Question 1

What are the three pathways through which fiscal policy can influence exchange rates?

Accepted Answer

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Question 2

What is the difference between a fixed,flexible,and partially flexible exchange rate regime?

Accepted Answer

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Question 3

Refer to the graph shown. If the supply curve shifts from S1 to S2, the value of the dollar will:

Accepted Answer

A) increase in response to excess demand equal to Q4 - Q2. 
B) increase in response to excess demand equal to Q3 - Q1. 
C) decrease in response to excess supply equal to Q4 - Q2. 
D) decrease in response to excess supply equal to Q3 - Q1.

Question 4

Expansionary monetary policy affects domestic income in a way that causes:

Accepted Answer

A) imports to rise. 
B) imports to fall. 
C) exports to rise. 
D) exports to fall.

Question 5

A currency support policy consists of the:

Accepted Answer

A) selling of a currency to offset fluctuation in supply and demand for the currency. 
B) buying of a currency to maintain its value above its long-term equilibrium value. 
C) buying of a currency to maintain its value below its long-term equilibrium value. 
D) selling of a currency to maintain its value above its short-term equilibrium value.

Question 6

Critics of purchasing power parity argue that:

Accepted Answer

A) it does not account for trade in goods. 
B) it cannot explain exchange rate changes in the long run. 
C) it does not apply when exchange rates are flexible. 
D) long-run equilibrium exchange rates are never attained.

Question 7

Contractionary monetary policy generally:

Accepted Answer

A) lowers U.S. interest rates. 
B) decreases the inflow of financial capital. 
C) increases the inflow of financial capital. 
D) decreases the U.S. exchange rate.

Question 8

Using a supply and demand diagram for British Pounds,demonstrate graphically and explain in words how Great Britain can increase the exchange rate value of the Pound by influencing private demand for its currency.

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Question 9

Direct exchange rate intervention:

Accepted Answer

A) gives government the ability to fix exchange rates at any level they choose. 
B) gives government greater power over exchange rates than the market. 
C) gives government limited control over exchange rates. 
D) has no effect on exchange rates.

Question 10

What is purchasing power parity and how is it related to changes in the real exchange rate?

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Question 11

U.S. exports involve an:

Accepted Answer

A) outflow of dollars from the United States to foreigners. 
B) inflow of dollars from foreigners to the U.S. economy. 
C) outflow of foreign currency from the United States to foreigners. 
D) inflow of foreign currency from foreigners to the U.S. economy.

Question 12

A country that wants to fix its exchange rate cannot achieve an interest rate target and an exchange rate target simultaneously.Explain why.

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Question 13

Answer the questions below based upon the following Balance of Payments table for Tundraland (figures are in millions of cugats):
  (a)What is the balance on the current account? Did more cugats flow in or out of that account?
(b)What is the balance on the financial and capital account? Did more cugats flow in or out of that account?
(c)Suppose Tundraland had purchased cugats.How would you know? Would it be trying to lower or raise the value of its currency? Show graphically.

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Question 14

Monetary policy has an:

Accepted Answer

A) unambiguous effect on exchange rates because the income, price, and interest rate effects offset one another. 
B) unambiguous effect on exchange rates because the income, price, and interest rate effects reinforce one another. 
C) ambiguous effect on exchange rates because the income, price, and interest rate effects offset one another. 
D) ambiguous effect on exchange rates because the income, price, and interest rate effects reinforce one another.

Question 15

If a basket of goods costs $10 in the United States and 100,000 rubles in Russia, then purchasing power parity will exist if the exchange rate between the ruble and the dollar is:

Accepted Answer

A) 1,000 rubles per dollar. 
B) 10,000 rubles per dollar. 
C) 0.01 dollars per ruble. 
D) 0.1 dollars per ruble.

Question 16

Which of the following is an advantage of the European Monetary Union?

Accepted Answer

A) A higher likelihood of conflict between members 
B) Increased monetary independence for each member 
C) Increased cost of exchanging currencies 
D) Increased price transparency

Question 17

Suppose a given basket of goods and services costs 9 dollars in Australia and 5,400 baht in Thailand. If the exchange rate is 600 baht per Australian dollar, purchasing power parity implies that the:

Accepted Answer

A) exchange rate has attained its long run equilibrium value. 
B) Australian dollar must appreciate to restore purchasing power parity. 
C) Australian dollar must depreciate to restore purchasing power parity. 
D) baht must depreciate to restore purchasing power parity.

Question 18

The exchange rate effects of fiscal policy are:

Accepted Answer

A) ambiguous because the price and income effects goes against the interest rate effect. 
B) ambiguous because the price and interest rate effects goes against the income effect. 
C) clear because the price and interest rate effects dominate the income effect. 
D) clear because the price and income effects dominate the interest rate effect.

Question 19

Suppose a McDonald's Big Mac costs 29 pesos in Mexico, and the exchange rate between the peso and the Canadian dollar is 10 pesos per Canadian dollar. According to purchasing power parity, a Canadian Big Mac should cost:

Accepted Answer

A) 0.34 Canadian dollars. 
B) 2.90 Canadian dollars. 
C) 5.80 Canadian dollars. 
D) 290 Canadian dollars.

Question 20

Other things being equal, an increase in trade restrictions on imports will:

Accepted Answer

A) reduce the demand for foreign currency, causing it to appreciate. 
B) reduce the demand for foreign currency, causing it to depreciate. 
C) increase the demand for foreign currency, causing it to appreciate. 
D) increase the demand for foreign currency, causing it to depreciate.

Exam 35: International Financial Policy