TOBB-ETU, Economics DepartmentMacroeconomics II (IKT 234)

Open Economy - Practice Questions 2(Ozan Eksi)

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CH 19 (continue)

1-)Which of the following expressions represents the �demandfor domestic goods�?

a-) C+I+Gb-) C+I+G+Xc-) C+I+G+"X-IMd-) all of the abovee-) none of the above

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ANS: E

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2-) Which of the following represents the domestic demandfor goods?

a-) C + I + Gb-) C + I + G + Xc-) C + I + G - IM/"d-) C + I + G + X - IMe-) C + I + G + X + "IM

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Answer: A

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3) Assume a country is open. Given this information, whichof the following must occur?

a-) demand for domestic goods will be equal to the domesticdemand for goodsb-) demand for domestic goods will be greater than the do-mestic demand for goodsc-) demand for domestic goods will be less than the domesticdemand for goodsd-) Sp + T = I + Ge-) none of the above

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Answer: E

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4-) Which of the following events would cause a reduction inimports?

a-) increase in Y*b-) decrease in Y*c-) decrease in "d-) an increase in Y

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ANS: C

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5-) Exports will decrease when there is

a-) an increase in the real exchange rate.b-) an increase in domestic output.c-) an increase in foreign output.d-) all of the above

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ANS: A

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6-) The net export declines with a positive shock to domesticoutput because of the e¤ect of:

a-) Y on IMb-) Y* on Xc-) " on Xd-) " on IM

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ANS: A

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7-) Suppose there is a reduction in foreign output (Y*). Thisreduction in Y* will cause which of the following in the do-mestic country?

a-) a reduction in outputb-) a reduction in consumptionc-) a reduction in net exportsd-) all of the abovee-) none of the above

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ANS: D

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8-) Suppose there is a real appreciation. This real appreciationis more likely to cause a reduction in net exports when

a-) domestic output is relatively low.b-) foreign output is relatively high.c-) the Marshall-Lerner condition does not hold.d-) imports are not at all sensitive to price changes.e-) exports and imports are relatively sensitive to price changes.

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Answer: E

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9-) Assume the Marshall-Lerner condition holds. A real ap-preciation will cause:

a-) the NX line to shift upb-) a reduction in NXc-) an increase in Yd-) all of the above

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ANS: B

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10-) The J-curve illustrates the e¤ects of:

a-) Y on NXb-) Y* on exportsc-) a real depreciation on NXd-) Y on imports

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ANS: C

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11-) For this question, assume the Marshal-Lerner conditionholds. Which of the following would occur as a result of anincrease in the real exchange rate?

a-) an improvement of the trade balanceb-) a reduction in the quantity of importsc-) an increase in domestic outputd-) all of the abovee-) none of the above

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Answer: E

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12-) We expect that a depreciation

a-) immediately improves the trade balance.b-) eventually improves the trade balance.c-) �rst improves, but then worsens the trade balance.d-) has no e¤ect on the trade balance.e-) none of the above

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Answer: B

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13-) Assume that the J-curve e¤ect exists. Which of the fol-lowing will occur after a real appreciation?

a-) the trade de�cit will improve temporarily before it worsens.b-) the trade de�cit will worsen temporarily before it im-proves.c-) the real exchange rate will fall temporarily before it rises.d-) the real exchange rate will rise temporarily before it falls.e-) none of the above

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Answer: A

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14-) For this question, assume that the Marshall-Lerner con-dition does NOT hold. A reduction in the real exchange ratewill tend to cause which of the following to occur?

a-) a reduction in NX and a reduction in foreign output(Y*)b-) a reduction in NX and an increase in domestic output

(Y)c-) an increase in NX and a reduction in Yd-) an increase in NX and an increase in Ye-) none of the above

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Answer: E

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CH 20

1-) Assume that the price levels in two countries are constant.In this situation, we know that

a-) neither the real nor the nominal exchange rate can change.b-) the real exchange rate can change, while the nominal ex-change rate is constantc-) the nominal exchange rate can change, while the real ex-change rate is constant.d-) the real and nominal exchange rate must move together,changing by the same percentage.e-) the nominal exchange rate will �uctuate more widely than

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the real exchange rate.

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Answer: D

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2-) In order for an individual to be indi¤erent between holdingforeign or domestic bonds,

a-) the Marshall-Lerner condition must hold.b-) the foreign and domestic interest rates must be equal.c-) the expected rate of depreciation of the domestic currencyis zero.d-) the interest parity condition must hold.

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Answer: D

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3-) As the economy moves up and to the left along the IScurve, which of the following will occur when exchange ratesare �exible?

a-) investment spending decreasesb-) the domestic currency appreciatesc-) net exports declined-) all of the above

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Answer: D

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4-) In an open economy under �exible exchange rates, a re-duction in consumer con�dence that causes a reduction inconsumption will cause which of the following?

a-) an appreciation of the domestic currencyb-) a depreciation of the domestic currencyc-) a reduction in net exportsd-) none of the above

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Answer: B

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5-) In an open economy under �exible exchange rates, expan-sionary monetary policy will always cause

a-) an increase in output.b-) an increase in exports.c-) a reduction in the exchange rate, E.d-) all of the abovee-) only A and C

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Answer: D

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6-) An increase in domestic demand will have which of thefollowing e¤ects in an open economy?

