Page 1
1.
A short-run open-economy model with demand shocks can analyze the effect on _____
if output prices and factor prices are sticky.
A)
inflation
B)
real economic activity (real GDP and unemployment)
C)
long-run variables
D)
expectations
2.
A Keynesian model is one in which prices are sticky:
A)
in the short run only.
B)
in the short run and in the long run.
C)
in the long run only.
D)
so that they never depend on the money supply.
3.
To simplify the analysis of demand shocks in an open, two-economy, short-run model,
we assume all of the following, EXCEPT:
A)
fixed prices and wages.
B)
levels of government spending and taxes; foreign GDP and foreign rates of interest
are given.
C)
no net unilateral transfers or foreign factor income.
D)
foreign GDP and foreign rates of interest are constant.
4.
Assumptions that output is fixed and factor prices have adjusted to reach the level of full
employment are:
A)
useful for long-run analysis.
B)
necessary for short-run analysis.
C)
unrealistic to the extent that economists should not make such assumptions.
D)
always true and therefore useful both in the long run and short run.
5.
The assumption of short-run price stickiness implies:
A)
that we must adjust nominal quantities for changes in inflation.
B)
that we must always allow for unexpected inflation.
C)
that expected inflation is zero and nominal quantities are the same as real.
D)
a balanced budget.
6.
The short-run model makes use of the ______, which assumes that private consumption
expenditure is sensitive to changes in current income.
A)
Pareto-optimal condition
B)
consumer sovereignty model
C)
Keynesian consumption function
D)
consumption-smoothing model
Page 2
7.
The slope of the consumption function relates changes in consumer spending to changes
in disposable income received by consumers. This is called:
A)
the marginal propensity to consume.
B)
the average propensity to consume.
C)
the utility-maximization function.
D)
the marginal rate of transformation.
8.
If the marginal propensity to consume for a nation is 0.8, it means:
A)
consumers save 80% of their incomes.
B)
consumers spend 80% of their incomes.
C)
consumers pay 20% tax on their earnings.
D)
consumers decrease their spending by $0.80 for each $1 of a decrease in their
income.
9.
Consider the following information for a family. If the income for the family is $58,000,
then an increase in income by $20,000 will result in an increase in consumption by:
A)
$15,000 if the MPC is 0.9.
B)
$10,000 if the MPC is 0.5.
C)
$12,000 if the MPC is 0.7.
D)
$1,000 if the MPC is 0.2.
10.
Consider the following information for a family. The income for the family is $58,000;
if the MPC is 0.6, and income increases by $13,000, then the increase in savings for the
family is:
A)
$5,400.
B)
$5,200.
C)
$420.
D)
$7,800.
11.
Consider the following information for a family. The income for the family is $58,000;
if the MPS is 0.25, and the income for the family decreases by $15,000, then the
decrease in consumption will be:
A)
$3,750.
B)
$10,500.
C)
$11,250.
D)
$1,500.
Page 3
12.
If taxes go up and all else remains equal, then consumption should:
A)
rise by more than the tax increase.
B)
rise by the same amount as the tax increase.
C)
rise by less than the tax increase.
D)
fall.
13.
If consumption has fallen, which of the following could be true?
A)
Taxes have fallen.
B)
Income has fallen.
C)
Taxes and income have fallen.
D)
Disposable income has risen.
14.
When analyzing the effects of changes in demand in an open economy, we assume that
firms:
A)
have only one fixed rate of return on various projects when deciding investment
activity.
B)
have differing returns on various projects when deciding investment activity.
C)
are required to borrow only from domestic banks when funding investment
activity.
D)
consider the effects of inflation on investment activity.
15.
Investment occurs when:
A)
firms are very profitable and have lots of extra cash on hand.
B)
there is a reduction in risk aversion.
C)
the expected real interest rate is less than the expected real return on the investment
project.
D)
individuals realize that there are greater long-term gains in the equity and credit
markets.
16.
Normally, a firm’s borrowing cost is the expected real interest rate, which takes
expected inflation into account. With price stickiness, however, the firm will consider
only:
A)
expected inflation.
B)
expected wages.
C)
the nominal rate of interest.
D)
the expected appreciation of the asset.
Page 4
17.
With expected inflation equal to zero in the model, investment activity for an economy
is:
A)
a positive function of the nominal rate of interest.
B)
a negative function of the nominal rate of interest.
C)
constant in the face of differing nominal rates of interest.
D)
limited to the rate of growth of nominal GDP minus the inflation rate.
18.
When the expected real rate of interest declines, ceteris paribus, we expect:
A)
more investment projects will be undertaken.
B)
lenders will need to lower their average default rate to maintain their profit
margins.
C)
firms will borrow less and cut back on their investment projects.
D)
individuals will steer clear of equity markets.
19.
What assumption results in investment depending only on the nominal interest rate?
A)
rationality
B)
zero expected inflation
C)
uncertainty
D)
The MPC is less than 1.
20.
If a government must run a balanced budget, then tax revenues and government
spending:
A)
move roughly in opposite directions.
B)
move exactly in opposite directions.
C)
move exactly in the same direction.
D)
move roughly in the same direction.
21.
