STUDY GUIDE FINAL ECO41 FALL 2009 UDAYAN ROY
The final will be held on Wednesday, December 16, 9:00 am – 10:40 am. It will be based on chapters 2 – 12 of my lecture notes and Ch 20 of the course’s textbook. This material is covered more extensively in the course’s textbook, International Economics, eighth edition, by Paul Krugman and Maurice Obstfeld. In that book, see especially all of Ch 12; “Equilibrium in the Foreign Exchange Market” in Ch 13; “Aggregate Money Demand” and “The Equilibrium Interest Rate: The Interaction of Money Supply and Demand” in Ch 14; “The Law of One Price” and “Purchasing Power Parity” in Ch 15; all of Ch 16 up to and including “Temporary Changes in Monetary and Fiscal Policy”; “How the Central Bank Fixes the Exchange Rate” and “Stabilization Policies with a Fixed Exchange rate” in Ch 17; and all of Ch 20.
I have provided some practice questions below. I will not provide the answers to the questions whose answers are not provided here.
December 13, 2009
National Income Accounting—based on Ch 12 of the course’s textbook
1. A country’s ____ is the market value of all final goods and services produced (for sale) by the factors of production (or, resources) owned by the permanent residents (or, nationals) of the country in a given time period.
a. Gross Domestic Product
b. Gross National Product
c. Net Domestic Product
d. National Income
2. A country’s ____ is the market value of all final goods and services produced (for sale) within the country in a given time period.
a. Gross Domestic Product
b. Gross National Product
c. Net Domestic Product
d. National Income
3. As in the textbook, let Y stand for GNP, C for consumption spending, I for investment spending, G for government purchases, EX for exports, IM for imports, and CA for the current account balance. Then the national income identity for the open economy is
a. Y = C + I + G.
b. Y = C + I + G + EX + IM.
c. Y = C + I + G + EX – IM.
d. Y = C + I + G – CA.
4. Let T denote the government’s net tax revenue. (That is, T = tax revenues – transfer payments (or, gifts) from the government to others. This is the government’s income.) Then national saving (S) is given by
a. S = Y – T – C
b. S = Y – C
c. S = Y – C – G
d. S = T – G
5. Let Sp denote the private sector’s saving. Then
a. Sp = Y – T – C
b. Sp = Y – C
c. Sp = Y – C – G
d. Sp = T – G
6. Let Sg denote the government’s saving (also called the budget surplus). Then
a. Sg = Y – T – C
b. Sg = Y – C
c. Sg = Y – C – G
d. Sg = T – G
7. The national income identity for the open economy can be re-written as
a. CA = S + I; therefore, a country can have a current account surplus only if it saves and invests more
b. CA = S – I; therefore, a country can have a current account surplus only if it saves more than its businesses invest
c. CA = I – S; therefore, a country can have a current account surplus only if it saves less than its businesses invest
d. None of the above. A country’s saving must be equal to its investment.
Balance of Payments Accounting—based on Ch 12 of the course’s textbook
8. For the United States, the balance on financial account in 2006 was +$833.2 billion. Therefore,
a. Americans lent more money to foreigners in 2006 than they borrowed from foreigners.
b. Americans lent less money to foreigners in 2006 than they borrowed from foreigners.
c. Americans lent the same amount of money to foreigners in 2006 than they borrowed from foreigners; the balance on financial account is not about lending and borrowing
d. More information would be needed to compare the amount lent by Americans to the amount borrowed by Americans.
