12.1 A country's gross national product (GNP) is

A. the value of all final goods and services produced by its factors of production, excluding land, and sold on the market in a given time period.

B. the value of all final goods and services produced by its factors of production and sold on the market.

C. the value of all final goods produced by its factors of production and sold on the market in a given time period.

D. the value of all final goods and services produced by its factors of production and sold on the market in a given time period.

E. the value of all intermediate goods and services produced by its factors of production and sold on the market in a given time period.

A. the value of all final goods and services produced by its factors of production, excluding land, and sold on the market in a given time period.

B. the value of all final goods and services produced by its factors of production and sold on the market.

C. the value of all final goods produced by its factors of production and sold on the market in a given time period.

D. the value of all final goods and services produced by its factors of production and sold on the market in a given time period.

E. the value of all intermediate goods and services produced by its factors of production and sold on the market in a given time period.

12.2 For most macroeconomists,

A. national income accounts and national output accounts are equal to each other.

B. national output accounts exceed national income accounts.

C. national income accounts exceed national output accounts.

D. it is impossible to tell whether national income accounts equal to national output accounts.

E. None of the above.

A. national income accounts and national output accounts are equal to each other.

B. national output accounts exceed national income accounts.

C. national income accounts exceed national output accounts.

D. it is impossible to tell whether national income accounts equal to national output accounts.

E. None of the above.

12.3 The highest component of GNP is,

A. consumption.

B. the current account.

C. investment.

D. government purchases.

E. none of the above.

A. consumption.

B. the current account.

C. investment.

D. government purchases.

E. none of the above.

12.4 The sale of

A. a used textbook does not enter GNP, but the sale of a used house does.

B. a used textbook does enter GNP.

C. a used house does not enter GNP, but the sale of a used book does.

D. both a used textbook and a used house do not enter GNP.

E. none of the above.

A. a used textbook does not enter GNP, but the sale of a used house does.

B. a used textbook does enter GNP.

C. a used house does not enter GNP, but the sale of a used book does.

D. both a used textbook and a used house do not enter GNP.

E. none of the above.

12.5 Which of the following statements is the most accurate?

A. It is hard to tell whether a sale of a used textbook does or does not generate income for factors of production.

B. The sale of a used textbook sometimes does and sometimes does not generate income for factors of production.

C. The sale of a used textbook does generate income for factors of production.

D. The sale of a used textbook does not generate income for any factor of production.

E. none of the above.

A. It is hard to tell whether a sale of a used textbook does or does not generate income for factors of production.

B. The sale of a used textbook sometimes does and sometimes does not generate income for factors of production.

C. The sale of a used textbook does generate income for factors of production.

D. The sale of a used textbook does not generate income for any factor of production.

E. none of the above.

12.6 GDP is supposed to measure

A. the volume of services generated within a country's borders.

B. the volume of production of a country's output.

C. GNP plus depreciation.

D. the volume of production within a country's borders.

E. none of the above.

A. the volume of services generated within a country's borders.

B. the volume of production of a country's output.

C. GNP plus depreciation.

D. the volume of production within a country's borders.

E. none of the above.

12.7 GNP equals GDP

A. minus receipts of factor income from the rest of the world.

B. plus net receipts of factor income from the rest of the world.

C. plus receipts of factor income from the rest of the world.

D. minus net receipts of factor income from the rest of the world.

E. none of the above.

A. minus receipts of factor income from the rest of the world.

B. plus net receipts of factor income from the rest of the world.

C. plus receipts of factor income from the rest of the world.

D. minus net receipts of factor income from the rest of the world.

E. none of the above.

12.8 In 2006, the United States had

A. a balance in the current account.

B. a surplus in the current account.

C. a deficit in the current account.

D. From 2006 data, it is too difficult to determine whether a surplus or a deficit existed in the current account.

E. none of the above.

A. a balance in the current account.

B. a surplus in the current account.

C. a deficit in the current account.

D. From 2006 data, it is too difficult to determine whether a surplus or a deficit existed in the current account.

E. none of the above.

12.9 GDP is different than GNP in

A. it accounts for depreciation.

B. it does not account for indirect business taxes.

C. it does not account for a country's production using services with foreign-owned capital.

D. it accounts for net unilateral transfers.

E. none of the above.

A. it accounts for depreciation.

B. it does not account for indirect business taxes.

C. it does not account for a country's production using services with foreign-owned capital.

D. it accounts for net unilateral transfers.

E. none of the above.

12.10 Movements in GDP

A. differ greatly from movements in GNP.

B. need to be inflation adjusted in order to match movements in GNP.

C. are not allowed to differ at all from movements in GNP by definition.

D. do not differ greatly from movements in GNP.

E. none of the above.

A. differ greatly from movements in GNP.

B. need to be inflation adjusted in order to match movements in GNP.

C. are not allowed to differ at all from movements in GNP by definition.

D. do not differ greatly from movements in GNP.

E. none of the above.

12.11 Purchases of inventories by

A. firms are not counted in investment spending.

B. households and firms are also counted in investment spending.

C. firms are also counted in investment.

D. households are also counted in investment spending.

E. none of the above.

A. firms are not counted in investment spending.

B. households and firms are also counted in investment spending.

C. firms are also counted in investment.

D. households are also counted in investment spending.

E. none of the above.

12.12 In open economies,

A. saving and investment are necessarily equal contrary to the case of a closed economy.

B. saving and investment are necessarily equal.

C. saving and investment are not necessarily equal as they are in a closed economy.

D. as in a closed economy, saving and investment are not necessarily equal.

E. none of the above.

A. saving and investment are necessarily equal contrary to the case of a closed economy.

B. saving and investment are necessarily equal.

C. saving and investment are not necessarily equal as they are in a closed economy.

D. as in a closed economy, saving and investment are not necessarily equal.

E. none of the above.

12.13 Government purchases are defined as

A. all goods and services purchased by the federal or state government.

B. only goods purchased by federal, state, or local governments.

C. all goods and services purchased by the federal, state, or local government.

D. all goods and services purchased by the federal government.

E. none of the above.

A. all goods and services purchased by the federal or state government.

B. only goods purchased by federal, state, or local governments.

C. all goods and services purchased by the federal, state, or local government.

D. all goods and services purchased by the federal government.

E. none of the above.

12.14 Government transfer payments like social security and unemployment benefits are

A. not included in government purchases.

B. not included in government purchases, but they are part of the investment component of GNP.

C. included in government purchases.

D. not included in government purchases, but they are included in the consumption component of GNP.

E. none of the above.

A. not included in government purchases.

B. not included in government purchases, but they are part of the investment component of GNP.

C. included in government purchases.

D. not included in government purchases, but they are included in the consumption component of GNP.

E. none of the above.

12.15 Which one of the following expressions is the most accurate?

A. CA = EX + IM

B. CA = IM - EX

C. CA = EX - IM

D. CA = EX = IM

E. none of the above.

A. CA = EX + IM

B. CA = IM - EX

C. CA = EX - IM

D. CA = EX = IM

E. none of the above.

12.16 Which of the following is true?

A. A country with a current account surplus is earning more from its exports than it spends on imports.

B. We can describe the current account surplus as the difference between income and absorption.

C. A country could finance a current account deficit by using previously accumulated foreign wealth to pay for its imports.

