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INTERNATIONAL FINANCE
Assignment Problems (10)
Name:
Student#:
I. Choose the correct answer for the following questions (only ONE correct
answer) (3 credits for each question, total credits 3 x 25 = 75)
1. GDP is the total value of __________.
A. a nation’s wealth at a point in time
B. a nation’s currency circulating within the nation at a point in time
C. all final goods and services produced in a nation during a given period of time
D. all transactions within a nation during a given period of time
2. Which of the following is NOT included in a nation’s GDP?
A. imports
B. consumption
C. investment
D. exports
3. Which of the following is the largest component in terms of the spending in most countries?
A. government expenditure
B. imports expenditure
C. investment expenditure
D. consumption expenditure
4. Autonomous consumption is a function of __________.
A. disposable income
B. real GDP
C. saving
D. none of the above
5. The marginal propensity to consume is defined as __________.
A. total consumption divided by total income
B. total consumption divided by total disposable income
C. additional consumption divided by additional disposable income
D. additional consumption divided by additional income
6. MPS in country A is .15. If the residents of country A’s disposable income increases by $500
million, their saving rises by __________.
A. $425 million
B. $75 million
C. 15% of the GDP
D. 85% of the GDP
7. Suppose that the marginal propensity to import in country A is 0.20. It means that __________.
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A. country A’s marginal propensity to consume is 0.80
B. country A’s imports are greater than its exports by 20%
C. if country A’s residents increases their disposable income by $100, $20 will be used for
imported goods and services
D. $20 will be spent on imports for every $100 in country A
8. Autonomous dissaving is the amount by which __________.
A. households would draw upon their current wealth to consume if they were to earn no income
B. households would draw upon their current wealth to consume if they were to earn little
income
C. households would reduce their savings as their disposable income declines
D. households would reduce their savings if they were to expect uncertainty in the future
9. A decline in interest rate usually leads to __________.
A. a rightward shift of the investment curve
B. a leftward shift of the investment curve
C. a rightward movement along the investment curve
D. a leftward movement along the investment curve
10. An increase in government spending usually results in __________.
A. an increase in interest rate
B. a decline in interest rate
C. a rightward movement along the investment curve
D. a leftward movement along the investment curve
11. IS curve shows the equilibrium condition in __________.
A. capital market
B. foreign exchange market
C. product market
D. factor market
12. LM curve shows the equilibrium condition in __________.
A. capital market
B. foreign exchange market
C. product market
D. factor market
13. An increase in investment spending induces __________.
A. leftward shift of the IS curve
B. rightward shift of the IS curve
C. a leftward movement along the IS curve
D. a rightward movement along the IS curve
14. Open market operation by the central bank results in __________.
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A. leftward shift of the LM curve
B. rightward shift of the LM curve
C. a leftward or rightward shift of the LM curve
D. a rightward movement along the IS curve
15. Assume the MPC is 0.80 and MPS is 0.15 for Mr. Williams. If Mr. Williams got a bonus check
of $75,000 at the end of the year and his personal income tax rate is 30%, his spending on foreign
goods is probably __________.
A. $22,500
B. $2,625
C. $7,875
D. $42,000
16. Which of the following events could possibly shift the IS curve to the left?
A. A rise in investment spending
B. A decrease in interest rate
C. A reduction in tax rate
D. A rise in saving
17. An increase in money stock will generally __________.
A. shift LM curve to the left
B. shift LM curve to the right
C. shift IS curve to the left
D. shift IS curve to the right
18. The BP curve shows the combination of __________ and __________ that are consistent with
BOP equilibrium.
A. import; export
B. income; interest rate
C. investment; interest rate
D. income; import
19. The intersection of IS and LM curve represents the __________.
A. foreign exchange market equilibrium
B. financial market equilibrium
C. goods market equilibrium
D. equilibrium both in goods market and financial market
20. BOP equilibrium is described as a situation in which __________.
A. exports equal imports
B. capital inflows equal capital outflows
C. transactions in current account are exactly the same as the transactions in capital and
financial account
D. the sum of net current account plus net capital and financial account equals zero
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21. If the intersection of IS-LM curve lies above the BP curve, it tells us that __________.
A. the country runs BOP deficit
B. the country runs BOP surplus
C. the country reaches BOP equilibrium
D. It is impossible to identify because more information are needed
22. The government of country A decides to raise tax rates. This action will probably induce
__________.
A. IS curve shifting to the left
B. LM curve shifting to the right
C. BP curve shifting to the left
D. none of the above
23. Country A runs BOP surplus. Which of the following changes will restore country A to BOP
equilibrium?
A. The central bank expands domestic credits.
B. The government reduces tariffs on all imports.
C. The central bank purchases foreign currencies in the foreign exchange market.
D. All of the above are the measures to bring BOP back to equilibrium.
24. Country A experiences high inflation now. This means __________.
A. the IS curve shifts rightward
B. the IS curve shifts leftward
C. the LM curve shifts rightward
D. the LM curve shifts leftward
25. The slope of the BP curve is determined by __________.
A. the responsiveness of capital flows to the interest rate
B. the degree that the exchange rate is allowed to float
C. the willingness that the central bank changes interest rate
D. all of the above
II. Problems
1. Suppose that the U.S. GDP deflator is equal to one and that the U.S. nominal money stock is
equal to $1.8 trillion. If the demand schedule for real money balances is given by the straight-line
function (measured in trillions of dollars), m = (0.9 x y) – (100 x R), then what is the equation for
the economy’s LM schedule? Show your work, and solve for R on the left-hand side of the
equation that you derive. Finally, if y is equal to $8 trillion, than what is the equilibrium nominal
interest rate?
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