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Homework KEY Devaluation

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Homework KEY  Devaluation Powered By Docstoc
					                             Homework 4 - ECO 215 - SPRING 2009 - CUTLER
                            Due at the beginning of class on Monday, April 27th

MULTIPLE-CHOICE questions - Please, select the letter which best answers each question, and enter it into the
table provided at the end of the homework form. Each multiple-choice question is worth 0.5 point.



1.    Under the price-specie-flow mechanism, what happens when say Germany’s current account surplus is
      greater than its non-reserve capital account deficits?
      (a) German loans will finance all foreign net imports.
      (b) Automatic drop in German domestic prices and rise in foreign prices.
      (c) Gold reserves will flow into Germany.
      (d) Gold reserves will flow out of Germany.
      (e) None of the above.
      Answer: C

2.    The “rules of the game” under the gold standard can best be described as which of the following:
      (a) Selling domestic assets in a deficit and buying assets in a surplus
      (b) Slowing down the automatic adjustments processes inherent in the gold standard
      (c) Selling domestic assets in order to accumulate gold
      (d) Selling foreign assets in a deficit and buying foreign assets in a surplus
      (e) None of the above.
      Answer: A

3.    By internal balance, most economists mean
      (a) Full employment
      (b) Price stability
      (c) Full employment and price stability
      (d) Full employment and moderate decrease in prices
      (e) None of the above.
      Answer: C

4.     Which one of the following statements is the most accurate?
       (a)   Depreciation is a rise in E when the exchange rate is fixed while
       devaluation is a rise in E when the exchange rate floats.
       (b)   Depreciation is a decrease in E when the exchange rate floats while
       devaluation is a rise in E when the exchange rate is fixed.
       (c)   Depreciation is a rise in E when the exchange rate floats while
       devaluation is a rise in E when the exchange rate is fixed.
       (d)   Depreciation is a rise in E when the exchange rate floats while
       devaluation is a decrease in E when the exchange rate is fixed.
       (e)   None of the above.
       Answer: C


5.     Under fixed exchange rate, in general,
      (a)   The domestic and foreign interest rates are equal, R  R*
      (b)   R  R*  (Ee – E)/E
      (c)   None of the above
      (d)   E is equal to one.
      e)    All of the above
        Answer: A

6.    Under fixed exchange rate, which one of the following statements is the most
accurate?
      (a)   Devaluation causes a reduction of the money supply.
      (b)   Devaluation has no effect on the stock of money.
      (c)   Devaluation causes an expansion of the money supply.
      (d)   Devaluation causes a reduction in output.
      (e)   Devaluation causes a reduction in official reserves.
      Answer: C


7.      Under the gold standard era of 1870–1914,
        (a)   Tokyo was the center of the international monetary system.
        (b)   Paris was the center of the international monetary system.
        (c)   Berlin the center of the international monetary system.
        (d)   New York was the center of the international monetary system.
        (e)   London was the center of the international monetary system.
        Answer: E

8.      The current account surplus
        (a)   is a decreasing function of disposable income and an increasing
        function of the real exchange rate
        (b)   is an increasing function of disposable income and an increasing
        function of the real exchange rate
        (c)   is an increasing function of disposable income and a decreasing
        function of the real exchange rate
        (d)   is a decreasing function of disposable income and a decreasing
        function of the real exchange rate
        (e)   cannot be modeled by a mathematical function
        Answer: A

9.    Countries with large current account surpluses might be viewed by the market
as candidates for
      (a)   devaluation
      (b)   revaluation
      (c)   bankruptcy
      (d)   All of the above
      (e)   None of the above
      Answer: B

10.     In order to bring about a real depreciation of the dollar, the U.S. can hope
for
        (a)   a fall in the U.S. price level
        (b)   a rise in foreign price levels
        (c)   a fall in the dollar’s nominal value in terms of foreign currencies
        (d)   All of the above
        (e)   None of the above
        Answer: D
11.   Advocates of floating rates pointed out that
      (a) Removal of the obligation to peg currency values would restore monetary control to central banks.
      (b) Imposing of the obligation to peg currency values would restore monetary control to central banks.
      (c) Removing of the obligation to peg currency values would restore fiscal control.
      (d) Imposing of the obligation to peg currency values would restore fiscal control.
      (e) None of the above.
Answer: A

