Macro Test #2

Front 1

A Mexican owned bank account in the US earns the dollar equivalent of 3000 pesos. This income is deposited in a US bank account. What is the effect on the Mexican trade balance & current account balance?

Back 1

The trade balance is unchanged while the current account balance rises

Front 2

A Mexican retailer buys US computer games worth 50,000 pesos paying with a check. What is the effect on the Mexican trade balance & current account balance?

Back 2

The trade balance & current account balance fall

Front 3

A Mexicans sells 10,000 pesos to an American. The Mexican deposits his dollars in a US bank, the American uses his pesos to buy a Mexican bond. Ignore future interest on these assets. What is the effect on the Mexican trade balance, current account balance?

Back 3

The trade balance and the current account balance are unchanged

Front 4

A US family buys 5,000 pesos with $s from a Mexican firm. The Mexican firm deposits its dollars in a US bank. The US family gives its relatives in Mexico the 5.000 pesos. What is the effect on the Mexican trade balance & current account balance

Back 4

The trade balance is unchanged while the current account balance rises

Front 5

According to uncovered interest parity if the home interest rate is lower than the foreign interest rates and default risk is the same across countries, then currency traders are expecting

Back 5

the foreign currency to fall

Front 6

An American vacations at a Mexican resort & spends 4,000 pesos paying with a credit card. What is the effect on the Mexican trade balance & current account balance?

Back 6

The trade account and the current account both rise

Front 7

Assume uncovered interest parity holds and there are no cross-country differences in default risk. If the US interest rate is 5% and the foreign interest rate is 3%, then we expect

Back 7

a 2% increase in the value of the foreign

currency

Front 8

If a country’s current account is in deficit, then it is

Back 8

selling assets to foreigners and borrowing from abroad

Front 9

Suppose the Brazilian interest rate is 40%. The current value of the real (the Brazilian currency) is $0.50 and the expected future value of the real is $0.40. If I invest $100,000 in Brazilian bonds, how many $s will I expect to get back in a year? (Give an exact answer).

Back 9

$112,000

Front 10

Suppose the peso interest rate is 30%, the current exchange rate is 2 pesos per $, and the expected future exchange rate is 2.4 pesos per $. If I invest $100,000 in Mexican bonds, how many $s will I expect to get back in a year? (Give an exact answer).

Back 10

$108,333

Front 11

Suppose you are a currency trader and the 180 day forward rate on the Euro is $1.45 but you are convinced the spot rate will be at $1.35 in 180 days. How can you make a profit using a forward contract?

Back 11

Sign a contract to sell Euros at $1.45 in six month

Front 12

The IS curve has a negative slope because

Back 12

as interest rates fall, the demand for investment goods rises

as interest rates fall, the home currency depreciates, the demand for exports increases, and the demand for imports falls.

Front 13

Consider the IS/LM model under flexible exchange rates. A decrease in consumer confidence cuts consumption. Assuming the money supply remains constant, the foreign currency value of the home currency should

Back 13

fall

Front 14

Consider the IS/LM model under flexible exchange rates. A decrease in consumer confidence cuts consumption. Assuming the money supply remains constant, the trade balance should

Back 14

rise

Front 15

Consider the IS/LM model under flexible exchange rates. Assume the money supply is decreased. The foreign currency value of the home currency should

Back 15

rise

Front 16

Consider the IS/LM model under flexible exchange rates. Assume the money supply is decreased. The trade balance should

Back 16

fall

Front 17

Consider the IS/LM model under flexible exchange rates. Assume foreign GDP increases. Assuming the money supply remains constant, the trade balance should

Back 17

rise

Front 18

Consider the IS/LM model under flexible exchange rates. The expected future value of the home currency rises. Assuming the money supply remains constant, the current foreign currency value of the home currency should

Back 18

rise

Front 19

Consider the IS/LM model under flexible exchange rates. The expected future value of the home currency rises. Assuming the money supply remains constant, the trade balance should

Back 19

fall

Front 20

Consider the IS/LM model under flexible exchange rates. The expected future value of the home currency rises. Assuming the money supply remains constant, output should

Back 20

fall

Front 21

Consider the IS/LM model under flexible exchange rates. The expected future value of the home currency rises. Assuming the money supply remains constant, the interest rate should

Back 21

fall

Front 22

Consider the IS/LM model under flexible exchange rates. A monetary expansion combined with a fiscal expansion

Back 22

will cause output to rise and have an ambiguous effect on interest rates

Front 23

A US export firm produces in the US and exports to Europe. Assume that currently the Euro is $1.20, the firm’s Euro price is 200 Euros, it is selling 10,000 units in Europe, and its production costs are $1,800,000. Assume the Euro falls to $0.96, the firm increases its Euro price to 220 Euros, and the price elasticity of demand is 1.3. The new level of demand would be closest to

Back 23

9,000 units

Front 24

Continuing with the information from problem 12, assume the elasticity of cost with respect to output is 0.7. The change in costs is closest to

Back 24

A $164,000 decrease

Front 25

An increase in consumer confidence temporarily increases consumption. To keep the exchange rate fixed, the money supply needs to

Back 25

rise

Front 26

An increase in consumer confidence increases consumption. Output will rise by

Back 26

a greater amount than under flexible rates

Front 27

An increase in consumer confidence increases consumption. The trade balance will

Back 27

fall

Front 28

Home default risk decreases. To keep the exchange rate fixed, the money supply needs to

Back 28

rise

Front 29

Home default risk decreases. Output will

Back 29

rise

Front 30

Home default risk decreases. The trade balance will

Back 30

fall

Front 31

Consider the IS/LM model under fixed exchange rates. Though the country is currently keeping the exchange rate constant, FX traders think there will be a devaluation by the end of the year. Thus the home interest rate will need to

Back 31

rise

Front 32

Which way does a small timid devaluation push interest rates? Assume this devaluation was not anticipated in advance.

Back 32

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