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40 Questions Final Exam - International Economics | 220 300, Exams of International Economic Relations

Rutgers University - CamdenInternational Economic Relations

No answers given Material Type: Exam; Class: 220 - INTERNATIONAL ECON; Subject: ECONOMICS; University: Rutgers University; Term: Summer 2007;

Typology: Exams

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Econ 300: International Economics (Summer 2007)
August 14, 2007
Section: 01:220:300:H6
Instructor: Demet Tunali
FINAL EXAMINATION
(B)
Name: __________________________
PART I
1) Under imperfect but high capital mobility, a temporary ------- leads to ----------
A) Expansionary fiscal policy in country A, the domestic currency to temporarily
depreciate
B) Expansionary monetary policy in country A, market participants’ expectation of
the domestic currency appreciation
C) Rise in government expenditure in country A, a less effective short-run result
compared to a permanent one
D) A and C
2) Suppose that an earthquake unemployment to increase. Which of the following is an
appropriate policy response if the goal is to achieve full employment without crowding
out private investment?
A) selling of government bond by the Central Bank
B) a new interstate freeway building by the federal government
C) a fall in corporate tax
D) buying of $300bn worth of U.S. government bond by the Central Bank
E) B and D
This exam consists of two parts:
Part I has 39 multiple choice questions with each question worth 1 point.
Part II has two essay questions worth six points in total. Partial credit will be given fo
r
this part.
You have 3 hours to work on the exam. Use of headphones, cell phones and calculators
are STRICTLY PROHIBITED. All cell phones MUST be switched off. “Any
involvement with cheating, (…) may result in disciplinary action being taken at either the
college or university level. Breaches of academic integrity can result in consequences
ranging from reprimand to expulsion.”
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Download 40 Questions Final Exam - International Economics | 220 300 and more Exams International Economic Relations in PDF only on Docsity!

Section: 01:220:300:H

Instructor: Demet Tunali

FINAL EXAMINATION

(B)

Name: __________________________

PART I

  1. Under imperfect but high capital mobility, a temporary ------- leads to ---------- A) Expansionary fiscal policy in country A, the domestic currency to temporarily depreciate B) Expansionary monetary policy in country A, market participants’ expectation of the domestic currency appreciation C) Rise in government expenditure in country A, a less effective short-run result compared to a permanent one D) A and C

  2. Suppose that an earthquake unemployment to increase. Which of the following is an appropriate policy response if the goal is to achieve full employment without crowding out private investment? A) selling of government bond by the Central Bank B) a new interstate freeway building by the federal government C) a fall in corporate tax D) buying of $300bn worth of U.S. government bond by the Central Bank E) B and D

This exam consists of two parts:

Part I has 39 multiple choice questions with each question worth 1 point.

Part II has two essay questions worth six points in total. Partial credit will be given for this part.

You have 3 hours to work on the exam. Use of headphones, cell phones and calculators are STRICTLY PROHIBITED. All cell phones MUST be switched off. “Any involvement with cheating, (…) may result in disciplinary action being taken at either the college or university level. Breaches of academic integrity can result in consequences ranging from reprimand to expulsion.”

Section: 01:220:300:H

Instructor: Demet Tunali

  1. A U.S. firm imports FF1mn worth of cosmetics from France. In U.S. the pegged FF exchange is $1/2FF. However in the foreign exchange market, participants sell FF at a higher rate. In this case then A) The U.S. capital account records a debit of $0.5mn B) The foreign exchange market in U.S. is in excess of FF. C) Official settlement balance of U.S. records a credit entry of $2mn. D) French official settlement balance records debit by FF1mn E) A and C

  2. Under the immobile capital, the balance of payments (BOP) curve will shift to the right if: A) the foreign currency depreciates against the domestic currency B) there is an increase in foreign interest rates. C) there is an increase in foreign income. D) all of these answers are correct. E) all of these answers are wrong.

  3. In a flexible exchange rate regime, external balance will result from changes in: A) the exchange rate. B) the domestic interest rate. C) the domestic money stock. D) government expenditures.