D. A country with a current account deficit must be increasing its net foreign debts by the amount of the deficit.

E. All of the above are true.

A. A country with a current account surplus is earning more from its exports than it spends on imports.

B. We can describe the current account surplus as the difference between income and absorption.

C. A country could finance a current account deficit by using previously accumulated foreign wealth to pay for its imports.

D. A country with a current account deficit must be increasing its net foreign debts by the amount of the deficit.

E. All of the above are true.

12.17 In a closed economy, national saving

A. always equals investment.

B. is always more than investment.

C. is always less than investment.

D. sometimes equals investment.

E. none of the above.

A. always equals investment.

B. is always more than investment.

C. is always less than investment.

D. sometimes equals investment.

E. none of the above.

12.18 For open economies,

A. S < I + CA

B. S = I - CA

C. S = I + CA

D. S = I

E. S > I + CA

A. S < I + CA

B. S = I - CA

C. S = I + CA

D. S = I

E. S > I + CA

12.19 A closed economy

A. can save only by building up its capital stock.

B. cannot save either by building up its capital stock or by acquiring foreign wealth.

C. can save either by building up its capital stock or by acquiring foreign wealth.

D. can save only be acquiring foreign wealth.

E. none of the above.

A. can save only by building up its capital stock.

B. cannot save either by building up its capital stock or by acquiring foreign wealth.

C. can save either by building up its capital stock or by acquiring foreign wealth.

D. can save only be acquiring foreign wealth.

E. none of the above.

12.20 Disposable income is national income

A. less taxes collected from households and firms by the government.

B. less net taxes collected from households and firms by the government.

C. plus net taxes collected from households and firms by the government.

D. less net taxes collected from households by the government.

E. less net taxes collected from households and firms by the government.

A. less taxes collected from households and firms by the government.

B. less net taxes collected from households and firms by the government.

C. plus net taxes collected from households and firms by the government.

D. less net taxes collected from households by the government.

E. less net taxes collected from households and firms by the government.

12.21 Government savings, S, is equal to

A. T + G

B. T = G

C. T + G - I

D. T - G

E. none of the above.

A. T + G

B. T = G

C. T + G - I

D. T - G

E. none of the above.

12.22 In an open economy, private saving, S, is equal to

A. I + CA + (G + T)

B. I + CA - (G - T)

C. I - CA + (G - T)

D. I + CA + (G - T)

E. I - CA - (G - T)

A. I + CA + (G + T)

B. I + CA - (G - T)

C. I - CA + (G - T)

D. I + CA + (G - T)

E. I - CA - (G - T)

12.23 Every international transaction automatically enter the balance of payments

A. twice, once as a credit and once as a debit.

B. twice, both times as a debit.

C. once as a credit.

D. once either as a credit or as a debit.

E. none of the above.

A. twice, once as a credit and once as a debit.

B. twice, both times as a debit.

C. once as a credit.

D. once either as a credit or as a debit.

E. none of the above.

12.24 The official settlements balance or balance of payments is the sum of

A. the current account balance and the capital account balance.

B. the current account balance, the capital account balance, the non reserve portion of the financial account balance, the statistical discrepancy.

C. the current account balance, the capital account balance, the non reserve portion of the financial account balance.

D. the current account balance and the non reserve portion of the financial account balance.

E. none of the above.

A. the current account balance and the capital account balance.

B. the current account balance, the capital account balance, the non reserve portion of the financial account balance, the statistical discrepancy.

C. the current account balance, the capital account balance, the non reserve portion of the financial account balance.

D. the current account balance and the non reserve portion of the financial account balance.

E. none of the above.

12.25 Unilateral transfers between countries are

A. long-term loans.

B. international gifts, or payments, that do not correspond to the purchase of any good, service, or asset.

C. part of the current account but not a part of national income.

D. the difference between Y and GNP if the identity Y = C + I + G + CA holds exactly.

E. both B and D.

A. long-term loans.

B. international gifts, or payments, that do not correspond to the purchase of any good, service, or asset.

C. part of the current account but not a part of national income.

D. the difference between Y and GNP if the identity Y = C + I + G + CA holds exactly.

E. both B and D.

13.1 How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per on British pound?

A. 62.5 dollars

B. 60 dollars

C. 50 dollars

D. 70 dollars

E. 40 British pounds

A. 62.5 dollars

B. 60 dollars

C. 50 dollars

D. 70 dollars

E. 40 British pounds

13.2 How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.50 dollars per one British pound?

A. 80 dollars

B. 75 dollars

C. 70 dollars

D. 60 dollars

E. 50 dollars

A. 80 dollars

B. 75 dollars

C. 70 dollars

D. 60 dollars

E. 50 dollars

13.3 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?

A. 100 dollars

B. 40 dollars

C. 90 dollars

D. 50 dollars

E. 95 dollars

A. 100 dollars

B. 40 dollars

C. 90 dollars

D. 50 dollars

E. 95 dollars

13.4 The Japanese currency is called the

A. Euro

B. Pound

C. DM

D. Yen

E. Dollar

A. Euro

B. Pound

C. DM

D. Yen

E. Dollar

13.5 How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.50 dollars per British pound?

A. 35 British pounds

B. 20 British pounds

C. 30 British pounds

D. 10 British pounds

E. 25 British pounds

A. 35 British pounds

B. 20 British pounds

C. 30 British pounds

D. 10 British pounds

E. 25 British pounds

13.6 How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.80 dollars per British pound?

A. 40 British pounds

B. 20 British pounds

C. 10 British pounds

D. 25 British pounds

E. 30 British pounds

A. 40 British pounds

B. 20 British pounds

C. 10 British pounds

D. 25 British pounds

E. 30 British pounds

13.7 How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 2.00 dollars per British pound?

A. 40 British pounds

B. 32.5 British pounds

C. 30 British pounds

D. 22.5 British pounds

E. 12.5 British pounds

A. 40 British pounds

B. 32.5 British pounds

C. 30 British pounds

D. 22.5 British pounds

E. 12.5 British pounds

13.8 How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.60 dollars per British pound?

A. 38.125 British pounds

B. 48.125 British pounds

C. 28.125 British pounds

D. 18.125 British pounds

E. 58.125 British pounds

A. 38.125 British pounds

B. 48.125 British pounds

C. 28.125 British pounds

D. 18.125 British pounds

E. 58.125 British pounds

13.9 What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 50 dollars in New York and 100 pounds in London?

A. 1.5 dollars per British pound

B. 2 dollars per British pound

C. 0.5 dollars per British pound

D. 2.5 dollars per British pound

E. 3.5 dollars per British pound

A. 1.5 dollars per British pound

B. 2 dollars per British pound

C. 0.5 dollars per British pound

D. 2.5 dollars per British pound

E. 3.5 dollars per British pound

13.10 What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 60 dollars in New York and 30 Pounds in London?

A. 1.5 dollars per British pound

B. 0.5 dollars per British pound

C. 3.5 dollars per British pound

D. 2.5 dollars per British pound

E. 2 dollars per British pound

A. 1.5 dollars per British pound

B. 0.5 dollars per British pound

C. 3.5 dollars per British pound

D. 2.5 dollars per British pound

E. 2 dollars per British pound

13.11 When a country's currency depreciates,

A. foreigners find that its exports are cheaper; however, domestic residents are not affected.

B. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper.

C. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive.

D. foreigners are not affected, but domestic residents find that imports from abroad are more expensive.

E. None of the above.

A. foreigners find that its exports are cheaper; however, domestic residents are not affected.

B. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper.

C. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive.

D. foreigners are not affected, but domestic residents find that imports from abroad are more expensive.

E. None of the above.

13.12 An appreciation of a country's currency,

A. raises the relative price of its exports and raises the relative price of its imports.

B. raises the relative price of its exports and lowers the relative price of its imports.

C. decreases the relative price of its exports and lowers the relative price of its imports.

D. lowers the relative price of its exports and raises the relative price of its imports.

E. none of the above

A. raises the relative price of its exports and raises the relative price of its imports.

B. raises the relative price of its exports and lowers the relative price of its imports.

C. decreases the relative price of its exports and lowers the relative price of its imports.

D. lowers the relative price of its exports and raises the relative price of its imports.

E. none of the above

13.13 Which one of the following statements is the most accurate?

A. A depreciation of a country's currency makes its goods cheaper for foreigners.

B. A depreciation of a country's currency makes its goods more expensive for foreigners.

C. A depreciation of a country's currency makes its goods cheaper.

D. A depreciation of a country's currency makes its goods cheaper for its own residents.

E. none of the above.

A. A depreciation of a country's currency makes its goods cheaper for foreigners.

B. A depreciation of a country's currency makes its goods more expensive for foreigners.

C. A depreciation of a country's currency makes its goods cheaper.

D. A depreciation of a country's currency makes its goods cheaper for its own residents.

E. none of the above.

13.14 If the goods' money prices do not change, an appreciation of the dollar against the pound

A. doesn't change the relative price f sweaters and jeans.

B. makes British sweaters more expensive in terms of American jeans.

C. makes American jeans cheaper in terms of British sweaters.

D. makes British sweaters cheaper in terms of American jeans.

E. none of the above.

A. doesn't change the relative price f sweaters and jeans.

B. makes British sweaters more expensive in terms of American jeans.

C. makes American jeans cheaper in terms of British sweaters.

D. makes British sweaters cheaper in terms of American jeans.

E. none of the above.

13.15 If the goods' money prices do not change, a depreciation of the dollar against the pound

A. makes British sweaters more expensive in terms of American jeans.

B. makes British sweaters cheaper in terms of American jeans.

C. makes American jeans more expensive in terms of British sweaters.

D. doesn't change the relative price of sweaters and jeans.

E. none of the above.

A. makes British sweaters more expensive in terms of American jeans.

B. makes British sweaters cheaper in terms of American jeans.

C. makes American jeans more expensive in terms of British sweaters.

D. doesn't change the relative price of sweaters and jeans.

E. none of the above.

13.16 The largest trading of foreign exchange occurs in

A. New York

B. Singapore

C. Tokyo

D. London

E. Frankfurt

A. New York

B. Singapore

C. Tokyo

D. London

E. Frankfurt

13.17 Forward and spot exchange rates

A. are necessarily equal.

B. are always such that the forward exchange rate is higher.

C. do not move closely together.

D. do move closely together.

E. none of the above.

A. are necessarily equal.

B. are always such that the forward exchange rate is higher.

C. do not move closely together.

D. do move closely together.

E. none of the above.

13.18 A foreign exchange swap

A. is a spot sale of a currency.

B. is a spot sale of a currency combined with a forward sale of the currency.

C. is a forward repurchase of the currency.

D. is a spot sale of a currency combined with a forward repurchase of the currency.

E. none of the above.

A. is a spot sale of a currency.

B. is a spot sale of a currency combined with a forward sale of the currency.

C. is a forward repurchase of the currency.

D. is a spot sale of a currency combined with a forward repurchase of the currency.

E. none of the above.

13.19 The following is an example of Radio Shack hedging its foreign currency risk:

A. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to buy yen.

B. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to sell yen.

C. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a spot-exchange 1 month from now.

D. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a spot exchange 1 month from now.

E. none of the above.

A. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to buy yen.

B. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to sell yen.

C. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a spot-exchange 1 month from now.

D. needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a spot exchange 1 month from now.

E. none of the above.

13.20 Which of the following is NOT an example of a financial derivative?

A. swaps

B. forwards

C. bonds

D. futures

E. options

A. swaps

B. forwards

C. bonds

D. futures

E. options

13.21 Which major actor is at the center of the foreign exchange market?

A. corporations

B. commercial banks

C. non-bank financial institutions

D. central banks

E. none of the above.

A. corporations

B. commercial banks

C. non-bank financial institutions

D. central banks

E. none of the above.

13.22 Which of the following is NOT a major actor in the foreign exchange market?

A. non-bank financial institutions

B. corporations

C. central banks

D. tourists

E. commercial banks

A. non-bank financial institutions

B. corporations

C. central banks

D. tourists

E. commercial banks

13.23 Which of the following statements is true about a vehicle currency?

A. The dollar is sometimes called a vehicle currency because of its pivotal role in many foreign exchange deals.

B. There is much skepticism that the euro will ever evolve into a vehicle currency on par with the dollar.

C. The pound sterling, once second only to the dollar as a key international currency, is beginning to rise in importance.

D. It is widely used to denominate contracts made by parties who reside in the country that issues the vehicle currency.

E. Only A and C.

A. The dollar is sometimes called a vehicle currency because of its pivotal role in many foreign exchange deals.

B. There is much skepticism that the euro will ever evolve into a vehicle currency on par with the dollar.

C. The pound sterling, once second only to the dollar as a key international currency, is beginning to rise in importance.

D. It is widely used to denominate contracts made by parties who reside in the country that issues the vehicle currency.

E. Only A and C.

13.24 The action or arbitrage is

A. the process of buying a currency cheap and selling it dear.

B. the process of selling currency at different prices in different markets.

C. the process of buying and selling currency at the same price.

D. the process of buying a currency dear and selling it cheap.

E. none of the above.

A. the process of buying a currency cheap and selling it dear.

B. the process of selling currency at different prices in different markets.

C. the process of buying and selling currency at the same price.

D. the process of buying a currency dear and selling it cheap.

E. none of the above.

13.25 Futures contracts differ from forward contracts in that

A. future contracts are a disadvantage if your views about the future spot exchange rate are to change.

B. future contracts ensure you will receive a certain amount of foreign currency at a specified future date.

C. future contracts bind you into your end of the deal.

D. future contracts allow you to sell your contract to an organized futures exchange.

E. futures contracts don't allow you to realize a profit of a loss right away.

A. future contracts are a disadvantage if your views about the future spot exchange rate are to change.

B. future contracts ensure you will receive a certain amount of foreign currency at a specified future date.

C. future contracts bind you into your end of the deal.

D. future contracts allow you to sell your contract to an organized futures exchange.

E. futures contracts don't allow you to realize a profit of a loss right away.

13.26 Exxon Mobil wants to pay 160,000 euros to a German supplier.  They get an exchange rate quotation from their own commercial bank and instruct it to debit their dollar account and pay 160,000 euros to the supplier's German account.  If the exchange rate quoted is $1.2 per euro, how much is debited from Exxon Mobil's account?

