Macro Final Ch 13

Front 1

The price of one currency in terms of another is called

Back 1

the exchange rate

Front 2

An exchange rate system in which the nominal exchange rate is set by the government is known as

Back 2

a fixed-exchange-rate-system

Front 3

The Bretton Woods system relied on

Back 3

a fixed-exchange-rate-system

Front 4

The real exchange rate is

Back 4

the price of domestic goods relative to foreign goods

Front 5

When domestic currency strengthens under a fixed-exchange-rate-system, this is called

Back 5

a revaluation

Front 6

Three-wheel cars made in North Edsel are sold for 5000 pound. Four-wheel cars made in South
Edsel are sold for 10,000 mark. The real exchange rate between North and South Edsel is four threewheel
cars for three four-wheel cars. The nominal exchange rate between the two countries is

Back 6

1.50 mark/pound.

Front 7

When the domestic currency buys fewer units of foreign currency,, the

Back 7

nominal exchange rate falls

Front 8

From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to 102 yen/dollar, while
the dollar/pound exchange rate fell from 2.22 dollar/pound to 1.62 dollar/pound. As a result,

Back 8

The dollar depreciated relative to the yen, but appreciated relative to the pound

Front 9

A rise in the real exchange rate is called

Back 9

a real appreciation

Front 10

If the real exchange rate rises by 2%, domestic inflation is 3%, and foreign inflation is 1%, what is
the percent change in the nominal exchange rate?

Back 10

0%

Front 11

If the nominal exchange rate rises by 5%, domestic inflation is 2%, and foreign inflation is 3%, what
is the percent change in the real exchange rate?

Back 11

4%

Front 12

If all countries produce the same good (or the same set of goods) and goods are freely traded among
countries, so that the real exchange rate equals one, then the relationship between domestic and
foreign prices and the nominal exchange rate is

Back 12

P = PFor / enom.

Front 13

The idea that similar foreign and domestic goods, or basket of goods, should have the same price when priced in terms of the same currency is called

Back 13

purchasing power parity

Front 14

Purchasing power parity means that

Back 14

enom=PFor/P

Front 15

Empirical evidence shows that in the short run, purchasing power parity _____, and in the long run,
purchasing power parity _____.

Back 15

does not hold;holds

Front 16

Purchasing power parity does not hold in the short to medium run because

Back 16

countries produce different goods

Front 17

Purchasing power parity does not hold in the short to medium run because

Back 17

some goods aren't internationally traded

Front 18

Suppose purchasing power parity holds. If the price level in the United States is 100 dollar per good
and the price level in Japan is 250 yen per good, then the nominal exchange rate is _____ yen per
dollar.

Back 18

2.5

Front 19

Relative purchasing power parity occurs when

Back 19

the real exchange rate is constant

Front 20

When the rate of appreciation of the nominal exchange rate equals the foreign inflation minus the domestic inflation rate, we say there is

Back 20

relative purchasing power parity

Front 21

When the dollar rises relative to other countries,

Back 21

US goods become more expensive to foreigners

Front 22

Suppose the euro/yen exchange rate falls while the dollar/yen exchange rate rises. What happens to
the price of goods imported into Japan?

Back 22

European goods become more expensive while the U.S. goods become cheaper

Front 23

A depreciation of the dollar causes

Back 23

an increase in the prices of the U.S. imports

Front 24

When the euro falls in value relative to other currencies, then

Back 24

goods imported into Europe rise in price

Front 25

Suppose the dollar/euro exchange rate falls. Then

Back 25

U.S. firms will export less to France

Front 26

There’s been a real depreciation of the dollar over the past month. In the long run, you would expect
the quantity of

Back 26

American imports to fall and the quantity of the American exports to rise

Front 27

The J curve implies that a real depreciation will cause

Back 27

net exports to fall in the short run and rise in the long run

Front 28

The rapid depreciation in the dollar from 1985 to 1987 caused net exports during this period

Back 28

to rise as the J curve would have predicted, but with a long lag (more than one year).

Front 29

According to the “beachhead effect,” in order to undo the effects of a strong-dollar period, the real
value of the dollar

Back 29

must fall to a much lower level than it had before appreciation of the dollar began.

Front 30

Under a flexible-exchange-rate system, an increase in the demand for Japanese yen would cause the
U.S. dollar/Japanese yen exchange rate to

Back 30

rise

Front 31

In a flexible-exchange-rate system, the value of a currency is determined by

Back 31

the demand and supply for the currency in the foreign exchange market

Front 32

An increase in domestic output would cause a _____ in net exports and a _____ in the exchange
rate.

