Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Under the Bretton Woods system,
a. | all countries fixed their exchange rates in terms of gold. | b. | all countries were
allowed to have floating exchange rates for the first time. | c. | all countries agreed
to switch to a flexible exchange rate system by 1973. | d. | the U.S. fixed the price of the dollar in terms
of gold and all other countries
fixed their exchange rates to the U.S.
dollar. |
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2.
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If the Italian lira were to depreciate relative to the dollar,
a. | you would get more lire for your dollar. | b. | you would get fewer
lire for your dollar. | c. | we can deduce that the Italians are under a
fixed exchange rate system. | d. | we can deduce that Italy will soon face a
balance of payments crisis. |
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3.
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The theory that the real exchange rate should be equal to one, because free
trade should lead to real prices being equalized everywhere, is called
a. | uncovered interest rate parity. | c. | purchasing power
parity. | b. | covered interest rate parity. | d. | relative purchasing power
parity. |
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4.
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The domestic currency of the fictitious country of Lutania is the Lotty. The
table above gives data on the U.S. price level P, the Lutanian price level P*, and the Lutanian
exchange rate e, for the years 1997 and 1998. An American tourist would have been better off in the
year
a. | 1997, because the Lutanian price level was lower compared to the U.S. price level
that year. | b. | 1998, because the nominal exchange rate was higher that year. | c. | 1997, because the
real exchange rate for Lutania was higher that year. | d. | 1998, because the real exchange rate for
Lutania was lower that year. |
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5.
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A depreciation of the domestic exchange rate in a small open economy
would
a. | shift its IS curve up. | c. | shift its LM curve to the left. | b. | shift its IS curve
down. | d. | shift its LM curve to
the right. |
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6.
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In an open economy, an increase in the domestic willingness to save
should
a. | reduce net foreign borrowing. | c. | not affect foreign
borrowing. | b. | increase net foreign borrowing. | d. | increase the world interest
rate. |
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7.
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In increase in the foreign price level in a small open economy would
a. | shift its IS curve up. | c. | shift its LM curve to the left. | b. | shift its IS curve
down. | d. | shift its LM curve to
the right. |
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8.
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Which of the following statements is not true in a small open economy
with fixed exchange rates?
a. | A decrease in the domestic exchange rate will shift the LM curve to the
left. | b. | A decrease in the domestic exchange rate will increase net foreign
borrowing. | c. | Domestic savers and investors face a fixed interest rate in the world capital
market. | d. | If the foreign price
level increases, the central bank must increase the money supply in order to maintain a fixed
exchange rate. |
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9.
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Which one of the following transactions is recorded
in the current account of the balance of payments?
a. | One country buys cars from another
country. | b. | Residents of one country buy equity in a foreign
company. | c. | Government purchases of foreign
currency. | d. | Residents of one country buy property in another
country. |
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10.
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Official financing refers to
a. | net interest payments made by governments on overseas
debt. | b. | net purchases of foreign currency by the monetary
authorities. | c. | net expenditure on
government responsibilities overseas. | d. | net expenditures
on overseas bonds by the monetary authorities. |
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