  4. When the marginal propensity to consume is 0.8 and the marginal propensity to import is 0.4, an increase of $100 in GDP income leads to A) $20 savings by the consumers B) $60 exports by the country’s firms C) $40 move to trade balance surplus D) $80 increase in the consumption of domestic goods E) A and C

  5. Suppose that the cost of a US basket of goods and services is $1,000, and the cost of the same basket of goods in Germany is €1,250. What does the absolute purchasing power parity imply about the exchange rate in dollars/euro ($/€)? A) The exchange rate should be $1/1.25 per €. B) The exchange rate should be $0.25 per €. C) The exchange rate should be $0.50 per €. D) The exchange rate should be $1.25 per €. E) None of these answers are correct.

Section: 01:220:300:H

Instructor: Demet Tunali

  1. Which of the following statements about the short-run macroeconomic policies is WRONG? A) Under a flexible exchange rate, the monetary policy always manages to establish higher equilibrium income. B) Under the immobile capital, an expansionary fiscal policy crowds out domestic investment due to the resulting rise in interest rate. C) Under the immobile capital, an expansionary fiscal policy would be effective only if it is temporary. D) Under the immobile capital, an expansionary monetary policy will initially generate a balance of payments deficit for some time until the exchange rate adjusts. E) None of the above is wrong

  2. In 2003, $2000 current account surplus and $3000 capital account deficit has been recorded in country A. Thus A) The balance of payments of this country recorded $1000 deficit. B) The country engaged in net asset purchases of $ C) Under the flexible exchange rate in the country, its currency depreciated since December 2003 D) All of the above E) C and A

  3. The monetary theory of exchange rate implies that A) Any event that changes the quantity of money demanded or supplied will alter the exchange rate (hint: recall equation 1) B) For given money demand growth rates, when the money supply growth of U.S. exceeds that of U.K, the dollar appreciates in the long run (hint: recall equation 1) C) When the U.S. interest rate exceeds that of the ECB, market participants expect higher inflation in European Union countries in the long run. (hint: recall equation

D) For given money supply growth rates, when credit card frauds increase in U.S. increasing the money demand growth above that of Singapore, U.S. $ would depreciate in the long run due to this higher demand. (hint: recall equation 1) E) All of the above

  1. Suppose the United States and Britain both produces an identical good that is sold at PU.S.=$10 and PB=£5. Ignoring the transportation costs, under which $ price of the £ would the individuals of both countries be indifferent between buying these goods. A) 1$/1£ B) 1$/2£ C) 2$/1£ D) 3$/1£

Section: 01:220:300:H

Instructor: Demet Tunali

  1. Under perfect capital mobility, if participants in the foreign exchange market expect the rise in the government purchases to be permanent, A) The participants will expect the accompanying depreciation to be permanent B) There is no need for the country’s BOP to shift up C) For a given foreign interest rate, so long as market participants update their expected spot rate to the resulting one, the domestic interest rate consistent with the interest parity will remain the same D) All of the above E) B and C

  2. When the foreign exchange market is in equilibrium A) Net autonomous credits equal the net credit in the official settlement balance B) The real exchange rate equals one C) The exchange rate is consistent with the quantity demanded and supplied. D) A and C E) All of the above

  3. In equilibrium A) the exchange rate is at a level where the total autonomous transactions sum to zero B) portfolio managers want to shift to domestic currency C) the expected rate of return on foreign currency is lower than that of the domestic currency D) the expected depreciation is zero. E) A and D

  4. Perceiving the balance of payments as the balance on autonomous transaction A) The balance of payments always balance B) Total credits are equal to total debits C) An excess of total autonomous debits over total credits implies that the balance of payments is in deficit D) An excess of autonomous credits over debits implies that the capital account is in surplus E) C and D

  5. When the £ depreciates against the U.S. $ A) The opportunity cost of the American good increases B) The relative price of the British good decreases C) For given forward exchange rate, short-term interest rates and expected $/£ exchange rate, the demand for pound deposits increases D) All of the above.

Section: 01:220:300:H

Instructor: Demet Tunali

  1. Which of the following statements is correct? A) A country's capital account balance will decrease if its spot exchange rate rises. B) An intervention by the central bank to supply foreign currency makes domestic- currency-denominated assets less attractive for given values of e, ee, ef, and i* C) In a flexible exchange rate system with perfect capital immobility, a balance of payments surplus corresponds to a point on the right of the BOP curve D) None of these is correct

  2. Suppose that capital is immobile and that the equilibrium level of income is less than the full employment level of income. An expansionary fiscal policy that is expected to be permanent will cause: A) domestic income to fall. B) the foreign currency to appreciate against the domestic currency. C) domestic interest rates to fall. D) all of these answers are correct. E) all of these answers are wrong.

