Download Midterm answers

EC 146: Midterm exam
Instructions. Use a number #2 pencil; make clean erasures. In many cases
there might be two or more correct answers; be sure to pick the best answer.
Also, ask if there are any questions whatsoever about the interpretation of the
questions. Answer all multiple choice questions.
1. It is only by borrowing abroad that a country can have a current account
deficit and consume more than it is currently producing.
(a) True.
(b) False.
2. In a closed economy, national savings must always be equal to national
investment.
(a) True
(b) False
3. The “Twin Towers” problem discussed in class suggests that increasing
deficit will usually cause an increase in the
deficit.
the
(a) government; current account
(b) current account; government
(c) current account; financial
(d) government; capital
4. With respect to exchange rates “up is down” implies
(a) a weaker exchange rate is a smaller number of LCU/FCU.
(b) a stronger exchange rate causes exports and employment to rise.
(c) a weaker exchange rate is a larger number of LCUs per FCU.
(d) a stronger exchange rate is a larger number of LCUs per FCU.
5. If the marginal propensity to import = 0.2, marginal propensity to consume = 0.8, and there is no government sector, the effect of an autonomous
increase in investment of 30 on imports is
(a) +6
(b) -15
(c) +75
(d) +15.
6. Comparative statics means
(a) A change in the variable with respect to the parameters.
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Table 1: Social Accounting Matris
Firms
Firms
HH
Savings
Taxes
Imports
Total
HH
Inv
Govt
Exports
Total
65
?
10
5
?
?
100
105
20
12
20
12
20
100
8
12
20
100
?
?
?
(b) A change in the equilibrium values of the variables with respect to a
change in the parameters.
(c) A change in the parameters with respect to the variables.
(d) A change in the equilibrium values of the variables with
respect to one and only one parameter.
7. In a Keynesian open economy, suppose that the marginal propensity to
consume, c = 0.8, the marginal propensity to import m = 0.10, and
t = 0.25. If it is desired to increase national income by 125 through an
increase in private investment, by how much will private investment have
to increase in order to generate the 125 increase in income?
(a) 25
(b) 31.25
(c) 50
(d) 62.5
8. In SAM of table 1, government savings is
(a) -3
(b) 3.
(c) -20.
(d) 32.
9. In the SAM of table 1 the country is running
(a) foreign surplus of 15.
(b) foreign deficit of 15.
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(c) neither foreign surplus nor deficit.
(d) a foreign deficit of 20.
10. In the SAM of table 1 the the marginal propensity to consume is 0.8.
Autonomous consumption C̄ is
(a) 10.6
(b) 1.
(c) -11.
(d) -19.
11. A thief goes to London and steels 1000 British pounds. He returns and
deposits it into a New York bank. For the United States this is a
(a) capital inflow balanced by errors and omissions.
(b) capital outflow balanced by errors and omissions.
(c) capital inflow not balanced by the current account.
(d) financial account surplus.
12. An approximation to the real interest rate is given by
(a) subtracting the nominal interest rate from the inflation rate.
(b) subtracting the price level from the nominal interest rate.
(c) dividing the nominal interest rate by the inflation rate.
(d) subtracting the inflation rate from the nominal interest rate.
be borrowed by U. S. banks for use in the United
13. Eurodollars
States, and, because of this fact, the conduct of effective monetary policy
in the United States is
than would otherwise be the case.
(a) cannot; more difficult
(b) cannot; easier
(c) can; more difficult
(d) can; easier
14. Fifty basis points expressed in terms of dollars is
(a) one 500th of one cent.
(b) five cents.
(c) one half of one cent.
(d) half of one dollar
15. A surge in international bank lending could be destabilizing since
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(a) it creates the possibility of reduced control of a country’s
money supply.
(b) it directly contributes to destabilizing real investment flows.
(c) it results in too much control of world investment by a few large
industrial countries.
(d) it results in inefficient use of financial capital, and hence reduces
world growth rates.
16. If a U.S. citizen gives $1,000 to a French citizen by writing a check on a
New York bank for deposit to the French citizens New York bank account,
and
the credit item in the U.S. balance-of-payments accounts is
the debit item is
.
(a) exports; unilateral transfers made
(b) increase in foreign short-term private assets in the United States;
exports
(c) increase in foreign short-term private assets in the United
States; unilateral transfers made.
(d) unilateral transfers made; decrease in foreign short-term private assets in the United States
17. In its international investment position in the 1980s, the United States
moved from a position of a
at the beginning of the decade to
that of a
at the end of the decade.
(a) small net debtor; very large net debtor
(b) net debtor; net creditor
(c) large net creditor; small net creditor
(d) net creditor; net debtor
18. If, in a countrys balance of payments statement, the merchandise trade
balance is $-100, services exports and factor income receipts from abroad
in total exceed services imports and factor income payments abroad by
$25, unilateral transfers made exceed unilateral transfers received by $15,
and the long-term financial account has debits exceeding credits by $30,
then the country’s balance on current account is
(a) $-120.
(b) $-90.
(c) $-75.
(d) $-60.
19. The multiplier (∆Y /∆I) is smaller in a model with imports and exports
because
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(a) the level of exports is fixed-otherwise it would be the same.
(b) part of the stimulus from extra investment leaks out in the
form imports.
(c) the change in the level of investment is usually not as large.