9. The balance of payments accounts are made up of
a. the current account and the capital account
b. the current account and the financial account
c. the current account, the capital account and the financial account
d. the current account, the capital account, and the official reserve transactions account
10. The balance of any of the accounts within the balance of payments accounts equals:
a. the total of all credits
b. the total of all debits
c. total credits – total debits
d. total debits – total credits
11. The Fundamental Balance of Payments Identity is that if we ignore any statistical discrepancy, then it is always true that
a. Balance on current account + balance on capital account = 0
b. Balance on current account + balance on financial account = 0
c. Balance on current account + balance on capital account + balance on financial account = 0
d. Balance on current account + balance on capital account + balance on official reserve transactions account = 0
12. In a country’s balance of payments, which of the following transactions are debits?
a. A decrease in the domestic bank balances of foreigners.
b. A decrease in the foreign bank balances of domestic residents.
c. Sale of assets by domestic residents to non-residents.
d. Sale of goods by domestic residents to non-residents.
Foreign exchange market—based on chapter 13 of the textbook
13. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing £50 if the exchange rate is $1.50 per one British pound (£)? $75____________
2. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.80 dollars per one British pound? $90________
3. If the price of a British pound increases from $1.50 per pound to $1.80 per pound, we say that:
a. The dollar has appreciated and the pound has depreciated
b. the dollar has depreciated and the pound has appreciated
c. the dollar has appreciated and the pound has appreciated
d. the dollar has depreciated and the pound has depreciated
14. When the price of a British pound increases from $1.50 per pound to $1.80 per pound,
a. Americans find that Britain’s exports are more expensive, and British residents find that imports from America are more expensive.
b. Americans find that Britain’s exports are more expensive, and British residents find that imports from America are less expensive.
c. Americans find that Britain’s exports are cheaper; however, British residents are not affected.
d. Americans are not affected, but British residents find that imports from America are more expensive.
e. None of the above.
15. An appreciation of a country’s currency
a. Decreases the relative price of its exports and lowers the relative price of its imports.
b. Raises the relative price of its exports and raises the relative price of its imports.
c. Lowers the relative price of its exports and raises the relative price of its imports.
d. Raises the relative price of its exports and lowers the relative price of its imports.
e. None of the above.
16. The exchange rate between currencies depends on
a. The interest rates that can be earned on deposits in those currencies.
b. The expected future exchange rate.
c. The interest rates that can be earned on deposits in those currencies and the expected future exchange rate.
d. National output.
e. None of the above.
17. If the interest rate on dollar deposits is 10 percent and the interest rate on euro deposits is 6 percent, then
a. An investor should invest only in dollar deposits.
b. An investor should invest only in euro deposits.
c. An investor should be indifferent between dollar deposits and euro deposits.
d. It is impossible to tell given the information.
18. Which of the following statements is the most accurate?
a. A rise in the interest rate on dollar bank deposits (R$) causes the dollar to appreciate.
b. A rise in the interest rate on dollar bank deposits (R$) causes the dollar to depreciate.
c. A rise in the interest rate on dollar bank deposits (R$) does not affect the U.S. dollar.
d. For a given euro interest rate (R€) and constant expected exchange rate (Ee$/€), a rise in the interest rate on dollar deposits (R$) causes the dollar to appreciate.
e. None of the above.
19. If the interest rate paid by US banks (R$) is 6 percent and the interest rate paid by European banks (R€) is 4 percent, the theory of interest parity says that people probably expect
a. The dollar to appreciate by 2 percent
b. The euro to appreciate by 2 percent
c. The dollar to appreciate by 10 percent
d. The euro to appreciate by 10 percent
20. What is equation that represents the interest parity condition?
a. R$ = R€ + (Ee$/€ – E$/€) / E$/€.
b. R€ = R$ + (Ee$/€ – E$/€) / E$/€.
c. R$ = R€ + (Ee€/$ – E€/$) / E€/$.
d. R$ = R€ - (Ee$/€ – E$/€) / E$/€.