A. $160,000

B. $172,000

C. $180,000

D. $192,000

E. none of the above.

A. $160,000

B. $172,000

C. $180,000

D. $192,000

E. none of the above.

13.27 What is the expected dollar rate of return on euro deposits with today's exchange rate at $1.10 per euro, next year's exchange rate at $1.166 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?

A. 0%

B. 10%

C. 11%

D. -1%

E. none of the above.

A. 0%

B. 10%

C. 11%

D. -1%

E. none of the above.

13.28 What is the expected dollar rate of return on dollar deposits with today's exchange rate at $1.10 per euro, next year's exchange rate at $1.165 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?

A. 11%

B. 0%

C. 10%

D. -1%

E. none of the above.

A. 11%

B. 0%

C. 10%

D. -1%

E. none of the above.

13.29 What is the expected dollar rate of return on euro deposits with today's exchange rate at $1.167 per euro, next year's exchange rate at $1.10 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?

13.30 If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then

A. an investor should invest only in dollars.

B. an investor should be indifferent between dollars and euros.

C. an investor should invest only in euros.

D. It is impossibly to tell given the information.

E. All of the above.

A. an investor should invest only in dollars.

B. an investor should be indifferent between dollars and euros.

C. an investor should invest only in euros.

D. It is impossibly to tell given the information.

E. All of the above.

13.31 If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is zero percent, then

A. an investor should be indifferent between dollars and euros.

B. an investor should invest only in dollars.

C. an investor should invest only in euros.

D. It is impossible to tell give the information.

E. all of the above.

A. an investor should be indifferent between dollars and euros.

B. an investor should invest only in dollars.

C. an investor should invest only in euros.

D. It is impossible to tell give the information.

E. all of the above.

13.32 If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 4 percent, then

A. an investor should invest only in euros.

B. an investor should be indifferent between dollars and euros.

C. an investor should invest only in dollars.

D. It is impossible to tell given the information.

E. All of the above.

A. an investor should invest only in euros.

B. an investor should be indifferent between dollars and euros.

C. an investor should invest only in dollars.

D. It is impossible to tell given the information.

E. All of the above.

13.33 If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 8 percent, then

A. an investor should be indifferent between dollars and euros.

B. an investor should invest only in euros.

C. an investor should invest only in dollars.

D. It is impossible to tell given the information.

E. All of the above.

A. an investor should be indifferent between dollars and euros.

B. an investor should invest only in euros.

C. an investor should invest only in dollars.

D. It is impossible to tell given the information.

E. All of the above.

13.34 If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, and the expected return on dollar depreciation against the euro is negative 4 percent, then

A. an investor should invest only in euros.

B. an investor should be indifferent between dollars and euros.

C. an investor should invest only in dollars.

D. It is impossible to tell given the information.

E. All of the above.

A. an investor should invest only in euros.

B. an investor should be indifferent between dollars and euros.

C. an investor should invest only in dollars.

D. It is impossible to tell given the information.

E. All of the above.

13.35 In the beginning of 2009, you pay $100 for a share of stock that pays you a dividend of $1 at the beginning of 2010.  If the stock price rises from $100 to $109 per share over the year:

A. then you have earned a rate of 5 percent over 2009.

B. then you have earned a rate of 10 percent over 2009.

C. then you have earned a rate of 9 percent over 2009.

D. then you have earned a rate of 4 percent over 2009.

E. then you have earned a rate of 1 percent over 2009.

A. then you have earned a rate of 5 percent over 2009.

B. then you have earned a rate of 10 percent over 2009.

C. then you have earned a rate of 9 percent over 2009.

D. then you have earned a rate of 4 percent over 2009.

E. then you have earned a rate of 1 percent over 2009.

13.36 Suppose that the one-year forward purchase price of euros in terms of dollars is equal to $1.113 per euro.  Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euro deposits it is 4 percent.  Under these assumptions,

A. interest parity does not hold.

B. interest parity does hold.

C. it is hard to tell whether interest parity does or does no hold.

D. Not enough information is given to answer this question.

E. None of the above.

A. interest parity does not hold.

B. interest parity does hold.

C. it is hard to tell whether interest parity does or does no hold.

D. Not enough information is given to answer this question.

E. None of the above.

13.37 Which one of the following statements is the most accurate?

A. A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.

B. A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
C. For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.

D. A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.

E. None of the above.

A. A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.

B. A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
C. For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.

D. A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.

E. None of the above.

13.38 Which one of the following statements is the most accurate?

A. For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the current exchange rate.

B. For a fixed interest rate, a rise in the expected future exchange rate does not cause a change in the current exchange rate.

C. For a given dollar interest rate and a constant expected exchange rate, a rise in the interest rate of the euro causes the dollar to depreciate.

D. For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the current exchange rate.

E. None of the above.

A. For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the current exchange rate.

B. For a fixed interest rate, a rise in the expected future exchange rate does not cause a change in the current exchange rate.

C. For a given dollar interest rate and a constant expected exchange rate, a rise in the interest rate of the euro causes the dollar to depreciate.

D. For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the current exchange rate.

E. None of the above.

13.39 The future date on which the currencies are actually exchanged is called what?

A. the two-day window

B. the commitment date

C. the spot exchange date

D. the value date

E. None of the above.

A. the two-day window

B. the commitment date

C. the spot exchange date

D. the value date

E. None of the above.

13.40 Which of the following type of funds cater to wealthy individuals, are not bound by government regulations, and are actively traded in foreign exchange markets?