Back 32

fall; fall

Front 33

A rise in the domestic real interest rate would cause a ________ in net exports and a _______ on the exchange rate

Back 33

fall; rise

Front 34

Which of the following changes would cause American net exports to increase?

Back 34

An increase in foreign income

Front 35

Which of the following changes would cause American net exports to decrease?

Back 35

A shift in demand by American consumer away from domestically produced goods

Front 36

The U.S. real interest rate rises relative to the British real interest rate. British net exports ___ and the British exchange rate ______.

Back 36

increase; falls

Front 37

Goods market equilibrium in the open economy occurs when

Back 37

desired saving minus desired investment equals net exports

Front 38

In an open economy, a decrease in net exports because of reduced demand for domestic products by
foreigners should cause the domestic real interest rate to _____ and should cause desired saving
minus desired investment to _____.

Back 38

fall; fall

Front 39

A decrease in foreign output would cause the domestic country’s net exports to _____ and cause the
domestic country’s IS curve to _____.

Back 39

fall; shift down

Front 40

A decrease in the foreign real interest rate would cause the domestic country’s net exports to _____
and cause the domestic country’s IS curve to _____.

Back 40

fall; shift down

Front 41

A shift in demand toward the home country’s goods would _____ the domestic real interest rate and
_____ net desired saving (desired saving less desired investment) in the economy.

Back 41

raise; increase

Front 42

A temporary decrease in government purchases would _____ the domestic real interest rate and
_____ net desired saving (desired saving less desired investment) in the economy.

Back 42

lower; increase

Front 43

In a Keynesian model, a temporary increase in government purchases would cause output to _____
and the domestic real interest rate to _____, in the short run.

Back 43

increase; increase

Front 44

In the short run in the Keynesian model, an increase in the domestic money supply would cause
domestic output to _____ and the domestic real interest rate to _____.

Back 44

rise; fall

Front 45

An increase in the American money supply would cause the value of the dollar to _____ and net
American exports to _____ in the short run using a Keynesian model.

Back 45

fall; fall

Front 46

The Federal Reserve has just purchased bonds in the market, carrying out open market operations. In
the short run in the Keynesian model, this would cause the foreign real interest rate to _____ and
foreign output to _____.

Back 46

increase; increase

Front 47

According to the classical model, an increase in the American nominal money supply would cause
the nominal exchange rate to _____ and the real exchange rate to _____.

Back 47

depreciate; remain unchanged

Front 48

Suppose Japan is currently running a current account surplus. The most effective way of eliminating
this current account surplus would be to temporarily _____ government purchases and _____ the
domestic money supply.

Back 48

increase; increase

Front 49

You have just noticed that the dollar appreciated and you suspect that the American government was
behind this change. Which would you choose as the most likely cause of this appreciation in the real
exchange rate?

Back 49

A decrease in the money supply

Front 50

To encourage more investment, Mexico has lowered its tax rates to reduce the user cost of capital.
Argentina is unable to pay back its foreign debts, causing its expected future marginal product of
capital to fall. Mexico’s real exchange rate will _____ and its net exports will _____.

Back 50

appreciate; fall

Front 51

Under a system of fixed exchange rates, what happens if a country’s currency is overvalued?

Back 51

The central bank loses official reserve assets

Front 52

Under a system of fixed exchange rates, what happens if a country’s currency is undervalued?

Back 52

The central bank gains official reserve assets

Front 53

If a country has an overvaluation problem, the best solution is to

Back 53

decrease the money supply

Front 54

International businesses like a fixed-exchange-rate system because

Back 54

they can plan better if they know what the exchange rate will be

Front 55

When a group of countries agree to share a common currency, they are said to have formed a

Back 55

currency union

Front 56

Currency unions are rare because

Back 56

countries are reluctant to give up having their own currencies

Front 57

Compared to a system of fixed exchange rates, currency unions are beneficial because they

Back 57

reduce the costs of trading goods and assets

Front 58

Compared with a system of fixed exchange rates, currency unions are beneficial because they

Back 58

eliminate the possibility of speculative attacks

Front 59

Monetary policy in the European Monetary Union is determined by

Back 59

The European Central Bank

Front 60

The Maastricht treaty was the first step toward

Back 60

European monetary union