International Economics Unit 3 Set 2
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This set of International Economics Multiple Choice Questions & Answers (MCQs) focuses on International Economics Unit 3 Set 2
Q1 | If the central bank purchases assets, it will result in:
- An increase in the central bank's net worth.
- A decline in the central bank's net worth.
- An increase in the money supply.
- A decline in the money supply.
Q2 | If there is a decline in output, to keep the exchange rate fixed, the central bank has to:
- Sell domestic assets.
- Purchase foreign assets.
- Sell foreign assets.
- Purchase domestic assets.
Q3 | What is the effect of an increase in taxes under fixed exchange rates and perfect asset substitutability in the short run?
- A decline in output and no change in interest rates.
- A decline in output and interest rates.
- An increase in output and no change in interest rates.
- An increase in output and interest rates.
Q4 | What is the effect of a currency devaluation under fixed exchange rates in the short run?
- A decline in output.
- A decline in foreign reserves.
- An increase in exports.
- An increase in imports.
Q5 | Reducing a current account deficit requires a country to:
- Increase the government’s deficit and increase private investment relative to saving
- Increase the government’s deficit and decrease private investment relative to saving
- Decrease the government’s deficit increase private investment relative to saving
- Decrease the government’s deficit and decrease private investment relative to saving
Q6 | Reducing a current account surplus requires a country to:
- Increase the government’s deficit and increase private investment relative to saving
- Increase the government’s deficit and decrease private investment relative to saving
- Decrease the government’s deficit and increase private investment relative to saving
- Decrease the government’s deficit and decrease private investment relative to saving
Q7 | Concerning a country’s business cycle, rapid growth of production and employment iscommonly associated with:
- Large or growing trade deficits and current account deficits
- Large or growing trade deficits and current account surpluses
- Small or shrinking trade deficits and current account deficits
- Small or shrinking trade deficits and current account surpluses
Q8 | The burden of a current account deficit would be the least if a nation uses what itborrows to finance:
- Unemployment compensation benefits
- Social Security benefits
- Expenditures on food and recreation
- Investment on plant and equipment
Q9 | A major difference between the spot market and the forward market is that the spot market deals with:
- The immediate delivery of currencies
- The merchandise trade account
- Currencies traded for future delivery
- Hedging of international currency risks
Q10 | The relationship between the exchange rate and the prices of tradable goods is known asthe:
- Purchasing-power-parity theory
- Asset-markets theory
- Monetary theory
- Balance-of-payments theory
Q11 | Low real interest rates in the United States tend to:
- Decrease the demand for dollars, causing the dollar to depreciate
- Decrease the demand for dollars, causing the dollar to appreciate
- Increase the demand for dollars, causing the dollar to depreciate
- Increase the demand for dollars, causing the dollar to appreciate
Q12 | Assume that the United States faces an 8 percent inflation rate while no (zero) inflation existsin Japan. According to the purchasing-power-parity theory, the dollar would be expected to:
- Appreciate by 8 percent against the yen
- Depreciate by 8 percent against the yen
- Remain at its existing exchange rate
- None of the above
Q13 | Suppose Mexico and the United States were the only two countries in the world. There exists anexcess supply of pesos on the foreign exchange market. This suggests that:
- Mexico’s current account is in surplus
- Mexico’s current account is in deficit
- The U.S. current account is in deficit
- The U.S. current account is in equilibrium
Q14 | If Canada runs a current account surplus and exchange rates are floating:
- The value of other currencies will rise relative to the dollar
- The dollar will depreciate relative to other currencies
- The price of foreign goods will become cheaper for Canadians
- The price of foreign goods will rise for Canadians
Q15 | Gold standard means:
- Currency of the country is made of gold
- Paper currency is not used
- Currency of the country is freely convertible into gold
- (a) & (c) of above
Q16 | If a country decreases the external value of its currency, it will affect:
- Volume of exports
- Volume of imports
- General price level
- All of the above
Q17 | Rich countries have deficit in their balance of payments:
- Sometimes
- Never
- Alternate years
- Always
Q18 | Balance of payments means:
- The balance of receipts and payments of all banks
- The balance of receipts and payments of State Bank
- The balance of receipts and payments of foreign exchange by a country
- The balance of govt. receipts and payments
Q19 | Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
- If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.
- If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.
- If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen.
- If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.
Q20 | The international Fisher effect (IFE) suggests that:
- a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
- a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
- a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
- a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
Q21 | According to the IFE, if British interest rates exceed U.S. interest rates:
- the British pound's value will remain constant.
- the British pound will depreciate against the dollar.
- the British inflation rate will decrease.
- the forward rate of the British pound will contain a premium.
Q22 | If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
- the value of the euro would often appreciate against the dollar.
- the value of the euro would often depreciate against the dollar.
- the value of the euro would remain constant most of the time.
- the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
Q23 | If interest rate parity holds, then the one-year forward rate of a currency will ______ the predicted spot rate of the currency in one year according to the international Fisher effect.
- greater than
- less than
- equal to
- answer is dependent on whether the forward rate has a discount or premium
Q24 | You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is:
- 8.00%.
- 10.16%.
- 6.00%.
- 5.88%.
Q25 | The balance of payments equals:
- The difference between household spending and income
- The difference between government spending and income
- A measure of the value of economic transactions between residents of a country and the rest of the world
- The difference between inflation and unemployment