International Economics Final Exam Review

Front 1

If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is zero percent, then

A. an investor should invest only in dollars.
B. an investor should invest only in euros.
C. an investor should be indifferent between dollars and euros.
D. It is impossible to tell given the information.
E. All of the above.

Back 1

A. an investor should invest only in dollars.

Front 2

If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 4 percent, then

A. an investor should invest only in dollars.
B. an investor should invest only in euros.
C. an investor should be indifferent between dollars and euros.
D. It is impossible to tell given the information.
E. All of the above.

Back 2

C. an investor should be indifferent between dollars and euros.

Front 3

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 8 percent, then

A. an investor should invest only in dollars.
B. an investor should invest only in euros.
C. an investor should be indifferent between dollars and euros.
D. It is impossible to tell given the information.
E. All of the above.

Back 3

B. an investor should invest only in euros.

Front 4

If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, and the expected return on dollar appreciation against the euro is 4 percent, then

A. an investor should invest only in dollars.
B. an investor should invest only in euros.
C. an investor should be indifferent between dollars and euros.
D. It is impossible to tell given the information.
E. All of the above.

Back 4

A. an investor should invest only in dollars.

Front 5

Which of the following statements is the most accurate?

A. A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
B. A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
C. A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
D. For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
E. None of the above.

Back 5

D. For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate. (because appreciation will only happen if we keep the exchange rate constant—here …)

Front 6

Every international transaction automatically enters the balance of payments

A. once either as a credit or as a debit.
B. twice, once as a credit and once as a debit.
C. once as a credit.
D. twice, both times as debit.
E. None of the above.

Back 6

B. twice, once as a credit and once as a debit. (doesn’t have to be in 2 different accounts—can be two in the current account or two in the financial account, as opposed to one in each)

Front 7

An appreciation of a country’s currency
A. decreases the relative price of its exports and lowers the relative price of its imports.
B. raises the relative price of its exports and raises the relative price of its imports.
C. lowers the relative price of its exports and raises the relative price of its imports.
D. raises the relative price of its exports and lowers the relative price of its imports.
E. None of the above.

Back 7

D. raises the relative price of its exports and lowers the relative price of its imports.

Front 8

The largest trading of foreign exchange occurs in

A. New York.
B. London.
C. Tokyo.
D. Frankfurt.
E. Singapore.

Back 8

B. London.

Front 9

9. Forward and spot exchange rates
A. are necessarily equal
B. do not move closely together
C. The forward exchange rate is always above the spot exchange rate.
D. while not necessarily equal, do move closely together
E. None of the above.

Back 9

D. while not necessarily equal, do move closely together—because expectations more or less self-fulfill.

Front 10

A foreign exchange swap
A. is a spot sale of a currency.
B. is a forward repurchase of the currency.
C. is a spot sale of a currency combined with a forward repurchase of the currency.
D. is a spot sale of a currency combined with a forward sale of the currency.
E. None of the above.

Back 10

C. is a spot sale of a currency combined with a forward repurchase of the currency—today, you are selling dollars, and six months from now you’re buying those dollars back.

Front 11

After a permanent increase in the money supply,
A. the exchange rate overshoots in the short run.
B. the exchange rate overshoots in the long run.
C. the exchange rate smoothly depreciates in the short run.
D. the exchange rate smoothly appreciates in the short run.
E. None of the above.

Back 11

E. None of the above (we need to know which exchange rate behavior we’re talking about. Because people could see that the dollar was going to depreciate, they expected that the euro was going to appreciate—basically this model was not incorporating expectations)

Front 12

In the long-run equilibrium, after a permanent money-supply increase there follows:

A. an increase in exchange rate, E.
B. a decrease in exchange rate, E.
C. an increase in output, Y.
D. a decrease in output, Y.
E. Both B and D.