a-) a smaller e¤ect on output than in a closed economy and apositive e¤ect on the trade balanceb-) a smaller e¤ect on output than in a closed economy and anegative e¤ect on the trade balancec-) a larger e¤ect on output than in a closed economy and apositive e¤ect on the trade balanced-) a larger e¤ect on output than in a closed economy and anegative e¤ect on the trade balance

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Answer: B

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7-) Which of the following will always cause an increase in netexports?

a-) a reduction in domestic outputb-) an increase in the real exchange ratec-) an increase in government spendingd-) an increase in investmente-) all of the above

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ANS: A

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8-) In a �exible exchange rate regime, an increase in the for-eign interest rate (i*) will cause

a-) the Interest Parity curve to shift to the left/up.b-) the Interest Parity curve to shift to the right/down.c-) a movement along the Interest Parity curve.d-) neither a shift nor movement along the Interest Paritycurve.

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Answer: A

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9-) In an open economy, an increase in government spendingwill cause

a-) an increase in domestic output.b-) a reduction in imports.c-) a reduction in net exports.d-) all of the abovee-) none of the above

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Answer: C

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10-) For this question, assume that there is a simultaneoustax increase and monetary expansion. In a �exible exchangerate regime, we know with certainty that

a-) the exchange rate and output would both increase.b-) the exchange rate would increase and output would de-crease.c-) the exchange rate would decrease.d-) the exchange rate would decrease and output would in-crease.e-) none of the above

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Answer: C

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11-) Suppose a government wishes to increase Y and leave NXunchanged. The government, therefore, should:

a-) increase Gb-) reduce Tc-) increase G and increase Md-) increase "

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ANS: C

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12-) For this question, assume that policy makers are pursuinga �xed exchange rate regime. Now suppose that an increasein stock market wealth causes an increase in consumption.Which of the following will tend to occur in a �xed exchangerate regime?

a-) an increase in Yb-) an increase in the money supplyc-) no change in the domestic interest rated-) all of the above

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Answer: D

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13-) Suppose a country switches from a �xed to a �exibleexchange rate. Which of the following will occur as a resultof this change?

a-) monetary policy will become a less e¤ective tool for chang-ing output.b-) a given change in government spending will now have agreater e¤ect on output.c-) both �scal and monetary policy will become more e¤ectivein changing GDP.d-) both �scal and monetary policy will become completelyine¤ective in changing GDP.e-) none of the above

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Answer: E

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CH 21

1-) Assume policy makers in a �xed exchange rate regimedecide to peg the exchange rate at a lower level. This is called

a-) a devaluation.b-) a revaluation.c-) a depreciation.d-) an appreciation.

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Answer: A

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2-) A common argument for �xed exchange rates is that they

a-) give central banks greater freedom in adjusting their econ-omy�s level of output.b-) forever free the central bank from have to adjust the ex-change rate to fundamental changes in the economy.c-) make trade more costly, and thus encourage domestic cit-izens to buy domestically produced output.d-) all of the abovee-) none of the above

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Answer: E

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3-) In practice, under the European Monetary System (EMS),a member country

a-) could never change its interest rate.b-) could change its interest rate only if other countries changedtheirs as well.c-) must apply to a special European Commission in order tochange its interest rate.d-) had complete freedom in choosing the interest rate itwanted.e-) had complete freedom in choosing its interest rate only ifit is a very small country.

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Answer: B

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4-) Under a "crawling peg" system, a country�s exchange rate

a-) is �xed except for small, surprise changes.b-) changes at a predetermined rate against the dollar or someother major currency.c-) can �uctuate within a narrow band.d-) can change, but the changes are kept secret from the pub-lic.e-) is determined by the central bank of another country.

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Answer: B

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4-) Which exchange rate system does not require monetaryreserves for o¢ cial exchange rate intervention?

a-) �oating exchange ratesb-) pegged exchange ratesc-) managed �oating exchange ratesd-) dual exchange rates

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ANS: A

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5-) The exchange rate system that best characterizes the presentinternational monetary arrangement used by industrializedcountries is:

a-) freely �uctuating exchange ratesb-) adjustable pegged exchange ratesc-) managed �oating exchange ratesd-) pegged or �xed exchange rates

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ANS: C

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6-) A drawback of a �oating exchange rate system is:

a-) In�ation can be �exported�from one country to another.b-) Monetary policy is ine¤ective.c-) Variability of exchange rates can be excessive.d-) None of the answers.

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ANSWER: C

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7-) Which of the following statements about �xed exchangerate systems is not correct?

a-) The government may run out of foreign exchange whileattempting to �x its exchange rate.b-) Fixed exchange rates refer to the case where the govern-ment pegs the exchange rate at a �xed level.c-) If a country lowers the value of its currency, it has devaluedthe currency.d-) They are all correct

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ANS: D

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8-) Historically, countries that have had serious economic prob-lems but now want to establish a reputation for responsiblemacroeconomic policy have implemented:

a-) a currency board.b-) a crawling pegged exchange rate.c-) a �exible exchange rate.d-) managed �xed exchange rate.

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ANSWER: A

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9-) A foreign exchange intervention with an o¤setting openmarket operation that leaves the monetary base unchanged iscalled

a-) a money neutral foreign exchange intervention.b-) an exchange rate feedback rule.c-) an unsterilized foreign exchange intervention.d-) a sterilized foreign exchange intervention.

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ANSWER: D

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