A. Pension funds

B. Mutual funds

C. Hedge funds

D. Exchange funds

A. Pension funds

B. Mutual funds

C. Hedge funds

D. Exchange funds

14.1 The exchange rate between currencies depends on

A. the interest rate that can be earned on deposits of those currencies and the expected future exchange rate.

B. the expected future exchange rate.

C. the interest rate that can be earned on deposits of those currencies.

D. national output.

E. None of the above.

A. the interest rate that can be earned on deposits of those currencies and the expected future exchange rate.

B. the expected future exchange rate.

C. the interest rate that can be earned on deposits of those currencies.

D. national output.

E. None of the above.

14.2 Money serves as

A. a unit of account.

B. a store of value.

C. a medium of exchange.

D. All of the above.

E. Only A and B.

A. a unit of account.

B. a store of value.

C. a medium of exchange.

D. All of the above.

E. Only A and B.

14.3 Money includes

A. currency

B. checking deposits held by households and firms.

C. deposits in the foreign exchange markets.

D. Both A and B.

E. A, B, and C.

A. currency

B. checking deposits held by households and firms.

C. deposits in the foreign exchange markets.

D. Both A and B.

E. A, B, and C.

14.4 Individuals base their demand for an asset on

A. the asset's liquidity

B. the expected return the asset offers compared with the returns offered by other assets.

C. the riskiness of the asset's expected return.

D. All of the above.

E. Only A and B.

A. the asset's liquidity

B. the expected return the asset offers compared with the returns offered by other assets.

C. the riskiness of the asset's expected return.

D. All of the above.

E. Only A and B.

14.5 An individual's need for liquidity would be up if:

A. the individual received a new ATM card.

B. the average value of transactions carried out by the individual rose.

C. the individual got a raise.

D. the average value of transactions carried out by the individual fell.

E. None of the above.

A. the individual received a new ATM card.

B. the average value of transactions carried out by the individual rose.

C. the individual got a raise.

D. the average value of transactions carried out by the individual fell.

E. None of the above.

14.6 The aggregate money demand depends on

A. real national income.

B. the interest rate.

C. the price level.

D. All of the above.

E. Only A and C.

A. real national income.

B. the interest rate.

C. the price level.

D. All of the above.

E. Only A and C.

14.7 If there is initially

A. excess demand for money, the interest rate falls, and if there is initially an excess supply, it rises.

B. excess supply of money, the interest rate falls, and if there is initially an excess demand, it rises.

C. excess supply of money, the interest rate falls, and if there is initially an excess demand, it further falls.

D. excess supply of money, the interest rate increases, and if there is initially an excess demand, it falls.

E. None of the above.

A. excess demand for money, the interest rate falls, and if there is initially an excess supply, it rises.

B. excess supply of money, the interest rate falls, and if there is initially an excess demand, it rises.

C. excess supply of money, the interest rate falls, and if there is initially an excess demand, it further falls.

D. excess supply of money, the interest rate increases, and if there is initially an excess demand, it falls.

E. None of the above.

14.8 Which one of the following statements is the most accurate?

A. A decrease in the money supply lowers the interest rate while an increase in the money supply raises the interest rate, given the price level an output.

B. An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the output level.

C. An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level.

D. An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level and output.

E. None of the above.

A. A decrease in the money supply lowers the interest rate while an increase in the money supply raises the interest rate, given the price level an output.

B. An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the output level.

C. An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level.

D. An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level and output.

E. None of the above.

14.9 An increase in

A. nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.

B. real output decreases the interest rate while a fall in real output increases the interest rate, given the price level.

C. real output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.

D. real output raises the interest rate while a fall in real output lowers the interest rate, given the money supply.

E. nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level.

A. nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.

B. real output decreases the interest rate while a fall in real output increases the interest rate, given the price level.

C. real output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.

D. real output raises the interest rate while a fall in real output lowers the interest rate, given the money supply.

E. nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level.

14.10 The aggregate demand for money can be expressed by:

A. Md = P x L(R,Y).

B. Md = L x P(R,Y).

C. Md = R x L(P,Y).

D. Md = R x L(R,P).

E. Md = P x Y(R,L).

A. Md = P x L(R,Y).

B. Md = L x P(R,Y).

C. Md = R x L(P,Y).

D. Md = R x L(R,P).

E. Md = P x Y(R,L).

14.11 The aggregate real money demand schedule L(R,Y)

A. has a zero slope because a fall in the interest rate keeps constant the desired real money holdings of each household and firm in the economy.

B. slopes upward because a fall in the interest rate raises the desired real money holdings of each household and firm in the economy.

C. slopes downward because a fall in the interest rate raises the desired real money holdings of each household and firm in the economy.

D. slopes downward because a fall in the interest rate reduces the desired real money holdings of each household and firm in the economy.

E. None of the above.

A. has a zero slope because a fall in the interest rate keeps constant the desired real money holdings of each household and firm in the economy.

B. slopes upward because a fall in the interest rate raises the desired real money holdings of each household and firm in the economy.

C. slopes downward because a fall in the interest rate raises the desired real money holdings of each household and firm in the economy.

D. slopes downward because a fall in the interest rate reduces the desired real money holdings of each household and firm in the economy.

E. None of the above.

14.12 For a given level of

A. nominal GNP, changes in interest rates cause an increase in the L(R,Y) schedule.

B. nominal GNP, changes in interest rates cause movements along the L(R,Y) schedule.

C. real GNP, changes in interest rates cause movements along the L(R,Y) schedule.

D. real GNP, changes in interest rates cause a decrease of the L(R,Y) schedule.

E. real GNP, changes in interest rates cause an increase of the L(R,Y) schedule.

A. nominal GNP, changes in interest rates cause an increase in the L(R,Y) schedule.

B. nominal GNP, changes in interest rates cause movements along the L(R,Y) schedule.

C. real GNP, changes in interest rates cause movements along the L(R,Y) schedule.

D. real GNP, changes in interest rates cause a decrease of the L(R,Y) schedule.

E. real GNP, changes in interest rates cause an increase of the L(R,Y) schedule.

14.13 The money supply schedule is

A. vertical because Ms and P are set be the central bank.

B. vertical because Ms is set by the households and firms while P is taken as given.

C. horizontal because Ms is set by the central bank.

D. horizontal because Ms is set by the central bank while P is taken as given.

E. vertical because Ms is set by the central bank while P is taken as given.

A. vertical because Ms and P are set be the central bank.

B. vertical because Ms is set by the households and firms while P is taken as given.

C. horizontal because Ms is set by the central bank.

D. horizontal because Ms is set by the central bank while P is taken as given.

E. vertical because Ms is set by the central bank while P is taken as given.

14.14 If individuals are holding more money than they desire,

A. they will attempt to reduce their liquidity by using money to purchase interest-bearing assets.

B. they will attempt to reduce their liquidity by converting real money holdings into nominal money holdings.

C. they will keep their holdings constant.

D. they will attempt to reduce their liquidity by using money to purchase goods.

A. they will attempt to reduce their liquidity by using money to purchase interest-bearing assets.

B. they will attempt to reduce their liquidity by converting real money holdings into nominal money holdings.

C. they will keep their holdings constant.

D. they will attempt to reduce their liquidity by using money to purchase goods.

14.15 If there is an excess supply of money:

A. the interest rate rises.

B. the real money supply shifts left to make an equilibrium.

C. the interest rate falls.

D. the real money supply shifts right to make an equilibrium.

E. A and C.

A. the interest rate rises.

B. the real money supply shifts left to make an equilibrium.

C. the interest rate falls.

D. the real money supply shifts right to make an equilibrium.

E. A and C.

14.16 An increase in a country's money supply causes

A. its currency to appreciate in the foreign exchange market while a reduction in the money supply causes its currency to depreciate.

B. no effect on the values of its currency in international markets.

C. its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to appreciate.

D. its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to further depreciate.

E. None of the above.

A. its currency to appreciate in the foreign exchange market while a reduction in the money supply causes its currency to depreciate.

B. no effect on the values of its currency in international markets.

C. its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to appreciate.

D. its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to further depreciate.

E. None of the above.

14.17 Which one of the following statements is the most accurate?

A. Given Pus and Yus, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

B. Given Pus and Yus, when the money supply decreases, the dollar interest rate declines and the dollar depreciates against the euro.

C. Given Yus, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

D. Given Pus, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

E. Given Pus and Yus, when the money supply rises, the dollar interest rate declines and the dollar appreciates against the euro.