When analyzing the impact of government consumption and taxes in an open economy,
we exclude transfer payments because:
A)
they are not paid for by taxes.
B)
in the aggregate, they do not generate a change in total spending on goods and
services.
C)
the sums are so large as to be incalculable.
D)
the sums are so small as to be insignificant.
Page 5
22.
When analyzing the impact of government consumption and taxes in an open economy,
we assume that:
A)
the reasons for changing fiscal policy are not important.
B)
government deficits are a problem for the domestic and international economy.
C)
governments always have a balanced budget.
D)
governments often do not coordinate their tax and spending policies with those of
other nations.
23.
The TB (i.e., X – M) is part of the short-run spending equation. With sticky prices, what
would be the effect on the TB with an increase (a real depreciation) of the home nation’s
exchange rate?
A)
Consumers in the home nation would find it more expensive to buy domestic goods
compared with foreign goods, and the TB would decrease.
B)
Consumers in the home nation would cut back on both domestic and foreign goods
and the TB would decrease.
C)
Consumers in the home nation would increase spending on both domestic and
foreign goods, and the TB would be unchanged.
D)
Consumers in the home nation would increase spending on domestic goods and
decrease spending on foreign goods, causing the TB to increase.
24.
A result of an exchange rate depreciation, _____ would occur as the spending patterns
change in response to a change in the exchange rate.
A)
expenditure switching from domestic to foreign products
B)
expenditure switching from foreign to domestic products
C)
expenditure switching from rural to urban producers
D)
terms-of-trade deterioration
25.
What is the real exchange rate?
A)
It is the ratio of the domestic cost of a foreign basket of products compared with
the cost of the same domestic basket of products.
B)
It is the exchange rate minus the rate of domestic inflation.
C)
It is the exchange rate plus the rate of domestic inflation.
D)
It is the original exchange rate that was in effect when the nations were on a gold
standard.
Page 6
26.
If the dollar appreciates against the Mexican peso, consumers in Mexico are likely to
buy more local products, and consumers in the United States are likely to buy more
Mexican products. This phenomenon is known as:
A)
forward exchange rates.
B)
currency pass through.
C)
expenditure switching.
D)
depreciation of the dollar.
27.
Calculate the relative price of a basket of goods sold in the United States and Japan in
terms of dollars if the yen/$ exchange rate = 90. The basket costs $100 in the United
States and ¥9,000 in Japan. The relative price is:
A)
0.9, which means the U.S. basket costs more.
B)
1.1010, which means the Japanese basket costs more.
C)
0.9, which means the Japanese basket costs more.
D)
1.0, which means they both cost the same.
28.
If a basket of goods costs $100 in the United States and 300 pesos in Mexico, and if the
exchange rate is $1 = 5 pesos, then the dollar price of the basket of goods in Mexico is:
A)
$250.
B)
$56.
C)
$60.
D)
$75.
29.
When the real exchange rate decreases in the United States, then there is a(n) ______ in
U.S. demand for U.S. goods and a(n) _________ in U.S. demand for Mexican goods.
A)
decrease; increase
B)
increase; decrease
C)
increase; increase
D)
decrease; decrease
30.
A major factor in changing levels of imports in an open economy is:
A)
real international rates of interest.
B)
relative international price levels.
C)
a change in a nation’s disposable income.
D)
a change in transportation costs.
Page 7
31.
If the trade surplus has fallen, which of the following is a possible explanation?
A)
The real exchange rate rose.
B)
Foreign income fell.
C)
Domestic income fell.
D)
The foreign price level rose.
32.
If domestic income falls, what must happen to keep the trade balance the same?
A)
The real exchange rate must fall.
B)
Foreign income must rise.
C)
The domestic price level must fall.
D)
Domestic income must fall.
33.
If domestic and foreign prices rise by the same relative amount, what will happen to the
trade balance?
A)
It will rise.
B)
Nothing will happen.
C)
It will fall.
D)
Not enough information is provided to answer the question.
34.
An increase in the home country’s income will result in a(n) _____ in the home country
trade balance, and an increase in foreign income will result in a(n) _____ in the home
country trade balance.
A)
fall; fall
B)
increase; increase
C)
increase; fall
D)
fall; increase
35.
The functional relationship between the trade balance and the real exchange rate is:
A)
a negative, or decreasing, function.
B)
a positive, or increasing, function.
C)
a parabolic function.
D)
impossible to quantify because there are so many unknown variables.
36.
When income levels in the home nation increase, what is the effect on the home TB?
A)
It decreases because of expenditure switching.
B)
It decreases because of an increase in imports.
C)
It increases because of an increase in exports.
D)
It increases because of expenditure switching.
Page 8
37.
When income levels in the rest of the world increase, what is the effect on the home
TB?
A)
It decreases because of expenditure switching.
B)
It decreases because of an increase in imports.
C)
It increases because of an increase in exports.
D)
It increases because of expenditure switching.
38.
The marginal propensity to consume goods and services can be broken out into the:
A)
marginal propensity to invest plus the marginal propensity to save.
B)
marginal propensity to consume home-produced goods and services plus the
marginal propensity to consume imports.
C)
marginal propensity to spend minus the marginal propensity to save.
D)
marginal propensity to consume goods plus the marginal propensity to consume
services.
