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Economics 345
Practice Examination
Spring 2004
Mr. Easton
This exam has two parts. Part I is worth 30 points, Part II is worth 20 points.
Part I. Answer the following questions by writing the question number in your exam
booklet and the letter of the correct answer. There is one correct answer per question.
1.
Which one of the following statements is the most accurate?
A.
A depreciation of a country’s currency makes its goods cheaper for
foreigners.
B.
A depreciation of a country’s currency makes its goods more expensive
for foreigners.
C.
A depreciation of a country’s currency makes its goods cheaper for its
own residents.
D.
A depreciation of a country’s currency makes its goods cheaper.
E.
None of the above.
2.
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.
3.
Which one of the following statements is the most accurate? Countries in the
euro zone include
A.
Austria, Belgium, Finland, France, and Germany.
B.
Austria, Belgium, Finland, France, Germany, and Greece.
C.
Austria, Belgium, Finland, France, Germany, and Ireland.
D.
Austria, Belgium, Finland, France, Germany, and Italy.
E.
All of the above statements are correct.
4.
If the dollar interest rate is 10 percent and the euro interest rate is 6 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.
5.
Individuals base their demand for an asset on
A.
the expected return the asset offers compared with the returns offered by
other assets.
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B.
C.
D.
E.
the riskiness of the asset’s expected return.
the asset’s liquidity.
All of the above.
Only A and B.
6.
The aggregate money demand depends on
A.
the interest rate.
B.
the price level.
C.
real national income.
D.
All of the above.
E.
Only A and C.
7.
After a permanent one time 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.
8.
An increase in a country’s money supply causes
A.
its currency to appreciate in the foreign exchange market, while a
reduction in the money supply causes its currency to depreciate.
B.
its currency to depreciate in the foreign exchange market, while a
reduction in the money supply causes its currency to appreciate.
C.
no effect on the values of its currency in international markets.
D.
its currency to depreciate in the foreign exchange market, while a
reduction in the money supply causes its currency to further depreciate.
E.
None of the above.
9.
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.
10.
Under the monetary approach to the exchange rate theory, money supply growth
at a constant rate
A.
eventually results in ongoing price level deflation at the same rate, but
changes in this long-run deflation rate do not affect the full-employment
output level or the long-run relative prices of goods and services.
B.
eventually results in ongoing price level inflation at the same rate, but
changes in this long-run inflation rate do affect the full-employment
output level and the long-run relative prices of goods and services.
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C.
D.
E.
eventually results in ongoing price level inflation at the same rate, but
changes in this long-run inflation rate do not affect the full-employment
output level or the long-run relative prices of goods and services.
eventually results in ongoing price level inflation at the same rate, but
changes in this long-run inflation rate do not affect the full-employment
output level, only the long-run relative prices of goods and services.
None of the above statements is true.
11.
In the short run,
A.
the interest rate can rise when the domestic money supply falls.
B.
the interest rate can decrease when the domestic money supply falls.
C.
the interest rate stays constant when the domestic money supply falls.
D.
the interest rate rises in the same proportion as the domestic money supply
falls.
E.
None of the above statements is true.
12.
If people expect relative PPP to hold,
A.
the difference between the interest rates offered by dollar and euro
deposits will equal the difference between the inflation rates expected, in
the United States and Europe, over the relevant horizon.
B.
the difference between the interest rates offered by dollar and euro
deposits will equal the difference between the inflation rates expected in
Europe and the United States.
C.
the difference between the interest rates offered by dollar and euro
deposits will equal the difference between the inflation rates expected,
over the relevant horizon, in the United States and Europe, in the short
run.
D.
the difference between the interest rates offered by dollar and euro
deposits will be above the difference between the inflation rates expected,
over the relevant horizon, in the United States and Europe.
E.
None of the above statements is true.
13.
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.
14.
When the real exchange rate rises,
A.
Imports measured in terms of domestic output will rise.
B.
Imports measured in terms of domestic output will fall.
C.
Imports measured in terms of domestic output will not be affected.
D.
Imports measured in terms of domestic output will rise or fall.
E.
None of the above.
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15.
Using the DD – AA framework, which one of the following statements is the
most accurate?
A.
Only monetary policy can bring the economy to full employment.
B.
Only fiscal policy can bring the economy to full employment.
C.
Only both monetary and fiscal policies can bring the economy to full
employment.
D.
Neither policy is capable of bringing the economy to full employment.
E.
Monetary policy by itself or fiscal policy by itself can bring the economy
to full employment.
Suggested answers to the short answer questions
1.A
2.C
3.E
4.D
5.D
6.D
7.A
8.B
9.A
10.C
11.A
12.A
13.A
14.B
15.E
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Illustrative Practice Questions
Part II – Midterm Examination
1. Explain why one can write the price level in the demand for money as follows:
Md = P L (R, Y).
Answer: The aggregate money demand is proportional to the price level. Imagine that all
prices in an economy doubled, but the interest rate and everyone’s real incomes remained
unchanged. Then, the money value of each individual’s average daily transactions would
then simply double, as would the amount of money each wishes to hold.
2.
Does the existence of non-tradable goods allow for deviations from Purchasing
Power Parity?
Answer: Yes, the existence of non-tradable goods allows deviations from PPP. This is
because the price of a non-tradable good is determined entirely by its domestic supply
and demand curves, and in turn fluctuations in demand and supply for these goods will
affect the price level. Examples include housing, haircuts, services , etc.
3.
How can long-run values in the real exchange rate change?
Answer: An increase in world relative demand for Canadian output causes a long-run
real appreciation of the dollar against the euro (a fall in the real dollar/euro exchange
rate).
A relative expansion of Canadian output causes a long-run real depreciation of
the dollar against the euro (a rise in the real dollar/euro exchange rate).
Practice long-answer questions for which no answer is given. Each questions should
take about 10 minutes.
1.
2.
3.
How does the impact of fiscal policy on the exchange rate differ if it is temporary
or permanent?
An increase in the money stock will depreciate the exchange rate especially if
expectations of future exchange rates change. Discuss.
A once-and-for-all or a continuous rate of increase in the money supply both give
rise to changing prices and consequently have the same outcome.
Discuss this statement.
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