Back 12

A. an increase in exchange rate, E

Front 13

What are the biggest advantages the U.S. has above the EU in terms of being an Optimum Currency Area?
A. Low mobility of labor, higher labor productivity, lower level of intra-regional trade
B. High unionization of U.S. Labor force
C. I don’t know.
D. High mobility of labor force, more transfer payments between regions.
E. Higher uniformity of population’s taste in consumption

Back 13

D. High mobility of labor force, more transfer payments between regions (more mobility of both labor and capital)

Front 14

The EU countries were prompted to seek closer coordination of monetary policies and greater exchange rate stability in the late 1960s in order
A. to enhance Europe’s role in the world monetary system.
B. to turn the European Union into a truly unified market.
C. both to enhance Europe’s role in the world monetary system and to turn the European Union into a truly unified market.
D. None of the above.
E. both to turn the European Union into a truly unified market and to counter the rise of Japan in international financial markets.

Back 14

C. both to enhance Europe’s role in the world monetary system and to turn the European Union into a truly unified market.

Front 15

The level of fiscal federalism in the European Union is
A. too big to cushion member countries from adverse economic events.
B. too small to cushion member countries from adverse economic events.
C. appropriate to cushion member countries from adverse economic events.
D. too big relative to the one in the U.S.
E. similar in its level to that of the U.S.

Back 15

B. too small to cushion member countries from adverse economic events.

Front 16

If the U.S. dollar depreciates in terms of the Euro:
A) The relative price of U.S. exports would rise.
B) American goods would be cheaper for Europeans.
C) European goods would be cheaper for Americans.
D) Americans would have to pay fewer dollars for one Euro.

Back 16

B) American goods would be cheaper for Europeans.

Front 17

What accounts for most of the activity in the foreign exchange market?
A) Interbank trading.
B) Trading currency between importers and exporters.
C) Currency trade among central banks.
D) Trading by financial institutions.

Back 17

A) Interbank trading (could argue for D, because banks are financial institutions, but A is closer to the right answer.)

Front 18

What is the "arbitrage" opportunity in the foreign exchange market?
A) A cross-rate.
B) A difference between the exchange rate for buying and selling the currency from the same bank.
C) A difference between the exchange rates in different trading centers.
D) A fee that brokers charge for trading currency of their clients.

Back 18

C) A difference between the exchange rates in different trading centers.

Front 19

If a contract contains a promise that a specified amount of foreign currency will be delivered on the specified date in the future, this is:
A) A spot contract.
B) A foreign exchange option.
C) A futures contract.
D) A swap.
E) A forward contract.

Back 19

E) A forward contract (difference between forward and futures contracts is that all the features of a futures contract will be predetermined by a 3rd party, usually an exchange ; have only the possibility to buy it or sell it. Forward contract is a free on that anyone can negotiate with anyone else.)

Front 20

A saver will prefer asset X to asset Y if:
A) Asset X is more liquid.
B) Asset X is less risky.
C) Asset X has a higher expected return.
D) All of the above.
E) None of the above.

Back 20

D) All of the above.

Front 21

The (uncovered) interest parity condition:
A) Takes into account the risk differential between the assets.
B) Describes the equilibrium in the foreign exchange market.
C) Takes into account the liquidity of the assets.
D) Involves forward exchange rate and spot exchange rate.

Back 21

B) Describes the equilibrium in the foreign exchange market.

Front 22

If the interest rate on a deposit in Euros is 6% per year, and the Euro is expected to depreciate against the U.S. dollar by 1%, what does the interest parity condition imply about the interest rate on the deposit in U.S. dollars?
A) 6%
B) 7%
C) 4%
D) 5%
E) There is not enough information to find out.

Back 22

D) 5%

Front 23

The interest parity condition involves four variables. Which one adjusts to ensure equilibrium?
A) Expected future exchange rate
B) Current exchange rate
C) Foreign interest rate
D) Domestic interest rate

Back 23

B) Current exchange rate— it is only the current exchange rate that will shift to bring us back to equilibrium, while the expectations are shifting it

Front 24

Which of the following is NOT a function of money?
A) Medium of exchange
B) Unit of account
C) Capital used to produce goods and services
D) Store of value

Back 24

C) Capital used to produce goods and services (not in the monetary definition of money)

Front 25

What is M1?
A) A monetary aggregate that includes only cash.
B) A monetary aggregate that includes currency in circulation and checkable deposits.
C) A monetary aggregate that includes currency in circulation and in Federal Reserve vaults.
D) A monetary aggregate that includes currency in circulation, checkable and time deposits.