39.
When the marginal propensity to consume foreign imports (MPCF) rises, ceteris
paribus, what happens to the trade balance?
A)
It increases.
B)
It decreases.
C)
It depends on what happens to the MPC of domestic goods.
D)
It will not change.
40.
If the marginal propensity to consume foreign imports (MPCF) is equal to 0.15, then
a(n):
A)
increase in domestic consumption will generate a 15% rise in imports.
B)
decrease in domestic consumption will generate a 15% rise in imports.
C)
increase in domestic income will generate a 15% rise in imports.
D)
decrease in domestic income will generate a 15% rise in imports.
41.
Suppose the MPC is 0.8 in Canada and the MPC is 0.55 at Home. If income increases
by $100 million in Canada, then the increase in consumption of domestic goods will be:
A)
$25 million.
B)
$80 million.
C)
$55 million.
D)
$35 million.
Page 9
42.
Suppose the MPC is 0.8 in Canada and the MPCh is 0.55. If income increases by $100
million in Canada, then the increase in consumption of foreign goods will be:
A)
$35 million.
B)
$25 million.
C)
$80 million.
D)
$100 million.
43.
In 2004, retailers and exporters in the United States were happy, as were their customers
from abroad, because of:
A)
a reduction in import tariffs by the EU.
B)
the lifting of an embargo on U.S. exports to Germany.
C)
the high value of the U.S. dollar compared with other currencies.
D)
the low value of the U.S. dollar compared with other currencies.
44.
When we measure the impact of exchange rate changes on a nation’s trade balance, the
bilateral exchange rates explain only part of the change. To assess the overall change,
we need to calculate:
A)
the home multilateral exchange rate, or real effective exchange rate.
B)
a nation’s income versus income changes in the rest of the world.
C)
a nation’s marginal propensity to consume imports.
D)
the movement over time of the trade balance along with long-run expectations of
the exchange rate.
45.
Data on the relationship between the U.S. multilateral real exchange rate and the U.S.
trade balance show:
A)
a surprising result that the decrease in the trade balance is correlated with an
increase (depreciation) of the U.S. dollar multilateral real exchange rate.
B)
a predictable result that the increase in the trade balance is correlated with an
increase (depreciation) of the U.S. dollar multilateral real exchange rate.
C)
a correlation that is so weak it cannot be used to support the theory that the trade
balance is related to the real effective exchange rate of the U.S. dollar.
D)
a surprising result that the increase in the U.S. trade balance occurs with a decrease
(appreciation) in the real effective exchange rate of the dollar.
Page 10
46.
Sometimes a change in the real effective multilateral exchange rate has the opposite
result from what one would expect. One explanation may be that:
A)
buying habits are very strong and firms and consumers continue their behavior
despite large changes in prices of imports.
B)
price changes do not bring about immediate responses in import or export volume
because of contracts, or firms’ difficulty in changing suppliers quickly.
C)
the theory is fundamentally flawed and does not predict well.
D)
there are other factors we are not considering that affect the trade balance.
47.
Consider the following information on Mexico’s trade. Thirty percent of the trade is
conducted with country A, 55% of trade with country B, and 15% of trade with country
C. If the peso appreciates 10% against country A, depreciates 30% against country B,
and depreciates 10% against country C, then the effective trade-weighted real exchange
rate experiences a:
A)
15% appreciation.
B)
15% depreciation.
C)
25% depreciation.
D)
20% appreciation.
48.
Suppose that the dollar real exchange rate falls by 10% against the euro, 20% against the
pound, and 25% against the yen. If the United States trades equally with each country,
what is the percentage decline in the real effective exchange rate?
A)
22.5%
B)
18.3%
C)
15.1%
D)
20.3%
49.
Suppose that the United States does
1
2
of its trade with Canada,
1
4
with the United
Kingdom, and
1
4
with Mexico. If the dollar real exchange rate rises by 10% with
Canada, rises by 20% for the United Kingdom, and falls by 10% for Mexico, what is the
percentage change in the real effective exchange rate?
A)
11.5%
B)
10%
C)
7.5%
D)
–2.5%
Page 11
50.
If a nation trades with another nation in a foreign currency (such as some commodities
sold that are priced in U.S. dollars), then, when nominal exchange rates change, the real
effective exchange rate will:
A)
change by more.
B)
change by less.
C)
change in exactly the same proportion.
D)
not change at all.
51.
Full pass-through means that a 10% rise in the overseas price of an imported good leads
to:
A)
a 100% rise in the domestic price.
B)
a greater than 10% rise in the domestic price.
C)
a 10% rise in the domestic price.
D)
a less than 10% rise in the domestic price.
52.
The devaluation of a currency results in a(n):
A)
initial increase in trade balance, but an eventual decline in the trade balance.
B)
permanent decline in the trade balance.
C)
permanent increase in the trade balance.
D)
initial decrease in trade balance, but an eventual increase in the trade balance.
53.
If we assume sticky prices in both foreign and domestic trading nations, the rate of
pass-through from the nominal to the real exchange rate falls as:
A)
the percentage of traded goods priced in foreign currencies rises.
B)
the percentage of traded goods priced in the domestic currency rises.