  3. When the Fed intervenes to defend the U.S. dollar against appreciation against the Yen at the pegged exchange rate of 2$/¥ A) LM curve for the U.S. economy shifts left thereby increasing the equilibrium income B) For an intervention of ¥2mn, the U.S. money supply increases by $0.5mn C) The U.S. commercial banking system will provide a deposit expansion thereby adding to the initial liquidity injection D) Investments fall in the U.S. economy E) B and D

  4. In the foreign exchange market, A) The supply of pound is determined by the Bank of England as a function of the exchange rate with the dollar. B) In the case of a shortage of foreign currency, the domestic currency appreciates under a flexible exchange rate regime C) A rise in the interest rate on the domestic-currency-denominated deposits, other things being equal, promotes the attractiveness of the domestic currency. D) Under a fixed exchange rate regime, to prevent the appreciation of Yuan against the U.S. dollar, the Central Bank of China would deplete its dollar-denominated reserves at the FED. E) A, C and D

Section: 01:220:300:H

Instructor: Demet Tunali

  1. What are the circumstances in which an individual or a firm might make transactions in the foreign exchange market? A) Buying the foreign currency to be used in payment of a foreign good or asset B) Taking advantage of exchange rate discrepancies that prevail simultaneously in different markets C) Trying to transfer the foreign exchange rate risk in the case of a foreign-currency debt that accrued today but the actual payment of which is due in a month D) Buying a foreign currency with no link to finance a transaction but rather just with an expectation of it gaining value E) All of the above

  2. The GNP A) is greater than the GDP when the country’s net receipts of factor income is positive B) differs from GDP by measuring the value of output produced by a country’s factors of production C) excludes non-market transactions. D) A and B E) All of the above

  3. Which one is WRONG about the J-curve phenomenon A) depends on the currency on which the import contracts are written B) is less pronounced when the percentage change in the amount of imports and exports in response percentage change in the exchange rate; hence in the price of imports; is high C) would persist even if imports are denominated in the importer country’s currency D) becomes more pronounced with lower speed of adjustment of the quantities of goods and services exported and imported E) All of the above is correct

  4. The current account balance will move toward a deficit if: A) the domestic currency experiences a real depreciation B) the spending multiplier is less than one C) if the foreign interest rate increases D) none of these answers are correct.

  5. Under perfect capital mobility starting from a general equilibrium point, A) the BOP curve is vertical B) a rise in the € interest rate implies a capital inflow to U.S. C) a fall in the € interest rate implies a decrease in the U.S. capital account balance D) a very high interest rate increase in U.S. is necessary to restore the foreign exchange market equilibrium in response to an income rise. E) None of the above

Section: 01:220:300:H

Instructor: Demet Tunali

  1. Which of the following economic agents would tend to support the depreciation of the domestic currency A) Import-competing sectors B) Domestic consumers as this lowers the opportunity cost of the domestic goods C) Firms that use imported inputs D) A and B

PART II

40 -1) Assume that the exchange rate between the U.S. dollar ($) and the Mexican peso (P) is pegged at $1/P4. Assume that, initially, this exchange rate corresponds to equilibrium in the foreign exchange market. The United States now undertakes an economic policy that puts upward pressure on the interest rate on dollar- denominated deposits (i$). Mexico follows an economic policy that puts downward pressure on the interest rate on peso-denominated deposits (iP). Illustrate the effects of the two countries’ policies in the foreign exchange market by drawing two separate graphs from the U.S. and Mexican perspective. (2 points)

40- 2) Assume that the United States and Japan are the only countries in the world. Beginning from a position of equilibrium in the U.S. and Japanese markets for goods and services, suppose Japan increases government spending by 2,000. a) If the Japanese marginal propensity to consume is 0.8 and that of imports is 0.3, what will happen to Japanese income? b) Assume that the U.S. marginal propensity to consume is 0.9 and that of imports is 0.1. Compute the change in U.S. trade balance, compute the change in U.S. income and illustrate the result on a graph where U.S. exports and imports are plotted against its income. (4 points)