A. Given Pus and Yus, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

B. Given Pus and Yus, when the money supply decreases, the dollar interest rate declines and the dollar depreciates against the euro.

C. Given Yus, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

D. Given Pus, when the money supply rises, the dollar interest rate declines and the dollar depreciates against the euro.

E. Given Pus and Yus, when the money supply rises, the dollar interest rate declines and the dollar appreciates against the euro.

14.18 Given Pus and Yus

A. An increase in the European money supply causes the euro to appreciate against the dollar, but it does not disturb the U.S. money market equilibrium.

B. An increase in the European money supply causes the euro to appreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.

C. An increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium.

D. An increase in the European money supply causes the euro to depreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.

E. None of the above.

A. An increase in the European money supply causes the euro to appreciate against the dollar, but it does not disturb the U.S. money market equilibrium.

B. An increase in the European money supply causes the euro to appreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.

C. An increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium.

D. An increase in the European money supply causes the euro to depreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.

E. None of the above.

14.19 An economy's long-run equilibrium is

A. the equilibrium that would occur if prices were perfectly fixed to preserve full employment.

B. the equilibrium that would occur if prices were perfectly fixed at the full employment point.

C. the equilibrium that would occur if prices were perfectly flexible.

D. the equilibrium that would occur if prices were perfectly flexible and always adjusted immediately.

E. the equilibrium that would occur if prices were perfectly flexible and always adjusted immediately to preserve full employment.

A. the equilibrium that would occur if prices were perfectly fixed to preserve full employment.

B. the equilibrium that would occur if prices were perfectly fixed at the full employment point.

C. the equilibrium that would occur if prices were perfectly flexible.

D. the equilibrium that would occur if prices were perfectly flexible and always adjusted immediately.

E. the equilibrium that would occur if prices were perfectly flexible and always adjusted immediately to preserve full employment.

14.20 A permanent increase in a country's money supply

A. causes a less than proportional increase in its price level.

B. leaves its price level constant in long-run equilibrium.

C. causes a more than proportional increase in its price level.

D. causes a proportional increase in its price level.

E. None of the above.

A. causes a less than proportional increase in its price level.

B. leaves its price level constant in long-run equilibrium.

C. causes a more than proportional increase in its price level.

D. causes a proportional increase in its price level.

E. None of the above.

14.21 A change in the level of the supply of money

A. has no effect on the long-run values of the interest rate and real output.

B. decreases the long-run values of the interest rate and real output.

C. has no effect on the long-run values of the interest rate, but may affect real output.

D. increases the long-run values of the interest rate and real output.

E. has no effect on the long-run values of real output, but may affect the interest rate.

A. has no effect on the long-run values of the interest rate and real output.

B. decreases the long-run values of the interest rate and real output.

C. has no effect on the long-run values of the interest rate, but may affect real output.

D. increases the long-run values of the interest rate and real output.

E. has no effect on the long-run values of real output, but may affect the interest rate.

14.22 Which one of the following statements is the most accurate?

A. A permanent increase in a country's money supply causes a proportional short-run depreciation of its currency against foreign currencies.

B. A permanent increase in a country's money supply causes a proportional short-run appreciation of its currency against foreign currencies.

C. A permanent increase in a country's money supply causes a proportional long-run appreciation of its currency against foreign currencies.

D. A temporary increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.

E. A permanent increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.

A. A permanent increase in a country's money supply causes a proportional short-run depreciation of its currency against foreign currencies.

B. A permanent increase in a country's money supply causes a proportional short-run appreciation of its currency against foreign currencies.

C. A permanent increase in a country's money supply causes a proportional long-run appreciation of its currency against foreign currencies.

D. A temporary increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.

E. A permanent increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.

14.23 The long run effects of money supply have a(n)

A. no effect on the long-run values of the interest rate or real output, no change in the price level's long-run value.

B. ambiguous effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the opposite direction.

C. no effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.

D. proportional effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.

E. ambiguous effect on the long-run values of the interest rate or real output, a disproportional change in the price level's long-run value in the same direction.

A. no effect on the long-run values of the interest rate or real output, no change in the price level's long-run value.

B. ambiguous effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the opposite direction.

C. no effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.

D. proportional effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.

E. ambiguous effect on the long-run values of the interest rate or real output, a disproportional change in the price level's long-run value in the same direction.

14.24 After a permanent increase in the money supply,

A. the exchange rate overshoots in the long run.

B. the exchange rate overshoots in the short run.

C. the exchange rate smoothly appreciates in the short run.

D. the exchange rate smoothly depreciates in the short run.

E. None of the above.

A. the exchange rate overshoots in the long run.

B. the exchange rate overshoots in the short run.

C. the exchange rate smoothly appreciates in the short run.

D. the exchange rate smoothly depreciates in the short run.

E. None of the above.

14.25 A change in the money supply creates demand and cost pressures that lead to future increases in the price level from which main sources:

I. Excess demand for output and labor

II. Inflationary expectations

III. Raw materials prices

A. I

B. II

C. II and III

D. I and II

E. I, II, and III

A. I

B. II

C. II and III

D. I and II

E. I, II, and III

15.1 Which of the following statements is the most accurate?

The law of one price states:

A. identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

B. in competitive markets free of transportation costs and official barriers to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency.

C. in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

D. in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price.

E. None of the above.

A. identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

B. in competitive markets free of transportation costs and official barriers to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency.