C)
the percentage change in the exchange rate exceeds the percentage increase in
inflation.
D)
traders find new markets and are able to avoid nations with currency depreciations.
54.
Trade dollarization refers to:
A)
the practice of insisting on trade in U.S. dollars.
B)
the fact that many international commodities are traded in U.S. dollars only.
C)
the fact that many dollars have flowed out of the U.S. and are used in other nations
as their national currency.
D)
the falling dollar combined with a rising trade balance.
Page 12
55.
The final market price of imports may not reflect 100% of changes in the real effective
exchange rate because:
A)
exchange rates in many nations are fixed.
B)
there are restrictions on capital inflows.
C)
domestic price distortions, such as markups or taxes, reduce the impact of the
exchange rate change.
D)
the government has instituted price controls.
56.
When a depreciation in the nation’s real effective exchange rate initially lowers the trade
balance and then increases it, economists refer to the phenomenon as:
A)
the K curve effect.
B)
the J curve effect.
C)
the real balances effect.
D)
the marginal propensity to import.
57.
The J curve effect means that import prices are higher, thus revenues paid out increase
while export prices are lower and incoming revenues decrease. Therefore, after a
currency depreciation:
A)
the trade balance will improve, then decline, then improve, and then decline,
appearing to be a series of J shapes.
B)
the trade balance will increase, then decrease, then jump higher, which economists
call the J curve effect.
C)
the nation will cut back on imports immediately causing the trade balance to
improve, which gives the curve an inverted J shape.
D)
the trade balance decreases and then increases over time giving the curve a J shape.
58.
The J curve effect in reference to the trade balance may persist:
A)
for up to one year after the depreciation.
B)
permanently.
C)
for a few weeks only.
D)
for up to 10 years after the depreciation.
59.
In 2009, there was an unlikely boom in British cross-Channel grocery deliveries to
France because of:
A)
an increase in French income.
B)
an increase in French preferences for British food items.
C)
crop failures in France due to a year-long drought.
D)
a dramatic weakening of the British pound against the euro over the previous 18
months.
Page 13
60.
In order to assess the relationship between the real exchange rate and total exports for
any nation, one must construct a real effective exchange rate that measures:
A)
a composite of each trading partner’s real exchange rate change weighted by the
share of trade.
B)
the exchange rate that would exist with no inflation and balanced trade.
C)
the average of all nominal exchange rates since we assume no inflation.
D)
nominal trade adjusted for inflation.
61.
If a proportion of traded goods (such as oil) are priced in a foreign currency, the real
exchange rate becomes:
A)
lower.
B)
higher.
C)
less responsive to changes in the nominal exchange rate.
D)
more responsive to changes in the nominal exchange rate.
62.
The larger the percentage of U.S. imports already priced in dollars, the less likely
depreciation in the U.S. dollar will be to:
A)
decrease prices of imports.
B)
increase prices of imports.
C)
limit trade imbalances.
D)
increase trade with third-party nations.
63.
Because of international time lags between ordering and the receipt of goods, a
depreciation of a currency:
A)
will not change import or export volumes for a time, since prices on orders already
placed cannot be renegotiated.
B)
will immediately change import and export volumes, because buyers and sellers
always include an opt-out clause.
C)
will affect import and export volumes in third countries not party to the particular
transaction.
D)
will never change import or export volumes.
64.
In addition to government purchases or changes in taxes, demand shocks in the
economy can increase or decrease GDP, leading to a fall or rise in the trade balance.
Which of the following would NOT represent a demand shock?
A)
a change in household wealth leading to a rise in consumption expenditures
B)
a rise in inflation
C)
a change in the marginal propensity to import, causing imports to rise
D)
an increase in technology, causing investment spending to rise
Page 14
65.
A belief that high-tech companies would be highly profitable led to the boom in Internet
companies in the 1990s, which is known as a(n):
A)
investment shock.
B)
investment boom.
C)
technology surge.
D)
technology reversal.
66.
The Keynesian model of aggregate demand includes:
I. government purchases and taxes.
II. consumer spending and investment spending.
III. exports plus imports.
A)
I only
B)
I and II only
C)
II and III only
D)
I, II, and III
67.
Aggregate supply is the same thing as:
A)
total national spending.
B)
total domestic production.
C)
aggregate demand.
D)
a supply shock.
68.
The trade balance component of aggregate demand is a function of all the following,
EXCEPT:
A)
foreign disposable income.
B)
domestic disposable income.
C)
the real exchange rate.
D)
consumer spending.
69.
Because a change in consumer spending is positively related to a change in income, the
slope of the aggregate demand function is:
A)
0.
B)
1.
C)
equal to the MPC.
D)
equal to the marginal propensity to save.
Page 15
70.
The MPC shows the relationship between:
A)
interest rates and investment.
B)
disposable income and consumer spending.
C)
saving and investing.
D)
inflation and unemployment.
71.
An increase in income in an open economy nation will cause a change in consumer
spending on home production, and a(n):
A)
increase in taxes.
B)
decrease in savings.
C)
increase in foreign production.
D)
increase in imports if MPCF (marginal propensity to consume foreign goods) is
greater than zero.
72.
The goods market adjusts to an equilibrium right at the point of the Keynesian cross.
