PRACTICE TEST 25 (Bassam AbuAlFoul)

Chapter 25 Exchange Rates and the Open Economy Part I. Multiple Choice: Choose the best answer for the following questions.
1. Use the following information to find the exchange rate between the British pound and the Canadian dollar: AED 1 = 0.24 Canadian dollars AED 1 = 0.12 British pounds a. 1 Canadian dollar = 0.5 British pounds b. 1 Canadian dollar = 2 British pounds c. 1 British pound = 0.5 Canadian dollars d. 1 British pound = 4 Canadian dollars If the US dollar appreciates relative to the Euro, then, assuming it currently stands at $1= Euro0.75, the exchange rate is likely to go to: a. $1 = Eur0.75 b. $1 = Eur0.85 c. $1 = Eur0.65 d. None of the above When an exchange rate is set by the forces of demand and supply of the currency, it is called a: a. Fixed exchange rate b. Equilibrium exchange rate c. Flexible exchange rate d. None of the above Which of the following factors results in an increase in the quantity of dollars supplied for British pounds? a. Higher US real GDP b. Appreciation of the dollar c. Real interest rates on US assets being lower than those on British assets d. Stronger preference for British goods Demand for dollars by holders of the British pound will increase if: a. The preference for US goods is weaker b. Lower real GDP in Britain c. Appreciation of the dollar d. Real interest rates on US assets being higher than those of British assets A tighter monetary policy results in: a. An appreciation of that economy's currency b. A decrease in interest rates c. An increase in consumption and investment d. An increase in net exports Other things the same, if the exchange rate goes from 0.35 Kuwaiti dinar per dollar to 0.40 Kuwaiti dinar per dollar, the dollar has: a. Appreciated and so buys more Kuwaiti goods b. Depreciated and so buys more Kuwaiti goods c. Appreciated and so buys less Kuwaiti goods d. Depreciated and so buys less Kuwaiti goods

2.

3.

4.

5.

6.

7.

Page 1 of 2

8.

In the UAE, a three-kg bag of coffee costs about $10. Suppose the exchange rate is about 0.7 Euros per dollar, and that a three-kg bag of coffee in Belgium costs about 6 Euros. What is the real exchange rate? a. 6/7 bags of Belgian coffee per bag of UAE coffee b. 5/3 bags of Belgian coffee per bag of UAE coffee c. 7/6 bags of Belgian coffee per bag of UAE coffee d. 3/5 bags of Belgian coffee per bag of UAE coffee Purchasing power parity is the theory that: a. The price of an internationally traded commodity must be the same in all locations b. Nominal exchange rates are determined as necessary for the law of one price to hold c. The exchange rate is set by official government policy d. Not all internationally traded goods and services are perfectly standardized commodities

9.

10. If the US dollar's official value is greater than its equilibrium determined value, then the dollar is: a. Undervalued b. Properly valued c. Overvalued d. None of the above

Part II: Internet:

You are also encouraged to visit the web site for your textbook which is rich in learning resources and materials related to each chapter. In addition, you can test your knowledge with the online quizzes. The internet address was provided in the course syllabus. Here it is again: http://highered.mcgrawhill.com/sites/007712961x/student_view0/index.html

ANSWERS (For Part I):

1. 2. 3. 4. 5. 6. 7. 8. 9. 10 a. 1 Canadian dollar = 0.5 British pounds. b. $1 = Eur0.85. c. Flexible exchange rate b. Appreciation of the dollar d. Real interest rates on US assets being higher than those of British assets a. An appreciation of that economy's currency a. Appreciated and so buys more Kuwaiti goods c. 7/6 bags of Belgian coffee per bag of UAE coffee b. Nominal exchange rates are determined as necessary for the law of one price to hold. c. Overvalued

Page 2 of 2