Download ECON403 sample questions for chapters 17 and 19

Eastern Mediterranean University
Faculty of Business and Economics
Department of Economics
2014-15 Fall Semester
ECON 403
Sample Questions for Chapters 17 and 19
1. The theory of purchasing power parity cannot fully explain exchange rate movements because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) fiscal policy differs across countries. 2. When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated 3. An agreement to exchange dollar bank deposits for euro bank deposits in one month is a A) spot transaction. B) future transaction. C) forward transaction. D) deposit transaction. 4. According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is: A) 40 pesos per real. B) 100 pesos per real. C) 25 pesos per real. D) 0.4 pesos per real. 5. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries. Page 1 of 4 6. Everything else held constant, when a countryʹs currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more 7. According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is: A) 40 pesos per real. B) 100 pesos per real. C) 25 pesos per real. D) 0.4 pesos per real. 8. The theory of purchasing power parity (PPP) suggests that if one countryʹs price level falls relative to anotherʹs, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above. 9. According to PPP, the real exchange rate between two countries will always equal ________. A) 0.0 B) 0.5 C) 1.0 D) 1.5 10. Higher tariffs and quotas cause a countryʹs currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long 11. Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant. A) depreciate; lower B) depreciate; higher C) appreciate; lower D) appreciate; higher Page 2 of 4 12. Everything else held constant, increased demand for a countryʹs ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports 13. If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico, then, in the long run, ________, everything else held constant. A) the Mexican peso will appreciate relative to the U.S. dollar B) the Mexican peso will depreciate relative to the U.S. dollar C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the U.S. dollar D) there will be no effect on the Mexican peso relative to the U.S. dollar 14. When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets. A) higher; higher B) higher; lower C) lower; higher D) lower; lower 15. ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease 16. Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of A) interest­rate determination. B) the demand for money. C) exchange­rate determination. D) the demand for assets. 17. The classical economistsʹ contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________. A) constant; constant B) constant; variable C) variable; variable D) variable; constant Page 3 of 4 18. ________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money. A) Keynesʹs B) Fisherʹs C) Friedmanʹs D) Tobinʹs 19. Until the Great Depression, economists did not recognize that velocity A) increases during severe economic contractions. B) declines during severe economic contractions. C) declines during rapid economic expansions, since money growth fails to keep pace. D) fails to decline during economic contractions. 20. Keynes argued that the transactions component of the demand for money was primarily determined by the level of peopleʹs ________, which he believed were proportional to ________. A) transactions; income B) transactions; age C) incomes; wealth D) incomes; age Page 4 of 4