Question

1. Under a floating exchange rate system, everything remaining constant, an increase in European exports to Japan is most likely to result in:
a. a decrease in the demand for euro in the foreign exchange market.
b. a decrease in the supply of euro in the foreign exchange market.
c. an appreciation of the Japanese yen vis-à-vis the euro.
d. an appreciation of the euro vis-à-vis the Japanese yen.

2. Economists believe that the _____ determines the price level in the long run.
a. money supply
b. asset market approach
c. exchange rate
d. marginal tax rate

3. Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen?
a.   The dollar will depreciate
b.   The peso will be worth 1.5 dollars in the foreign exchange market
c.   The peso will depreciate
d.   The dollar will be worth 1.5 pesos in the foreign exchange market

4. Based on PPP and the quantity theory of money, everything else remaining unchanged, if Japan’s real income rises relative to real income in the U.S., there would be a(n):
a.   appreciation of the dollar.
b.   appreciation of the yen.
c.   interest rate parity.
d.   decrease in the demand for yen in the foreign exchange market.

5. If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.2, then value of the simple spending multiplier is:

a. 2.0.
b. 0.5.
c.1.5.
d.0.1.

6. If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.1, and the government increases expenditures by $10 billion, ignoring foreign-income repercussions, how much will GDP rise?
a. $20 billion.
b. $10 billion.
c. $25 billion.
d. $15 billion.

Answer 1

1. An increase in European exports to Japan will increase demand for Euro by Japanese importers which will raise its price. Hence Yen depreciates and Euro appreciates. Option D.

2. Economists believe that the it is the money supply that determines the price level in the long run because only price level is affected by money supply in the long run. Option A.

3. Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, the nation that has relatively higher inflation must have a relatively higher depreciation rate. Hence Option C is correct

4. Option A.

5. Option A

6. Option C.

answered by: anonymous