C. in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

D. in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price.

E. None of the above.

15.2 Under Purchasing Power Parity,

A. E$/e = Pus - Pe

B. E$/e = Pe/Pus

C. E$/e = Pus/Pe

D. E$/e = Pus + Pe

E. None of the above.

A. E$/e = Pus - Pe

B. E$/e = Pe/Pus

C. E$/e = Pus/Pe

D. E$/e = Pus + Pe

E. None of the above.

15.3 Which of the following statements is the most accurate?

A. The law of one price applies to the general price level while PPP applies to individual commodities.

B. The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities.

C. The law of one price applies to individual commodities while PPP applies to the general price level.

D. The law of one price applies only to the general price level.

E. PPP applies only to individual commodities.

A. The law of one price applies to the general price level while PPP applies to individual commodities.

B. The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities.

C. The law of one price applies to individual commodities while PPP applies to the general price level.

D. The law of one price applies only to the general price level.

E. PPP applies only to individual commodities.

15.4 Which of the following statements is the most accurate?

A. If the law of one price holds true for every commodity, PPP must hold automatically.

B. If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same.

C. If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same.

D. If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same.

E. None of the above.

A. If the law of one price holds true for every commodity, PPP must hold automatically.

B. If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same.

C. If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same.

D. If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same.

E. None of the above.

15.5 Which of the following statements is the most accurate?

A. Absolute PPP does not imply relative PPP.

B. Relative PPP implies absolute PPP.

C. Absolute PPP implies relative PPP.

D. There is no causality relation between the two.

E. None of the above.

A. Absolute PPP does not imply relative PPP.

B. Relative PPP implies absolute PPP.

C. Absolute PPP implies relative PPP.

D. There is no causality relation between the two.

E. None of the above.

15.6 Which of the following statements is the most accurate?

A. In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded.

B. In the long run, national price levels play a key role only in determining interest rates.

C. In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded.

D. In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded.

E. None of the above.

A. In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded.

B. In the long run, national price levels play a key role only in determining interest rates.

C. In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded.

D. In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded.

E. None of the above.

15.7 Which of the following statements is the most accurate?

In general,

A. the monetary approach to the exchange rate is a short run theory.

B. the monetary approach to the exchange rate is a long run theory.

C. the monetary approach to the exchange rate is both a short and long run theory.

D. the monetary approach to the exchange rate is neither a long run nor short run theory.

E. None of the above.

A. the monetary approach to the exchange rate is a short run theory.

B. the monetary approach to the exchange rate is a long run theory.

C. the monetary approach to the exchange rate is both a short and long run theory.

D. the monetary approach to the exchange rate is neither a long run nor short run theory.

E. None of the above.

15.8 The monetary approach makes the general prediction that

A. the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them.

B. the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies.

C. the exchange rate, which is the relative price of American and European money, is fully determined in the short and long run by the relative supplies of those monies and the relative demands for them.

D. the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them.

E. None of the above.

A. the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them.

B. the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies.

C. the exchange rate, which is the relative price of American and European money, is fully determined in the short and long run by the relative supplies of those monies and the relative demands for them.

D. the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them.

E. None of the above.

15.9 Under the monetary approach to the exchange rate theory, money supply growth at a constant rate

A. eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

B. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

C. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services.

D. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

E. None of the above.

A. eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

B. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

C. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services.

D. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

E. None of the above.

15.10 Which of the following statements is the most accurate?

In general, under the monetary approach to the exchange rate,

A. the interest rate is not independent of the money supply growth rate in the short run.

B. the interest rate is not independent of the money supply growth rate in the long run.

C. the interest rate is independent of the money supply growth rate in the long run.

D. the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run.

E. None of the above.

A. the interest rate is not independent of the money supply growth rate in the short run.

B. the interest rate is not independent of the money supply growth rate in the long run.

C. the interest rate is independent of the money supply growth rate in the long run.

D. the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run.

E. None of the above.

15.11 Which of the following statements is the most accurate?

In general, under the monetary approach to the exchange rate,

A. while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

B. the long-run interest rate does not depend on the absolute level of the money supply,  and thus continuing growth in the money supply will not affect the interest rate.

C. while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

D. while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate.

E. None of the above.

A. while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

B. the long-run interest rate does not depend on the absolute level of the money supply,  and thus continuing growth in the money supply will not affect the interest rate.

C. while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

D. while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate.

E. None of the above.

15.12 If people expect relative PPP to hold,

A. the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rate expected, in the United States and Europe, respectively, over the relevant horizon.

B. the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run.

C. the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

D. the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively.

E. None of the above.

A. the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rate expected, in the United States and Europe, respectively, over the relevant horizon.

B. the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run.

C. the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

D. the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively.

E. None of the above.

15.13 Under PPP (and by the Fisher Effect), all else equal,

A. a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

B. a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.

C. a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

D. a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

E. None of the above.

A. a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

B. a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.

C. a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

D. a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

E. None of the above.

15.14 In the short run,

A. the interest rate rises in the same proportion as the domestic money supply falls.

B. the interest rate can rise when the domestic money supply falls.

C. the interest rate can decrease when the domestic money supply falls.

D. the interest rate stays constant when the domestic money supply falls.

E. None of the above.

A. the interest rate rises in the same proportion as the domestic money supply falls.

B. the interest rate can rise when the domestic money supply falls.

C. the interest rate can decrease when the domestic money supply falls.

D. the interest rate stays constant when the domestic money supply falls.

E. None of the above.

15.15 Under a flexible-price monetary approach to the exchange rate,

A. when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

B. when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant.

C. when the domestic money supply falls, the price level would eventually fall, increasing the interest rate.

D. when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate.

E. when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate.

A. when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

B. when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant.

C. when the domestic money supply falls, the price level would eventually fall, increasing the interest rate.

D. when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate.

E. when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate.

15.16 Under sticky prices,

A. a fall in the money supply does not affect the interest rate in the short run, only in the long run.

B. a fall in the money supply raises the interest rate to preserve money market equilibrium.

C. a fall in the money supply reduces the interest rate to preserve money market equilibrium.

D. a fall in the money supply keep the interest rate intact to preserve money market equilibrium.

E. None of the above.

A. a fall in the money supply does not affect the interest rate in the short run, only in the long run.

B. a fall in the money supply raises the interest rate to preserve money market equilibrium.

C. a fall in the money supply reduces the interest rate to preserve money market equilibrium.

D. a fall in the money supply keep the interest rate intact to preserve money market equilibrium.

E. None of the above.

15.17 Under stick prices

A. an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately.

B. an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately.

C. an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

D. an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately.

E. an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

A. an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately.

B. an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately.

C. an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

D. an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately.

E. an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

15.18 Under the monetary approach to the exchange rate,

A. an interst rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates.

B. an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates.

C. an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates.

D. an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

E. an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates.

A. an interst rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates.

B. an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates.

C. an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates.

D. an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

E. an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates.

15.19 Under the monetary approach to the exchange rate,

A. a rise in the money supply will cause immediate currency appreciation.

B. a rise in the money supply will cause currency depreciation.

C. a rise in the money supply will cause immediate currency depreciation.

D. a rise in the money supply will cause depreciation.

E. a reduction in the money supply will cause immediate currency depreciation.

A. a rise in the money supply will cause immediate currency appreciation.

B. a rise in the money supply will cause currency depreciation.

C. a rise in the money supply will cause immediate currency depreciation.

D. a rise in the money supply will cause depreciation.

E. a reduction in the money supply will cause immediate currency depreciation.

15.20 When the domestic money prices of goods are held constant

A. a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods.

B. a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods.

C. a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods.

D. A and C only.

E. B and C only.

A. a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods.

B. a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods.

C. a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods.

D. A and C only.

E. B and C only.

15.21 An increase in the world relative demand for U.S. output causes

A. a long-run real depreciation of the dollar against the euro.

B. a long-run real appreciation of the dollar against the euro.

C. a short-run real depreciation of the dollar against the euro.

D. A and B only.

E. None of the above.

A. a long-run real depreciation of the dollar against the euro.

B. a long-run real appreciation of the dollar against the euro.

C. a short-run real depreciation of the dollar against the euro.

D. A and B only.

E. None of the above.

15.22 Which of the following statements is most accurate?

A. A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

B. A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

C. A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro.

D. A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

E. A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

A. A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

B. A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

C. A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro.

D. A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

E. A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

15.23 Which of the following statements is most accurate?

A. In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.

B. In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate.

C. In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate.

D.In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate.

E. None of the above.

A. In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.

B. In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate.

C. In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate.

D.In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate.