21. If all interest rates stay unchanged, the theory of interest parity says that an increase in the expected future value of the euro (Ee$/€)
a. Will cause the value of the euro (E$/€) to increase immediately
b. Will cause the value of the euro (E$/€) to decrease immediately
c. Will have no immediate effect on the value of the euro (E$/€)
d. Will cause the value of the euro (E$/€) to increase, but only in the long run
22. When the interest parity equation is satisfied,
a. The goods market is in equilibrium
b. The money market is in equilibrium
c. The foreign exchange market is in equilibrium
d. All of the above
e. None of the above
Money market—based on chapter 14 of the textbook
23. The aggregate money demand (Md) depends on
a. The interest rate (R)
b. The price level (P)
c. Real national income (Y)
d. All of the above.
e. Only (a) and (c)
24. A rise in
a. real GNP (Y) decreases aggregate real money demand (L) for any given interest rate (R), thereby moving the L(R,Y) curve to the right.
b. real GNP raises aggregate real money demand for any given interest rate, moving the L(R,Y) curve to the left.
c. real GNP raises aggregate real money demand for any given interest rate, moving the L(R,Y) curve to the right.
d. nominal GNP raises aggregate real money demand for a given interest rate, moving the L(R,Y) curve to the right.
e. real GNP raises aggregate nominal money demand for a given interest rate, moving the L(R,Y) curve to the right.
25. The real money supply (Ms/P) curve is
a. horizontal because MS is set by the central bank while P is taken as given.
b. vertical because MS is set by the central bank.
c. vertical because MS is set by the households and firms while P is taken as given.
d. horizontal because MS and P are set by the central bank.
e. vertical because MS is set by the central bank while P is taken as given.
26. Which of the following is accurate?
a. As the left panel of the figure above shows, an increase in the supply of money reduces the interest rate, provided the price level and the real GNP are unchanged.
b. As the right panel of the figure above shows, an increase in the supply of money raises the interest rate, provided the price level and the real GNP are unchanged.
c. As the left panel of the figure above shows, an increase in the supply of money raises the interest rate, provided the price level and the real GNP are unchanged.
d. As the right panel of the figure above shows, an increase in the supply of money reduces the interest rate, provided real GNP is unchanged.
e. None of the above.
27. Which of the following is accurate?
a. As the left panel of the figure above shows, an increase in real GNP reduces the interest rate, provided the price level and the supply of money are unchanged.
b. As the right panel of the figure above shows, an increase in real GNP raises the interest rate, provided the price level and the supply of money are unchanged.
c. As the left panel of the figure above shows, an increase in real GNP raises the interest rate, provided the price level and the supply of money are unchanged.
d. As the right panel of the figure above shows, an increase in real GNP reduces the interest rate, provided the supply of money is unchanged.
e. None of the above.
28. The requirement that the real supply of money (Ms/P) must equal the real demand for money (L) implies that the domestic interest rate (R) will rise if:
a. Ms↓ or P↑ or Y↑ or some combination of these changes occurs.
b. Ms↑ or P↓ or Y↑ or some combination of these changes occurs.
c. Ms↑ or P↓ or Y↓ or some combination of these changes occurs.
d. None of the above.
29. We saw in the discussion of interest parity in Chapter 13 that R = R* + (Ee – E)/E, where R is the domestic interest rate, R* is the foreign interest rate, and Ee is the expected future value of the foreign currency. This implies that the value of the foreign currency (E) will rise if:
a. R↓ or R*↑ or Ee↑ or some combination of these changes occurs.
b. R↑ or R*↑ or Ee↑ or some combination of these changes occurs.
c. R↓ or R*↑ or Ee↓ or some combination of these changes occurs.
d. None of the above.
30. Combining the themes of Chapter 13 and of this chapter that were discussed in the last 2 questions, we can say that the value of the foreign currency (E) will rise if:
a. Ms↓ or P↑ or Y↑ in the US, or Ee↑ or some combination of these changes occurs.
b. Ms↑ or P↓ or Y↓ in the US, or Ee↑ or some combination of these changes occurs.
c. Ms↓ or P↑ or Y↑ in either the US or in Europe, or Ee↑ or some combination of these changes occurs.