Name ______Exam # ______
Student ID# ______Section: a (13:15)b (14:45)
Eco 212Fall 2001
Mid-Term #1Prof. S. Sullivan
Instructions: For part I, write your answer directly on the exam sheet. For part II, circle the one best answer.
Part I
Suppose the two countries of Gunland and Butterland trade only with each other. Both countries have adopted the gold standard. The official price of gold in Gunland is 20 bullets (Gunland's unit of currency) per gram. The official price in Butterland Dee is 80 pats (Butterland's unit of currency) per gram.
Gunland exports guns and imports butter. One gun costs 10 bullets. The demand for guns in Butterland depends on the price, according to the following chart:
Price per gun# of guns demanded
20 pats40
30 pats20
40 pats10
Butterland exports butter and imports guns. One kilogram of butter costs 36 pats. The demand for butter in Gunland depends on the price, according to the following chart:
Price per kgKg of butter demanded
9 bullets30
12 bullets20
18 bullets10
1.Sketch the supply and demand curve for bullets in the foreign exchange market. Identify the exchange rate at which trade takes place by drawing a horizontal line on your graph.
2.Fill in the blanks: "In the short-run, Gunland's imports of goods, services, and assets are equal in value to its exports of goods, services, and assets.
Gunland imports:
Gunland exports:
In each blank above, identify each good, service, or asset imported and specify the value of that item imported. Do the same with all exports.
3.Explain the mechanism which will guarantee that the value of Gunland's exports will equal the value of its imports in the long run, assuming both countries continue to use the gold standard and uphold their commitments under the gold standard.
4.Suppose there are 2 countries. Country U has a floating exchange rate system, Country D has fixed the value of its currency equal to one unit of Country U's currency. Let U and D represent the currencies of the two countries. Suppose the supply of D's in the foreign exchange market has been greater than the demand for D's at the fixed exchange rate. Country D's central bank has intervened to support the currency, but also sterilized its intervention in foreign currency markets.
a.Explain exactly what the transactions to sterilize the intervention would be.
b.Suppose that currency market speculators believe that Country D is likely to abandon the fixed exchange rate system rather than continue it. Explain why the Country D central bank might prefer to abandon the fixed exchange rate rather than undertake the necessary steps to maintain it.
c.Suppose a currency market speculator in Country U wishes to profit from her belief that Country D will abandon the fixed exchange rate. Detail as clearly as possible what transaction she would make.
Part II
1.If some of the resources of land, labor, or capital that belong to our country are used to help produce output in another country, these are called:
a.unilateral transfers.
b.foreign purchase of domestic assets.
c.net factor payments.
d.domestic purchase of foreign assets.
e.none of the above.
2.An economist sent to study Eskimo culture would distinguish Eskimo money from other Eskimo assets according to whether the money asset:
a.is produced or approved by the government.
b.is the best available store of value.
c.is completely inflation-proof.
d.is generally acceptable as payment for goods and services.
e.contains or can be easily converted into gold.
3.All financial markets have the characteristic that:
a.funds are transferred from savers to borrowers.
b.the quantity of money in circulation to the general public is determined.
c.one of the participants is a bank or insurance company.
d.the value of the currency is determined.
e.loans are made.
4.Holding everything else constant, when the Bulgarian lev appreciates relative to the US dollar:
a.vacations in Bulgaria become less expensive for tourists from the US.
b.U.S. citizens will buy more Bulgarian goods.
c.U.S. goods exported to Bulgaria will cost less to Bulgarians, so more US goods will be purchased.
d.every Bulgarian is made better off.
e.none of the above.
5.Which of the following is counted as capital?
a.the used equipment that Pizza Napoli is installing in its restaurant.
b.the fertile soil which helps Bulgarian farmers grow crops.
c.the money that a firm has accumulated to pay for an expansion of its factory.
d.the cash that a company has borrowed from bond owners.
e.none of the above.
6.You repay your debt to me by giving me a gift certificate from The Underground, which can be used to buy one beer (or whatever products or services might be for sale) there. If I accept the certificate as payment because I believe someone else will also accept the certificate as payment, the category which best describes the gift certificate is:
a.commodity money.
b.commodity-backed money.
c.fiat money.
d.unit of account.
e.instrument of barter.
7.Suppose the picture above describes the supply and demand for the currency of South Africa, the rand, in terms of its value relative to the Zimbabwe dollar. Assume that South Africa and Zimbabwe use the gold standard and the official prices of gold are 8 rand per gram and 40 Z$ per gram. Then:
a.The South African government will sell 2.5 grams of gold.
b.The Zimbabwean government will gain 100 Z$ worth of gold.
c.The South African government will gain 20 grams of gold.
d.The South African government will buy 20 rand worth of gold.
e.The South African government must buy 20 Zimbabwe dollars.