Why?
A)
At that point, the Keynesian theory of sticky prices is correct.
B)
At only that point, total spending is equal to total production.
C)
At only that point, consumers are fully satisfied and firms have maximized profits.
D)
At only that point, the unemployment rate is zero and workers need not seek higher
wages.
73.
A fall in the real exchange rate (appreciation) will decrease the trade balance in the short
run and cause a(n) ________ of the total demand curve.
A)
downward shift
B)
increase in the slope
C)
upward shift
D)
decrease in the slope
74.
Unlike in the long-run model, in the short-run Keynesian model, we make two critical
assumptions: that firms adjust production depending on _______, and that _______.
A)
total demand; prices are fixed
B)
resource limitations; prices are flexible
C)
the market rate of interest; consumers maximize utility
D)
consumer spending; there is full employment
Page 16
75.
In the Keynesian model, when is the economy in short-run equilibrium?
A)
when there is no inflation
B)
when there is full employment
C)
when there is a balanced federal budget
D)
when total spending (demand) is equal to production (supply)
76.
The greater the MPC is, the ______ the slope of the demand curve.
A)
greater
B)
smaller
C)
It depends on the trade balance.
D)
The slope of the demand curve does not depend on this.
77.
If output falls, which of the following could be an explanation?
A)
a fall in the interest rate
B)
a fall in foreign income or a rise in investments
C)
a decline in government spending
D)
a rise in the interest rate, a fall in foreign income, or a decline in government
spending
78.
The total demand line will shift whenever:
A)
the MPC increases.
B)
output changes.
C)
there is an exogenous change in one of its components (C, I, G, or X).
D)
aggregate supply increases.
79.
If the interest rate rises and government spending falls, what will happen to output,
ceteris paribus?
A)
It will rise.
B)
It will stay the same.
C)
It will fall.
D)
It is uncertain what will happen.
80.
If taxes fall and foreign income falls, what will happen to output, ceteris paribus?
A)
It will rise.
B)
It will stay the same.
C)
It will fall.
D)
It is uncertain what will happen.
Page 17
81.
Along the IS curve, which of the following markets are in equilibrium?
A)
the money and forex markets
B)
the goods and forex markets
C)
the goods and money markets
D)
the goods, money, and forex markets
82.
Every point on an open-economy IS curve represents:
A)
combinations of interest rates and the supply of money, which result in equilibrium
in the money market.
B)
combinations of interest rates and levels of production, which result in equilibrium
in the goods market.
C)
combinations of interest rates and levels of production, which result in equilibrium
in the money market, the goods market, and the forex market.
D)
combinations of interest rates and levels of production, which result in equilibrium
in the goods market and the forex market.
83.
At a given nominal rate of interest, when spending is equal to output and there is
uncovered interest parity, we have:
A)
real exchange rate parity.
B)
equilibrium in the goods market and in the forex market.
C)
stable inflation and low unemployment.
D)
depreciation of the home currency.
84.
Traders operate on the principle that the ______ the value of the nominal exchange rate
(E), the ______ it is to purchase foreign currency, and the _____ its return measured in
the domestic currency.
A)
higher; more expensive; lower
B)
higher; less expensive; higher
C)
lower; more expensive; higher
D)
higher; more expensive; higher
85.
The principle involved in short-run uncovered interest parity is that home interest rates
will be equal to:
A)
the world equilibrium real rate of interest.
B)
the foreign interest rate minus foreign inflation.
C)
the foreign rate of interest plus the expected rate of depreciation of the home
currency.
D)
the domestic nominal rate of interest plus domestic inflation.
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86.
Under uncovered interest parity, if the domestic interest rate is greater than the foreign
interest rate, then exchange rates are:
A)
expected to rise.
B)
expected to stay constant.
C)
expected to fall.
D)
uncertain.
87.
At some rate of interest, i, domestic demand is equal to output, and at some exchange
rate, the domestic return is equivalent to the foreign return. This must be one point on:
A)
the IS curve.
B)
the aggregate expenditure line.
C)
the supply curve.
D)
the LM curve.
88.
The open-economy IS curve slopes down because any change in the foreign or home
interest rate will inversely affect demand, along with a secondary effect from a change
in:
A)
the rate of depreciation of assets.
B)
the exchange rate and the trade balance.
C)
the real interest rate.
D)
the growth rate of money.
89.
Assume the economy is in equilibrium. If the interest rate falls, what sequence of events
will return the economy to equilibrium?
A)
Total spending rises as investors move funds into foreign assets, causing the
exchange rate to rise (depreciate), and the trade balance increases, causing output
to rise.
B)
Savers save more to replace lost interest earnings, consumption falls, imports rise,
and the trade balance falls, causing output to fall.
C)
Total spending falls, unemployment rises, government transfers increase, inflation
rises, and the exchange rate falls (appreciates).
D)
Bond prices rise, causing foreign investment to flow in, causing the exchange rate
to fall (appreciate).
90.
Considering only the goods and forex markets, as the economy adjusts to lower rates of
interest and equilibrium is restored, the level of GDP will:
A)
fall.
B)
rise.
C)
become unstable.
D)
decline very gradually.
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91.
Factors that shift the IS curve involve:
A)
interest rates and levels of GDP.
