Question 1

Explain the three distinct notions of openness.

Accepted Answer

There are three notions of openness.Firs...

Question 2

Which of the following best defines the real exchange rate?

Accepted Answer

A)  the price of foreign bonds in terms of domestic bonds
B)  the price of foreign currency in terms of domestic currency
C)  the price of domestic goods in terms of foreign goods
D)  the price of domestic currency in terms of foreign currency
E)   none of the above

Question 3

America's largest trading partner is

Accepted Answer

A)  Canada.
B)  Japan.
C)  Mexico.
D)  European Union.
E)   none of the above

Question 4

Which of the following,all else fixed,will cause the real exchange rate to increase?

Accepted Answer

A)  a nominal depreciation
B)  a reduction in the foreign price level
C)  a reduction in the domestic price level
D)  all of the above
E)   none of the above

Question 5

Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate.What does this imply about the current versus future expected exchange rate? Explain.

Accepted Answer

If i > i*,we know that the for...

Question 6

A nominal appreciation of the Mexican peso (against all currencies) indicates that

Accepted Answer

A)  the peso price of foreign currency has risen.
B)  the Mexican real exchange rate will not change if the price level in Mexico falls.
C)  the peso price of, for example, the U.K. pound has decreased.
D)  the number of units of foreign currency that one can obtain with one peso has increased.

Question 7

For this question,assume the interest parity conditions holds.Also assume that the domestic interest rate is 9% and that the foreign interest rate is 5%.Given this information,we would expect that

Accepted Answer

A)  individuals will only hold foreign bonds.
B)  individuals will only hold domestic bonds.
C)  the domestic currency is expected to appreciate by 4%.
D)  the domestic currency is expected to depreciate by 4%.

Question 8

Explain why a comparison between the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.

Accepted Answer

A simple comparison of interest rates wi...

Question 9

If the price level in Japan is 1.0,the price level in the U.S.is 2.0,and it costs 100 Yen to buy one dollar,then the real exchange rate between the U.S.and Japan is

Accepted Answer

A)  2.
B)  10.
C)  50.
D)  100.
E)   200.

Question 10

Suppose that over the past decade,U.S.inflation is greater than that in Mexico.Further assume that during this same period,the dollar appreciates relative to the Mexican peso.Given this information,

Accepted Answer

A)  the real exchange rate remains unchanged.
B)  the real exchange rate must decrease.
C)  the real exchange rate must increase.
D)  the real exchange rate can increase or remain the same, but not decrease.
E)   the real exchange rate can decrease or remain the same, but not increase.

Question 11

Suppose you have one U.S.dollar with which you wish to purchase U.K.(one-year) bonds in period t.Which of the following expressions represents the amount of U.K.pounds you will receive in one year (i.e.,period t + 1) from purchasing U.K.bonds in period t?

Accepted Answer

A)  i
B)  1 + i*
C)  (1 + i*) Eᵉt₊₁ / Et
D)  (1 + i*) Et / Eᵉt₊₁
E)   none of the above

Question 12

Which of the following will cause a real depreciation?

Accepted Answer

A)  an increase in E
B)  a reduction in P*
C)  a reduction in P
D)  all of the above
E)   none of the above

Question 13

Assume that the nominal exchange rate decreases by 4%.If prices (both domestic and foreign do not change) ,we know that

Accepted Answer

A)  foreign goods are now relatively cheaper.
B)  foreign goods are now relatively more expensive.
C)  domestic goods are now relatively more expensive.
D)  both A and C

Question 14

Assume that the uncovered interest parity condition holds.Also assume that the U.S.interest rate is less than the U.K.interest rate.Given this information,we know that investors expect

Accepted Answer

A)  the pound to depreciate.
B)  the pound to appreciate.
C)  the dollar-pound exchange rate to remain fixed.
D)  the U.S. interest rate to fall.
E)   none of the above

Question 15

For this question,suppose the domestic interest rate is 4% and that the foreign interest rate is 7%.And finally,assume that the domestic currency is expected to depreciate by 3% during the coming year.Given this information,we know that

Accepted Answer

A)  individuals will only hold domestic bonds.
B)  individuals will only hold foreign bonds.
C)  individuals will be indifferent about holding domestic or foreign bonds.
D)  the interest parity condition holds.

Question 16

In 2014,which of the following countries had the highest ratio of exports to GDP?