8.Suppose the picture above describes the supply and demand for the currency of South Africa in terms of its value relative to the Zimbabwe dollar. Assume that Zimbabwe operates a fixed exchange rate system, in which its governments seeks to maintain the foreign exchange value of the Zimbabwean dollar at 7 Z$/SAR. If currency speculators believe that the government of Zimbabwe will soon abandon the fixed exchange rate rather than change its money supply, the speculators will immediately:
a.sell Z $ and convert them into SAR.
b. take their Z$ to the Zimbabwean treasury and convert them into gold until the change takes place.
c.borrow SAR and sell them in the currency market in order to buy Z$.
d.borrow Z$ and convert them into SAR.
e.sell SAR and convert them into US dollars.
9.If the exchange rate we expect in the future is based on the rate we believe will satisfy the purchasing power parity condition, then we would show the effect of an increase in domestic inflation in the RETD-RETF diagram by:
a.a shift of the RETD line to the right.
b.a shift of the RETD line to the left.
c.a shift of the RETF line to the right.
d.a shift of the RETF line to the left.
e.a movement along the RETF line.
10.The difference between the Bretton Woods system and the gold standard system was that the Bretton Woods system:
a.used U.S. dollars as the official reserve asset for most countries instead of gold.
b.gave the International Monetary Fund authority to force countries to re-value their currencies up or down when the need arose.
c.had floating exchange rates between currencies.
d.forced countries to hold stockpiles of Bretton Wood instead of gold as the backing of their currencies.
e.allowed countries a choice as to whether their currency would be convertible into gold or silver.
11.The difference between the M2 definition of the money supply and the M1 definition of the money supply is that the M2 money supply:
a.counts types of assets that are very liquid, but not liquid enough to satisfy the M1 definition, in addition to all the assets that are counted as part of M1.
b.counts types of assets that earn interest, instead of the M1 assets which do not earn interest.
c.counts money that people are saving as well as money that people are spending.
d.counts types of assets that are riskier than the types of assets that are included in M1.
e.none of the above.
12.A ______is an example of a contractual savings institution, and a ______is an example of an investment intermediary.
a.savings and loan associationfire and casualty insurance company
b.pension fundlife insurance company
c.mutual fundcommercial bank
d.life insurance companyfinance company
e.credit unionpension fund
13.If a country has a current account deficit of $1 billion, then it must also have:
a.either a capital account surplus of $1 billion or an increase in government reserve assets of $1 billion.
b.a capital account deficit of $1 billion.
c.some combination of capital account surplus or decrease of government reserve assets which adds up to $1 billion.
d.some combination of capital account surplus or increase in government reserve assets which adds up to $1 billion.
e.none of the above.
14.Suppose one can earn 6% interest on a bank deposit denominated in Finnish markka (FIM) and 26% interest on a Tanzanian bank deposit denominated in Tanzanian shillings(TZS). If the current exchange rate of 136 TZS/ FIM satisfies the interest rate parity condition, then depositors must be expecting the exchange rate in one year to be about:
a.156 TZS/FIM
b.116 TZS/FIM
c.163 TZS/FIM
d.109 TZS/FIM
e.136 TZS/FIM
15.When a country's central bank wants to prevent the foreign exchange value of its currency from rising, it sells its currency in foreign exchange markets. If it does not want this transaction to affect the domestic money supply, it will carry out another transaction. This second transaction is called "______", and it involves ______.
a.sterilizationselling domestic assets
b.interventionbuying foreign assets
c.sterilizationbuying foreign assets
d.interventionbuying domestic assets
e.none of the above.
16.Which of the following situations presents an arbitrage opportunity?
a.it is known for certain that the domestic currency will be re-valued downward in the very near future.
b.the interest rate on foreign bank accounts is substantially higher than the interest rate on domestic bank accounts, and the exchange rate has not changed very much recently.
c.the interest rate on domestic bank accounts is substantially higher than the interest rate on foreign bank accounts, and the domestic currency is expected to fall in value relative to the foreign currency.
d.all of the above.
e.none of the above.
17.A country exports 80 francs worth of merchandise, imports 50 francs worth of merchandise, lends 20 francs to other countries, receives 10 francs from foreign ships passing through its territorial waters, pays 15 francs to foreign workers working in domestic factories, and receives 20 francs from foreign countries on its president's birthday. The country's current account balance is:
a.+25 francs.
b.-25 francs.
c.+45 francs.
d.-45 francs.
e.zero.
18.The invention of money solved a problem associated with barter trade -- namely the problem of:
a.exchange value parity.
b.Gresham's Law.
c.reciprocal demands.
d.double coincidence of wants.
e.mutual compatibility.
19.The purchasing power parity condition states that exchange rates should equate the cost of ______with the cost of the same thing purchased in another country.
a.a typical basket of goods and services
b.any tradable, standard commodity
c.gold
d.a bank deposit
e.an ordinary worker's wage
20.In any economy, savings must always be equal to uses of savings. Uses of savings in an open economy are:
a.investment, government expenditure, and imports.
b.purchase of foreign assets, increasing international reserve assets, and investment.
c.government budget deficit and current account deficit.
d.investment, government budget deficit, current account deficit, and capital account deficit.
e.none of the above.
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