12.    Under Brettoon Woods,
      (a)    Any foreign country cannot devalue its currency against the dollar in
      conditions of “fundamental disequilibriun.”
      (b) Any foreign country could devalue its currency against the dollar in conditions of “fundamental
          disequilibrium,” but the system’s rules did not give the United States the option of devaluing against
          foreign currencies.
      (c) Any foreign country could devalue its currency against the dollar in conditions of “fundamental
          disequilibrium,” and the system’s rules did give the United States the same option of devaluing
          against foreign currencies.
      (d) The U.S. could devalue its currency against the foreign currencies in conditions of “fundamental
          disequilibriun.”
      (e) None of the above.
      Answer: B


13.   If most of the shocks that buffet the economy come from the home money market then,
      (a) Fixed exchange rate is better than flexible exchange rates.
      (b) Flexible exchange rate is better than fixed exchange rates.
      (c) Which system is chosen is not important.
      (d) Fixed exchange rate is better than flexible exchange rates only in the short run.
      (e) Flexible exchange rate is better than fixed exchange rates only in the short-run.
      Answer: A


14.     The mechanism behind the inflation insulation provided by a floating exchange rate is:
      (a) Purchasing Power Parity
      (b) A fixed AA curve
      (c) Market speculation
      (d) Tight monetary policy
      (e) Symmetry
      Answer: A
15.   The EMU created a currency area with more than
      (a) 200 million consumers
      (b) 250 million consumers
      (c) about a billion
      (d) 500 million consumers
      (e) 300 million consumers
      Answer: E


16.   To join the EMU, a country should have no more than
      (a) 1.5 percent inflation rate above the average of the three EU member states with the highest inflation.
      (b) 3 percent inflation rate above the average of the three EU member states with the lowest inflation.
      (c) 4 percent inflation rate above the average of the three EU member states with the lowest inflation.
      (d) 1.5 percent inflation rate above the average of the three EU member states with the lowest inflation.
      (e) None of the above.
Answer: D

17.   A country that joins an exchange rate area
      (a) gives up its ability to use the exchange rate for the purpose of stabilizing output and employment.
      (b) does not give up its ability to use the exchange rate and monetary policy for the purpose of stabilizing
          output and employment.
      (c) gives up its ability to use the exchange rate and monetary policy for the purpose of stabilizing output
          and employment.
      (d) gives up its ability to use only monetary policy for the purpose of stabilizing output and employment.
      (e) does not gives up its ability to use only monetary policy for the purpose of stabilizing output and
          employment.
      Answer: C

18.   When the economy is disturbed by a change in the output market,
      (a) a fixed exchange rate has an advantage over a flexible rate.
      (b) a floating exchange rate has an advantage over a fixed rate.
      (c) a crawling peg exchange rate has an advantage over a fixed rate.
      (d) a floating exchange rate has the same effect as fixed rate.
      (e) None of the above statement is true.
      Answer: B

19.   Which of the following is true about the future of the EU and its associated institutions?
      (a) the lack of a strong EU political center may limit the ECB’s political legitimacy in the eyes of the
          European public
      (b) there is a danger that voters throughout Europe will come to view the ECB as a distant and politically
          unaccountable group of technocrats unresponsive to people’s needs
      (c) Asymmetric economic development within different countries of the euro zone will be hard to handle
          through monetary policy
      (d) persistent barriers to labor mobility might continue to result in high levels of unemployment
      (e) All of the above
      Answer: E
20.   The theory of optimum currency areas predicts that
      (a) floating exchange rates are most appropriate for areas closely integrated through international trade
          and factor movements
      (b) fixed exchange rates are most appropriate for areas that are loosely integrated through international
          trade and factor movements
      (c) fixed exchange rates are most appropriate for areas closely integrated through international trade and
          factor movements
      (d) floating exchange rates are most appropriate for all countries in Europe
      (e) fixed exchange rates are most appropriate for all countries in Europe
      Answer: C
NAME________________________________________________________________________

                                             ANSWER KEY
 For each multiple-choice question, please, include a check in the box under the chosen letter answer.



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