B)
the quantity of money and the demand for money.
C)
the trade balance.
D)
exogenous variables affecting demand, such as a change in government spending
or a change in the exchange rate.
92.
If the United States cuts its government budget deficit, what impact would there be on
the IS curve?
A)
It would shift right due to higher levels of total spending.
B)
It would shift left due to lower levels of total spending.
C)
It would shift left because of lower levels of total spending, and it would shift right
if U.S. interest rates decline due to lower borrowing.
D)
It would shift left because of higher nominal and real interest rates due to increased
borrowing.
93.
If there is an increase in government spending, then, ceteris paribus, the IS curve:
A)
will shift to the left.
B)
will shift to the right.
C)
will not shift at all.
D)
will shift to the left if there is a corresponding decrease in taxes.
94.
If the central bank in a foreign country increases its interest rate, then the IS curve of the
domestic economy will:
A)
shift to the right.
B)
shift to the left.
C)
not shift at all.
D)
shift to the right because U.S. exports will decrease.
95.
A shift to the left by the IS curve can be achieved by all of the following, EXCEPT a(n):
A)
decrease in government spending.
B)
increase in taxes.
C)
increase in the foreign interest rate.
D)
increase in the domestic price level.
Page 20
96.
Which of the following is a general rule for how demand shocks affect the IS curve?
A)
Demand shocks will always show up as changes in the expected real exchange rate.
B)
Demand shocks are usually rare and have little effect.
C)
When any exogenous variable works to increase demand, IS shifts to the right and,
conversely, when any exogenous variable works to decrease demand, IS shifts to
the left.
D)
When any exogenous variable works to increase demand, IS shifts to the left and
conversely, when any exogenous variable works to decrease demand, IS shifts to
the right.
97.
A set of combinations of nominal interest rates and GDP, for which the demand for
money is equal to the supply of money, is the:
A)
IS curve.
B)
aggregate expenditure line.
C)
supply curve.
D)
LM curve.
98.
The LM curve shows that, with a fixed supply of money, as GDP rises, the demand for
money will ____ and the rate of interest will ____.
A)
rise; rise
B)
fall; fall
C)
rise; fall
D)
fall; rise
99.
The quantity of real balances demanded varies ____ with the nominal rate of interest
because ________.
A)
directly; at higher interest rates people want more money
B)
inversely; at lower interest rates people want less money
C)
inversely; when people hold more money, they forego interest on other assets
D)
directly; real balances are independent of inflation and would not be affected by it
100.
The relationship between the quantity of real balances demanded and the rate of interest
(called the demand for money curve) will ____ when GDP increases because _____.
A)
increase (shift right); more transactions balances are needed to make purchases and
to hold between pay periods
B)
increase (shift right); more asset balances are needed for saving or precautionary
reasons
C)
decrease (shift left); fewer transactions balances are needed to make purchases and
to hold between pay periods
D)
decrease (shift left); lower asset balances are needed for saving or precautionary
reasons
Page 21
101.
The LM curve shows equilibrium in the _______ market at various levels of interest
rates and GDP.
A)
forex
B)
goods
C)
equities
D)
money
102.
After identifying one combination of interest rates and GDP for which the demand for
money is equal to the supply of money (equilibrium), to maintain the equilibrium if
GDP rises:
A)
this would not affect interest rates.
B)
interest rates would have to fall.
C)
interest rates would have to rise.
D)
interest rates would not be in parity with foreign rates of interest.
103.
The LM curve describes the relationship between interest rates and GDP for which the
supply of money is equal to the demand for real balances, holding _____ constant.
A)
expectations
B)
tastes and preferences
C)
the quantity of money
D)
expectations, tastes, and the quantity of money
104.
If the supply of money increases, what happens in the IS–LM framework?
A)
The IS curve shifts right.
B)
The LM curve shifts right.
C)
The IS curve shifts left.
D)
The LM curve shifts left.
105.
If the demand for money increases, what happens in the IS–LM framework?
A)
The IS curve shifts right.
B)
The LM curve shifts right.
C)
The IS curve shifts left.
D)
The LM curve shifts left.
Page 22
106.
With a fixed supply of money, as GDP rises, the demand for money ____ and therefore
____ must rise to encourage savers to hold financial assets instead of cash.
A)
falls; prices
B)
rises; incomes
C)
rises; rates of interest
D)
falls; taxes
107.
The LM curve will shift to the right, if there is a(n):
A)
decrease in money supply.
B)
increase in real money demand.
C)
increase in money supply.
D)
increase in output.
108.
If the LM curve shifts down, this would be consistent with:
A)
a rise in the money supply.
B)
a fall in interest rates.
C)
a rise in interest rates.
D)
both a rise in the money supply and a fall in interest rates.
109.
If the demand for money decreases, ceteris paribus, the LM curve would:
A)
shift right.
B)
shift left.
C)
remain constant.
D)
slope more steeply.
110.
A government policy deemed to be “temporary” indicates:
A)
only long-run expectations are unchanged.
B)
only expected exchange rates are unchanged.
C)
only prices are not flexible in the short run.
D)
there are sticky prices, fixed expected exchange rates, and constant long-run
expectations.
111.