(d) is just this example and nothing more; in general the multiplier in a
model with imports can be larger or smaller.
20. The government deficit falls when there is an increase in investment because
(a) government spending responds to the increase.
(b) government wages are a smaller proportion of the total GDP.
(c) tariffs rise and the deficit falls.
(d) taxes increase with aggregate demand and the deficit falls.
21. Consider a real depreciation caused by a fall in p. If the Marshall-Lerner
in output and employment. If
condition holds this will cause an
will occur.
the Marshall-Lerner condition does not hold the
(a) decrease; same
(b) decrease; opposite
(c) increase; same
(d) increase; opposite
22. In a Keynesian income model, if a countrys actual level of income is below the equilibrium income level, then there will be an
of firm
inventories and an increase
the level of output.
(a) unintended depletion; increase
(b) unintended depletion; decrease
(c) unintended accumulation; increase
(d) unintended accumulation; decrease
23. If expansionary aggregate demand-oriented macroeconomic policy is to
be used to move the economy towards simultaneous external and internal
in the current account and high
.
balance, there must be a
(a) deficit ; unemployment
(b) deficit ; inflation
(c) surplus ; unemployment
(d) surplus ; high inflation
24. For thepurchasing power parity exchange rate (e.g. the Big Mac index) to
be an accurate forecast of the exchange, there would have to be no
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(a) trade in services.
(b) errors and omissions.
(c) asset demand for currencies.
(d) capital account surpluses in developing countries.
25. Other things equal, an export of goods from the United States as a gift to
and to no
foreigners would lead to an improvement in the U.S.
.
change in the
(a) merchandise trade balance; balance on current account
(b) balance on current account; merchandise trade balance
(c) financial account balance; merchandise trade balance
(d) merchandise trade balance; balance on goods and services
26. The nominal exchange is expected to devalue by 10 percent. The local
rate of inflation is 6 percent and the foreign rate of inflation is 8 percent.
The real exchange rate will
by
.
(a) appreciate; 8 percent
(b) appreciate; 12 percent
(c) depreciate; 12 percent
(d) depreciate; 8 percent
27. Which one of the following sets of exchange rates shows cross-rate equality?
(a) 50 Indian rupees = 1;2 = 1 pound; 25 Indian rupees = 1
(b) 1 Indian rupee = 1.5 Pakistani rupees; 50 Pakistani rupees = 1 Singapore dollar; 1 Singapore dollar = 75 Indian rupees
(c) 2 Swiss francs = $1; 1 Swiss franc = a third of a euro ; 1
euro = $1.50
(d) $2 = pound; 1.5euro = 1 pound; 1euro = $0.75
28. If, in time period 1, the equilibrium value of the pound is $1.60, but then
U.K. prices double between time period 1 and time period 2 while U.S.
prices rise by 60 percent, then the (relative) purchasing power parity theory
would say that the equilibrium value of the pound in time period 2 is
(a) $0.80.
(b) $1.25.
(c) $1.28.
(d) $2.00
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29. If U.K. interest rates are higher than Japanese interest rates, then the
theory of covered interest arbitrage would suggest that, in the pound/yen
exchange markets, the yen would be at a forward
and the pound
.
would
(a) discount; be at a forward premium
(b) discount; also be at a forward discount
(c) premium; also be at a forward premium
(d) premium; be at a forward discount
30. Suppose that the one-year interest rate in the United States is 6% and that
the one-year interest rate in the United Kingdom is 3%. In the context of
“uncovered” interest arbitrage and with other things equal, funds would
tend to flow out of the United States and into the United Kingdom
(a) if the British pound is expected to depreciate by 2% relative to the
dollar during the coming year.
(b) if the British pound is expected to depreciate by 5% relative to the
dollar during the coming year.
(c) if the British pound is expected to appreciate by 2% relative to the
dollar during the coming year.
(d) if the British pound is expected to appreciate by 5% relative
to the dollar during the coming year.
You have finished part one. Tear off the next sheet and write your
name on it. Answer three of the four questions.
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Name:
1. Explain why a weak exchange rate is good for employment. Who does it
hurt?
2. Draw and label a demand curve for spot foreign exchange on the axes on
the next page. Add and label the supply curve of foreign exchange. Indicate the equilibrium exchange rate in this spot market. Draw a demand
curve and a supply curve for the forward market, and indicate the equilibrium forward exchange rate. If there is reduction in the foreign interest
rate, show how the spot and forward markets would likely behave. Show
the shifted curves as dotted lines.
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Spot exchange rate
FCU
Forward Exchange rate
FCU
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3. There are two major approaches balance of payments management, fixed
and flexible exchange rates. Explain the advantages and disadvantages of
each.
4. The marginal propensity to consume, c = 0.5 and investment is I =
2 and government spending (including wages) is G = 1. Autonomous
consumption is C̄ = 3 and the tax rate is t = 0.2 or 20 percent. Exports
are E = 4. Use the import function of the textbook with the marginal
propensity to import m = 0.3 and autonomous imports M̄ = 1. Number
and write down the equations of the model.
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(a) The variable list is V (
)
(b) The parameter list is P (
)
(c) The number of comparative static results is
(d) The solution for income is Y
.
.
(e) The mathematical expression for the multiplier ∆Y /∆I = is
(f) The numerical value of the multiplier ∆Y /∆I =
11
.