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FINANCIAL PLANNING 5

In order for the condition E = P/P* to hold, what assumptions does the principle of purchasing power parity make?

Question 1 options:

A) 

Only that there are no transportation costs and restrictions on trade.

B) 

Only that the markets are perfectly competitive.

C) 

The factors of production are identical between countries.

D) 

Home country and Foreign country are perfectly competitive and there are no transportation costs or restrictions on trade.

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Question 2 (1 point)

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Under Purchasing Power Parity (and by the Fisher Effect), all else equal,

 

Question 2 options:

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 an equal rise in the interest rate that deposits of its currency offer.

C) 

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 for the higher inflation.

D) 

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 to accommodate for the higher inflation.

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Question 3 (1 point)

 Question 3 Unsaved

A country's domestic currency's real exchange rate, q, is defined as

Question 3 options:

A) 

E

B) 

E times P

C) 

E times P*

D) 

E times P*/P

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Question 4 (1 point)

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Disposable income, Yd, is defined as

Question 4 options:

A) 

Y-C

B) 

Y-T

C) 

C-T

D) 

Y-I

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Question 5 (1 point)

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In general, consumption expenditure rises by

Question 5 options:

A) 

more than the increase in disposable income.

B) 

less than the increase in disposable income.

C) 

more than income.

D) 

the same amount as disposable income rises.

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Question 6 (1 point)

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An increase in disposable income

Question 6 options:

A) 

improves the current account.

B) 

worsens the current account.

C) 

does not affect the current account.

D) 

affects exports, but does not affect imports.

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Question 7 (1 point)

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Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?

Question 7 options:

A) 

appreciation and depreciation

B) 

producers effect and volume effect

C) 

producers effect and value effect

D) 

volume effect and value effect

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Question 8 (1 point)

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What have we assumed when we conclude that a real depreciation of the currency improves the current account?

Question 8 options:

A) 

All else equal, the volume effect outweighs the value effect.

B) 

All else equal, the value effect outweighs the volume effect.

C) 

All else equal, the producers effect outweighs the volume effect.

D) 

All else equal, the producers effect outweighs the value effect.

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Question 9 (1 point)

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How would you define a DD schedule?

Question 9 options:

A) 

the combination of output and the exchange rate that must hold when the output market is in the short-run equilibrium.

B) 

the combinations of output and the exchange rate that must hold when the home money market and the foreign exchange market are in equilibrium.

C) 

the aggregate demand in relation to the foreign market value

D) 

factors of production in the long run

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Question 10 (1 point)

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The AA schedule is derived by the schedule of exchange rate and output combination that are

Question 10 options:

A) 

consistent with equilibrium in the foreign money market and the domestic exchange market.

B) 

consistent with equilibrium in the domestic money market and the foreign exchange market.

C) 

consistent with equilibrium in the domestic bond market and foreign asset market.

D) 

greater than equilibrium in the foreign money market and the domestic exchange market.

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Question 11 (1 point)

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In the short run, a temporary increase in money supply

Question 11 options:

A) 

shifts the DD curve to the right, increases output and appreciates the currency.

B) 

shifts the DD curve to the right, increases output and depreciates the currency.

C) 

shifts the AA curve to the right, increases output and appreciates the currency.

D) 

shifts the AA curve to the right, increases output and depreciates the currency.

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Question 12 (1 point)

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In the short run, with prices fixed, how would an increase in government spending affect the DD-AA schedule?

Question 12 options:

A) 

It will increase output and appreciate the currency.

B) 

It will increase output and depreciate the currency.

C) 

It will decrease output and appreciate the currency.

D) 

It will decrease output and depreciate the currency.

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Question 13 (1 point)

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In the short run, monetary expansion causes the CA to _______ and fiscal expansion causes the CA to ______.

Question 13 options:

A) 

decrease; decrease

B) 

increase; increase

C) 

decrease; increase

D) 

increase; decrease

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Question 14 (1 point)

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If a country chooses to have a monetary policy autonomy and the freedom of international capital flows, it cannot have

Question 14 options:

A) 

a floating exchange rate.

B) 

a fixed exchange rate.

C) 

fiscal policy.

D) 

tax policy.

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Question 15 (1 point)

 Question 15 Unsaved

A financial crisis is a breakdown in a country's financial system.  In developing countries this will usually result in

Question 15 options:

A) 

a crisis in the domestic banking industry.

B) 

a large drop in the value of the domestic currency.

C) 

an inability to repay foreign debt denominated in other currencies.

D) 

all of the above.