If we start from long-run general equilibrium of goods, forex, and the money markets,
and there is a temporary expansion of the money supply, what will be the outcome?
A)
GDP rises, the interest rate falls, and the exchange rate rises (depreciation).
B)
GDP rises, the interest rate rises, and the exchange rate falls (appreciation).
C)
GDP falls, the interest rate falls, and the exchange rate rises (depreciation).
D)
GDP falls, the interest rate rises, and the exchange rate rises (depreciation).
Page 23
112.
Consider an economy with flexible exchange rates. If there are high levels of inflation in
the economy, then the appropriate monetary policy would be to ________ the money
supply, which will cause the ______ curve to shift ________.
A)
increase; the LM; left
B)
decrease; the LM; right
C)
decrease; the LM; left
D)
increase; the IS; left
113.
Consider the IS–LM curves for an economy with flexible exchange rates. An increase in
the foreign income will result in the:
A)
LM curve shifting to the right.
B)
IS curve shifting to the right.
C)
LM curve shifting to the left.
D)
IS curve shifting to the left.
114.
Changing the rate at which the central bank makes loans counts as:
A)
fiscal policy.
B)
monetary policy.
C)
neither fiscal nor monetary policy.
D)
both fiscal and monetary policy.
115.
Increasing the transfers from workers to the unemployed counts as:
A)
fiscal policy.
B)
monetary policy.
C)
neither fiscal nor monetary policy.
D)
both fiscal and monetary policy.
116.
It can be shown using the IS–LM–FX model that a temporary expansion in the supply of
money is effective in:
A)
raising rates of interest.
B)
raising the rate of unemployment.
C)
combating temporary downturns in the economy.
D)
increasing consumer confidence.
117.
If the central bank expands the money supply under floating exchange rates, it
potentially stimulates the economy in two ways, namely:
A)
by raising the price level and by increased competition.
B)
by lowering the rate of interest and by causing a depreciation of the currency.
C)
by creating higher spending and by increasing the budget deficit.
D)
by increasing worker productivity and creating R&D incentives for firms.
Page 24
118.
The direction of change in the trade balance is uncertain because expansionary monetary
policy may exert forces in the opposite direction. What are they?
A)
An increase in income tends to lower the trade balance, whereas a fall in interest
rates through depreciation tends to raise the trade balance.
B)
An increase in the supply of money raises interest rates, which lowers the trade
balance, whereas the increase in the demand for money raises it.
C)
Exchange rates rise (depreciation) and expected exchange rates fall (appreciation).
D)
An increase in financial assets raises foreign inflows and raises the trade balance,
whereas decreases in interest rates lower the trade balance.
119.
When exchange rates are fixed, a temporary expansion in the money supply will:
A)
increase output.
B)
leave output unchanged.
C)
lower output.
D)
increase the exchange rate.
120.
All else being equal, an increase in government spending would shift the ______ line to
the ______, causing interest rates to _______ and the trade balance to _______.
A)
LM; right; fall; fall
B)
IS; right; rise; rise
C)
LM; left; rise; rise
D)
IS; right; fall; fall
121.
Whenever U.S. government spending increases, thereby increasing the demand for real
balances and the rate of interest, the currency will appreciate and there is a potential for:
A)
overshooting.
B)
crowding out.
C)
a Republican backlash.
D)
recession.
122.
Crowding out occurs because expansionary fiscal policy:
A)
appreciates the exchange rate.
B)
lowers foreign income.
C)
lowers the interest rate.
D)
increases net exports.
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123.
Which of the following would NOT lead to crowding out?
A)
Expansionary fiscal policy depreciates the exchange rate.
B)
Expansionary fiscal policy raises foreign income.
C)
Expansionary fiscal policy raises the money supply.
D)
Expansionary fiscal policy increases net exports.
124.
Under a fixed exchange rate regime, an expansionary fiscal policy would ____ interest
rates and GDP, which would cause ____ pressure on the exchange rate, forcing the
monetary authority to undertake a(n) ______ monetary policy.
A)
raise; downward (appreciation); expansionary
B)
lower; upward (depreciation); contractionary
C)
raise; upward (depreciation); contractionary
D)
lower; downward (appreciation); expansionary
125.
When exchange rates are fixed, a government, to counter a temporary negative demand
shock, should, in part:
A)
reduce taxes.
B)
reduce defense spending.
C)
reduce the money supply.
D)
reduce defense spending and the money supply.
126.
When comparing monetary and fiscal policy under fixed and floating exchange rate
regimes, which of the following statements is FALSE?
A)
In a floating exchange rate regime, an expansionary monetary policy is effective by
stimulating spending and by depreciating the currency.
B)
In a floating exchange rate regime, an expansionary fiscal policy is effective by
stimulating spending, though there may be crowding-out effects due to higher rates
of interest and currency appreciation.
C)
In a fixed exchange rate regime, an expansionary monetary policy is effective by
stimulating spending; it has no impact on the currency value or the trade balance.
D)
In a fixed exchange rate regime, an expansionary fiscal policy is effective by
stimulating spending, as long as the parallel expansionary monetary policy keeps
exchange rates stable.
127.
During the Great Recession, the Polish economy withstood the economic impact by:
A)
decreasing the money supply.