Accepted Answer

A)  United States
B)  Germany
C)  Japan
D)  Netherlands

Question 17

Suppose two countries make a credible commitment to fix their bilateral exchange rate.In such a situation,we know that

Accepted Answer

A)  the uncovered interest parity condition no longer holds.
B)  the real exchange rate must be constant as well.
C)  each country can freely allow its interest rate to diverge from that of the other country.
D)  the interest rate in the two countries must be equal.
E)   neither country will run a trade deficit.

Question 18

The nominal exchange rate (E) as defined in the text represents

Accepted Answer

A)  the number of units of foreign currency you can obtain with one unit of domestic currency.
B)  the number of units of domestic goods you can obtain with one unit of foreign goods.
C)  the price of domestic currency in terms of foreign currency.
D)  none of the above
E)   both A and C

Question 19

Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 5% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.

Accepted Answer

If the interest rate in US is ...

Question 20

Which of the following events will cause the smallest change in the real exchange rate (ε) ?

Accepted Answer

A)  a 6% drop in E and a 6% increase in the foreign price level (P*) 
B)  a 6% increase in the domestic price level (P) and a 6% reduction in P*
C)  a 6% drop in E and a 6% reduction in P*
D)  a 3% increase in E
E)   a 2% increase in E and a 2% increase in P

Exam 17: Openness in Goods and Financial Markets

In 2014,which of the following countries had the highest ratio of exports to GDP?

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America's largest trading partner is

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Which of the following will cause a real depreciation?

Correct AnswerverifiedShow Answer

For this question,suppose the domestic interest rate is 4% and that the foreign interest rate is 7%.And finally,assume that the domestic currency is expected to depreciate by 3% during the coming year.Given this information,we know that

Correct AnswerverifiedShow Answer

Explain the three distinct notions of openness.

Correct AnswerverifiedThere are three notions of openness.Firs...View AnswerShow Answer

If the price level in Japan is 1.0,the price level in the U.S.is 2.0,and it costs 100 Yen to buy one dollar,then the real exchange rate between the U.S.and Japan is

Correct AnswerverifiedShow Answer

Which of the following,all else fixed,will cause the real exchange rate to increase?

Correct AnswerverifiedShow Answer

Suppose that over the past decade,U.S.inflation is greater than that in Mexico.Further assume that during this same period,the dollar appreciates relative to the Mexican peso.Given this information,

Correct AnswerverifiedShow Answer

Suppose you have one U.S.dollar with which you wish to purchase U.K.(one-year) bonds in period t.Which of the following expressions represents the amount of U.K.pounds you will receive in one year (i.e.,period t + 1) from purchasing U.K.bonds in period t?

Correct AnswerverifiedShow Answer

Suppose two countries make a credible commitment to fix their bilateral exchange rate.In such a situation,we know that

Correct AnswerverifiedShow Answer

For this question,assume the interest parity conditions holds.Also assume that the domestic interest rate is 9% and that the foreign interest rate is 5%.Given this information,we would expect that

Correct AnswerverifiedShow Answer

Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 5% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.

Correct AnswerverifiedIf the interest rate in US is ...View AnswerShow Answer

Which of the following events will cause the smallest change in the real exchange rate (ε) ?

Correct AnswerverifiedShow Answer

Assume that the nominal exchange rate decreases by 4%.If prices (both domestic and foreign do not change) ,we know that

Correct AnswerverifiedShow Answer

Assume that the uncovered interest parity condition holds.Also assume that the U.S.interest rate is less than the U.K.interest rate.Given this information,we know that investors expect

Correct AnswerverifiedShow Answer

Explain why a comparison between the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.

Correct AnswerverifiedA simple comparison of interest rates wi...View AnswerShow Answer

A nominal appreciation of the Mexican peso (against all currencies) indicates that

Correct AnswerverifiedShow Answer

Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate.What does this imply about the current versus future expected exchange rate? Explain.

Correct AnswerverifiedIf i > i*,we know that the for...View AnswerShow Answer

Which of the following best defines the real exchange rate?

Correct AnswerverifiedShow Answer

The nominal exchange rate (E) as defined in the text represents

Correct AnswerverifiedShow Answer

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There are three notions of openness.Firs...
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If the interest rate in US is ...
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A simple comparison of interest rates wi...
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If i > i*,we know that the for...
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Correct Answer
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