E. None of the above.

15.24 Which of the following statements is most accurate?

A. In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

B. In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate.

C. In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

D. In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

E. In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate.

A. In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

B. In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate.

C. In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

D. In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

E. In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate.

15.25 In the long run

A. exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets.

B. exchange rates obey absolute PPP when all disturbances are monetary in nature.

C. exchange rates obey absolute PPP when all disturbances occur in the output markets.

D. exchange rates obey relative PPP when all disturbances occur in the output markets.

E. exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature.

A. exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets.

B. exchange rates obey absolute PPP when all disturbances are monetary in nature.

C. exchange rates obey absolute PPP when all disturbances occur in the output markets.

D. exchange rates obey relative PPP when all disturbances occur in the output markets.

E. exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature.

21.1 What would best describe the national capital markets?

A. The market of exchange of real estate.

B. The market in which residents of different countries trade assets.

C. The market of exchange of bonds.

D. The market of exchange of stocks.

E. None of the above.

A. The market of exchange of real estate.

B. The market in which residents of different countries trade assets.

C. The market of exchange of bonds.

D. The market of exchange of stocks.

E. None of the above.

21.2 Asset trades that deal with debt instruments are best described as

A. share of stock.

B. exchange rate.

C. bonds.

D. bank deposits.

E. Both C and D.

A. share of stock.

B. exchange rate.

C. bonds.

D. bank deposits.

E. Both C and D.

21.3 Asset trades that deal with equity instruments are best described as

A. exchange rate.

B. share of stock.

C. bank deposits.

D. bonds.

E. Both C and D.

A. exchange rate.

B. share of stock.

C. bank deposits.

D. bonds.

E. Both C and D.

21.4 The international capital market is

A. not really a single market, but a group of closely interconnected markets in which asset exchanges with some international dimension take place.

B. the market in which residents of different countries trade assets.

C. the market that is subject to intense regulation and must file a report to the Basel committee on a biannual basis.

D. A and B.

E. A, B, and C.

A. not really a single market, but a group of closely interconnected markets in which asset exchanges with some international dimension take place.

B. the market in which residents of different countries trade assets.

C. the market that is subject to intense regulation and must file a report to the Basel committee on a biannual basis.

D. A and B.

E. A, B, and C.

21.5 What is the basic motive for asset trade?

A. Reduce risk

B. Increase expected returns

C. Portfolio unification

D. Economic stability

E. A and B.

A. Reduce risk

B. Increase expected returns

C. Portfolio unification

D. Economic stability

E. A and B.

21.6 Investment banks in the U.S. are

A. not banks at all but institutions which specialize in underwriting sales of stocks and bonds.

B. regular banks specializing in investment projects, but allowed to offer limited domestic transactions.

C. special arm of the U.S. government for U.S. banks operating outside the U.S.

D. regular banks specializing in investment projects.

E. None of the above.

A. not banks at all but institutions which specialize in underwriting sales of stocks and bonds.

B. regular banks specializing in investment projects, but allowed to offer limited domestic transactions.

C. special arm of the U.S. government for U.S. banks operating outside the U.S.

D. regular banks specializing in investment projects.

E. None of the above.

21.7 Credit Suisse, Goldman Sachs, and Lazard Freres are examples of

A. commercial banks.

B. non-bank financial institutions, such as insurance companies, pension funds, and mutual funds.  This includes investment banks, which specialize in underwriting sales of stocks and bonds by corporations and in some cases governments.

C. central banks and other government agencies.

D. corporations.

E. None of the above.

A. commercial banks.

B. non-bank financial institutions, such as insurance companies, pension funds, and mutual funds.  This includes investment banks, which specialize in underwriting sales of stocks and bonds by corporations and in some cases governments.

C. central banks and other government agencies.

D. corporations.

E. None of the above.

21.8 Eurodollars are

A. dollar deposits located outside both Europe and the USA.

B. dollar deposits located outside the USA.

C. dollar deposits located in the USA.

D. dollar deposits located outside Europe.

E. dollar deposits located in Europe.

A. dollar deposits located outside both Europe and the USA.

B. dollar deposits located outside the USA.

C. dollar deposits located in the USA.

D. dollar deposits located outside Europe.

E. dollar deposits located in Europe.

21.9 Eurobanks are

A. banks that accept deposits denominated in Eurocurrencies excluding Eurodollars.

B. all European banks.

C. all non American banks.

D. banks that accept deposits denominated in Eurocurrencies including Eurodollars.

E. None of the above.

A. banks that accept deposits denominated in Eurocurrencies excluding Eurodollars.

B. all European banks.

C. all non American banks.

D. banks that accept deposits denominated in Eurocurrencies including Eurodollars.

E. None of the above.

21.10 The leading center of Eurocurrency trading is

A. Chicago.

B. London.

C. Frankfurt.

D. New York City.

E. Paris.

A. Chicago.

B. London.

C. Frankfurt.

D. New York City.

E. Paris.

21.11 Which type of main institution in the international capital market most often is involved in foreign exchange intervention?

A. non-bank financial institutions

B. insurance companies

C. central banks

D. corporations

E. commercial banks

A. non-bank financial institutions

B. insurance companies

C. central banks

D. corporations

E. commercial banks

21.12  The difference between an agency office located abroad and a subsidiary bank located abroad is:

A. an agency office is just a home bank in another country while a subsidiary bank arranges loans and transfers funds but does not accept deposits.

B. an agency office is just a home bank in another country while a subsidiary bank is controlled by a foreign bank and subject to the same regulations as local banks.

C. an agency office arranges loans and transfers funds but does not accept deposits while a subsidiary bank is controlled by a foreign bank and subject to the same regulations as local banks.

D. an agency office arranges loans and transfers funds but does not accept deposits while a subsidiary bank is just a home bank in a foreign country.

E. There is no difference.

A. an agency office is just a home bank in another country while a subsidiary bank arranges loans and transfers funds but does not accept deposits.

B. an agency office is just a home bank in another country while a subsidiary bank is controlled by a foreign bank and subject to the same regulations as local banks.

C. an agency office arranges loans and transfers funds but does not accept deposits while a subsidiary bank is controlled by a foreign bank and subject to the same regulations as local banks.

D. an agency office arranges loans and transfers funds but does not accept deposits while a subsidiary bank is just a home bank in a foreign country.

E. There is no difference.

21.13  What structures make up the international capital markets?

A. Bond market, Foreign exchange rates, IFM, and the World bank

B. Stock market, IFM, and the World bank

C. Commercial banks, corporations, non bank financial institutions, the central banks, and other government agencies.

D. All of the above.

E. None of the above.

A. Bond market, Foreign exchange rates, IFM, and the World bank

B. Stock market, IFM, and the World bank

C. Commercial banks, corporations, non bank financial institutions, the central banks, and other government agencies.

D. All of the above.

E. None of the above.

21.14 What are the types of institution banks used to conduct foreign business?

A. agency office

B. subsidiary bank

C. foreign branch

D. All of the above.

E. None of the above.

A. agency office

B. subsidiary bank

C. foreign branch

D. All of the above.

E. None of the above.

21.15 A business's use of a bank located outside of the home country is called

A. domestic banking.

B. international banking.

C. Swiss banking.

D. offshore banking.

E. Not enough information.

A. domestic banking.

B. international banking.

C. Swiss banking.

D. offshore banking.

E. Not enough information.