B)
increasing the taxes.
C)
increasing the money supply.
D)
appreciating its currency.
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128.
Excessive use of monetary or fiscal policies to achieve stabilization may:
A)
require the cooperation of firms and the public in order to be effective.
B)
backfire if the economy becomes destabilized through erratic application.
C)
never be necessary as long as the economy can rely on automatic stabilizers.
D)
be better than weaker measures that may not hit the target.
129.
The time gap between a nation’s decision to implement a corrective economic policy
and the actual results of the policy is known as the:
A)
inside lag.
B)
inside lapse.
C)
outside lag.
D)
outside lapse.
130.
The inside lag is the time between:
A)
observing a shock and countering it.
B)
taking an action and observing its effect.
C)
short-term and long-term goals.
D)
taking an action and determining future long-term goals.
131.
Which of the following is NOT a reason for the inability to stabilize output?
A)
lags between observation and action
B)
policy actions can immediately take effect
C)
policy constraints
D)
preference to maintain long-range goals
132.
In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro. If a Ferrari cost $100,000 in 2002, then
it should have cost ______ in 2006.
A)
$160,000
B)
$140,000
C)
$166,666
D)
$60,000
133.
In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro. If the price of a Ferrari was $125,000
in 2006, then:
A)
U.S. consumers partially benefited, even though the dollar depreciated.
B)
U.S. consumers paid the full price because of the depreciated dollar.
C)
U.S. consumers benefited because of the appreciation of the dollar.
D)
one can say that the J curve effect is not valid.
Page 27
134.
Even though it may seem that nations have a wide variety of policy options to stabilize
their economies, there are a number of issues to be considered and overcome. Which of
the following is NOT an issue confronting policy makers?
A)
the desire to maintain fixed exchange rates or membership in a pegged currency
bloc
B)
long and uncertain time lags when policy effects will occur
C)
the pass-through issue, when little effect occurs on the real effective exchange rate
D)
international controls that limit the ability of any nation to determine its exchange
rate policy
135.
The financial crisis of 2008 resulted in extreme policy measures by the Federal Reserve.
Which of the following is the BEST characterization of its policy?
A)
It was a complete reversion to the idea that eventually the economy is
self-correcting and the best policy is to wait it out.
B)
It was a massive injection of liquidity to banks and major purchases of U.S.
government securities, which resulted in a near-zero federal funds rate.
C)
It was a moderate approach that limited monetary growth to the rate of growth of
real GDP.
D)
It was based on a realization that the Federal Reserve was ineffective in the face of
such a crisis.
136.
When the interest rate is so low that the opportunity cost of holding money is zero, then
economists say we have reached:
A)
the era of total liquidity.
B)
the zero lower bound situation, which means the U.S. economy may be in a
liquidity trap.
C)
full monetary saturation.
D)
a situation in which a nation must use caution, since monetary policy is “super”
effective.
137.
Why wasn’t the stimulus passed in 2009 effective in reducing unemployment during the
recession of 2009–10?
A)
Congress cut the size of the final package, it was skewed toward tax cuts, and it
was only 25% of the amount needed to restore GDP to full employment.
B)
The administration mismanaged it—and it was much too large.
C)
Fiscal policy is ineffective in a liquidity trap.
D)
Tax cuts and interest rate cuts would have been effective, but they were politically
undesirable.
138.
Identify the determinants of the trade balance and give a brief intuitive explanation for
each.
Page 28
139.
Explain expenditure switching.
140.
Explain the J curve.
141.
There are a number of factors that can increase demand and affect the equilibrium level
of total output and, therefore, affect the trade balance. Discuss several of these and
indicate in which direction total demand would change, and in which direction the trade
balance would change.
142.
A series of stories in the popular press in early 2004 reflected the effect of the
depreciation of the U.S. dollar vis-à-vis other currencies. Describe some of these effects.
Should the United States be worried? What about trading partners of the United States?
143.
Explain why the IS curve slopes down.
144.
As the level of real GDP rises, with a fixed quantity of money, something must “give.”
Describe the process of deriving the LM curve whereby a rise in GDP is associated with
an increase in the rate of interest, resulting in an upward-sloping LM curve.
145.
What are the ultimate impacts of temporary expansionary monetary policy under
floating exchange rates on Y, i, E and the TB? Briefly explain.
146.
What are the ultimate impacts of temporary expansionary monetary policy under fixed
exchange rates on Y, i, E and the TB? Briefly explain.
147.
What are the ultimate impacts of temporary fiscal contraction under floating exchange
rates on Y, i, E, and the TB? Briefly explain.
148.
What are the ultimate impacts of temporary fiscal contraction under fixed exchange
rates on Y, i, E, and the TB? Briefly explain.
149.
If the government attempts to stimulate the economy under a fixed-rate regime, it must
also conduct a parallel expansionary monetary policy. Why? And what impact would
there be on the domestic economy?
Page 29
150.
Suppose firms become more optimistic about future profitability. What will this shock
do to Y, i, E, and TB?
151.
What are the possible constraints on the decision to conduct an expansionary economic
policy?
152.
What is the zero lower bound and why is it important?
153.
Briefly describe the issues associated with stabilization policy.
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