Back 25

B) A monetary aggregate that includes currency in circulation and checkable deposits.

Front 26

Which economic agent determines money supply in the U.S.?
A) Commercial banks
B) The Federal Reserve
C) Consumers
D) Government

Back 26

B) The Federal Reserve

Front 27

What are the determinants of the aggregate money demand?
A) Inflation, price level, exchange rate and interest rate
B) Price level, national income and interest rate
C) Exchange rate, national income and interest rate
D) Inflation rate, price level and national income
E) Money supply, national income and interest rate

Back 27

B) Price level, national income and interest rate (on graph, L, y, and R, respectively. “L” is actually liquidity, but here it is price level—WHY?)

Front 28

Which of the following is true about the short-run equilibrium on the money market?
A) The equilibrium amount of real money balances does not depend on the real money demand
B) Real money supply is completely elastic with respect to the interest rate
C) If national income rises, equilibrium interest rate falls.
D) If money supply rises, equilibrium interest rate rises as well.

Back 28

A) The equilibrium amount of real money balances (graph: M/P*) does not depend on the real money demand (Fed decides M/P, and the money demand can move wherever)

Front 29

How do we distinguish in the model between the short run and the long run?
A) The short run is up to one year; the long run is over a year.
B) In the short run exchange rates are fixed; in the long run they are flexible.
C) The short run is up to 3 months; the long run is over 3 months.
D) In the short run price level is fixed; in the long run, it is flexible.

Back 29

D) In the short run price level is fixed; in the long run, it is flexible.

Front 30

. For a given Euro interest rate, what is the correct causality chain in the short run?
A) The Fed determines nominal money supply, given the exchange rate, price level adjusts, which determines inflation rate, interest rate and, given interest parity condition, Euro/dollar exchange rate.
B) The Fed determines the interest rate, which in turn determines the interest rate and the money balances, real balances in turn determine the Euro/dollar exchange rate, given money demand.
C) The Fed determines real money balances, which in turn determine the interest rate, given money demand, which, given the interest parity condition, determines the Euro/dollar exchange rate
D) The Fed determines the Euro/dollar exchange rate, which, given interest parity, determines the dollar interest rate, which in turn determines the real balances of the U.S. dollar, given money demand.

Back 30

C) The Fed determines real money balances, which in turn determine the interest rate, given money demand, which, given the interest parity condition, determines the Euro/dollar exchange rate (the Fed determines the real money balances—how much M [graph] we’re going to have, which determines the int. rates for a given money demand; and the interest rate in turn is going to determine the exchange rate)

Front 31

If the European System of Central Banks increases the supply of Euros, other things being equal, in the short run:
A) The European interest rate will fall and the dollar will appreciate against the Euro.
B) The European interest rate will rise and the dollar will depreciate against the Euro.
C) The European interest rate will fall and the dollar will depreciate against the Euro.
D) The European interest rate will rise and the dollar will appreciate against the Euro.
E) None of the above.

Back 31

A) The European interest rate will fall and the dollar will appreciate against the Euro.

Front 32

What does exchange rate overshooting describe?
A) The exchange rate changes by more than the interest rate in the long run.
B) The exchange rate increases by more in the long run than the price level.
C) The exchange rate changes in the short run by more than in the long run.
D) The exchange rate changes by more in the long run than in the short run.

Back 32

C) The exchange rate changes in the short run by more than in the long run.

Front 33

Which of the following statements is the most accurate? The law of one price states:
A. In competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.
B. In competitive markets free of transportation costs and official barriers to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency.
C. In competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price.
D. Identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.
E. None of the above

Back 33

A. In competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

Front 34

Under Purchasing Power Parity,
A. E$/E = PUS / PE.
B. E$/E = PE / PES.
C. E$/E = PUS + PE.
D. E$/E = PUS - PE.
E. None of the above.

