competitiveness the CB will sell domestic securities. (b) if Macrodonia becomes more competitive the CB will buy domestic securities. (c) if Macrodonia becomes more competitive the CB will sell domestic securities. (d) the money supply will rise whenever the CB increases its holdings of international re- serves....
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