Back 34

A. E$/E = PUS / PE.

Front 35

Which of the following statements is the most accurate?
A. Relative PPP has not held up well since the 1960s.
B. Relative PPP has not held up well since the early 1970s, but in the 1960s it was a more reliable guide to the relationship among exchange rates and national price levels.
C. Relative PPP has held up well since the early 1960s, but in the 1970s it was a more reliable guide to the relationship among exchange rates and national price levels.
D. Relative PPP has held up well since the early 1970s.
E. None of the above statements is true.

Back 35

A. Relative PPP has not held up well since the 1960s.

Front 36

The PPP theory fails in reality because
A. transport costs and restrictions on trade.
B. monopolistic or oligopolistic practices in goods markets.
C. the inflation data reported in different countries are based on different commodity baskets.
D. A, B, and C.
E. A and B only.

Back 36

D. A, B, and C.

Front 37

The real exchange rate, q, is defined as
A. the price of the foreign basket in terms of the domestic one.
B. the price of the domestic basket in terms of the foreign one.
C. the price of the foreign basket.
D. the price of the domestic basket.
E. None of the above.

Back 37

A. the price of the foreign basket in terms of the domestic one.

Front 38

By internal balance, most economists mean
A. only full employment.
B. only price stability.
C. full employment and price stability.
D. full employment and moderate increase in prices.
E. None of the above.

Back 38

C. full employment and price stability.

Front 39

By external balance, most economists mean
A. avoiding excessive imbalances in international payments.
B. a balance between exports and imports.
C. a balance between trade account and service account.
D. a fixed exchange rate.
E. None of the above.

Back 39

A. avoiding excessive imbalances in international payments.

Front 40

Under the gold standard era of 1870 – 1914,
A. central banks tried to have sharp fluctuations in the balance of payments.
B. central banks tried to avoid sharp fluctuations in the current account of the balance of payments.
C. central banks tried to avoid sharp fluctuations in the trade account of the balance of payments.
D. central banks tried to avoid sharp fluctuations in the capital account of the balance of payments.
E. central banks tried to avoid sharp fluctuations in the balance of payments.

Back 40

E. central banks tried to avoid sharp fluctuations in the balance of payments.

Front 41

A convertible currency is a currency that may be freely exchanged for
A. gold or silver.
B. only silver.
C. only copper.
D. national currency.
E. foreign currencies.

Back 41

E. foreign currencies.

Front 42

The dollar of the United States became the postwar world’s key currency because
A. of the early convertibility of the U.S. dollar in 1945.
B. of the special position of the dollar under the Bretton Woods system.
C. of the strength of the American economy relative to the devastated economies of Europe and Japan.
D. Central banks naturally found it advantageous to hold their international reserves in the form of interest-bearing dollar assets..
E. All of the above.

Back 42

E. All of the above.

Front 43

Under fixed exchange rates,
A. monetary policy is not an effective policy.
B. fiscal policy is not an effective policy.
C. monetary policy and fiscal policy are not effective.
D. both monetary and fiscal policies are effective.
E. None of the above.

Back 43

A. monetary policy is not an effective policy.

Front 44

Under Bretton Woods,
A. any foreign country cannot devalue its currency against the dollar in conditions of “fundamental disequilibriun.”
B. any foreign country could devalue its currency against the dollar in conditions of “fundamental disequilibrium,” but the system’s rules did not give the United States the option of devaluing against foreign currencies.
C. any foreign country could devalue its currency against the dollar in conditions of “fundamental disequilibrium,” and the system’s rules did give the United States the same option of devaluing against foreign currencies.
D. The United States could devalue its currency against the foreign currencies in conditions of “fundamental disequilibrium.”
E. None of the above.

Back 44

B. any foreign country could devalue its currency against the dollar in conditions of “fundamental disequilibrium,” but the system’s rules did not give the United States the option of devaluing against foreign currencies.