ECON 122 INTERNATIONAL FINANCE PROF.

ARIEL BURSTEIN Department of Economics, UCLA Practice multiple choice questions

1. If investment exceeds private savings, then the current account: (a) must be negative. (b) must be zero (c) must be positive. (d) not enough information. 2. Consider the following hypothetical information on the National Income and Product Accounts for Ireland. Category Consumption Investment Government consumption Exports Imports Foreign income payments to domestic factors Domestic income payments to foreign factors Net unilateral transfers Billions of Dollars 1200 700 200 500 600 100 400 10

Based on this information, are Irelands savings greater or smaller than its investment? (a) greater (b) smaller (c) the same size (d) not enough information. 3. When calculating the balance of payments, credit, or (+) entries, are made whenever all but one of the following occur. Which is the one that does not occur? (a) A domestic rm signs a contract to buy half of a foreign company headquartered overseas. (b) There is a trade surplus. (c) A domestic rm sells bonds to a foreign rm. (d) Other nations come to the aid of starving residents by gift of cash, food, and medicine. 1

4. A nation that runs a current account decit will also: (a) be a net importer of assets. (b) be a net exporter of assets. (c) suer a lack of capital resources. (d) increase its external wealth. 5. If a country has $100 million of debt at the start of year 1, the interest rate on the debt is 10%, and the country does not make any payments on the debt, then at the end of year 3, the debt amount would be (a) $121 million (b) $110 million. (c) $133.1 million. (d) $100 million. 6. Can a country simultaneously run a trade balance surplus and a current account decit? (a) No, because the trade balance and the current account are always equal. (b) Yes, if imports exceed exports, and the country is a big net creditor that earns large interest income. (c) Yes, if exports exceed imports, and the country is a big net creditor that earns large interest income. (d) Yes, if exports exceed imports, and the country is a big net debtor paying large interest income. (e) Yes, if imports exceed exports, and the country is a big net debtor paying large interest income. 7. Can a country with negative net foreign (negative external wealth) assets receive positive investment income? (a) Yes, if the average return on its foreign assets exceeds the average return on its foreign liabilities. (b) No, investment income cannot be positive. (c) Yes, if the average return on its foreign liabilities exceeds the average return on its foreign assets. (d) Yes, if exports exceed imports. (e) Yes, if imports exceed exports. 8. Which of the following would cause a nations external wealth to decrease? (a) a decrease in domestic GDP 2

(b) a decline in domestic real estate prices (c) a current account decit (d) an increase in the unemployment rate 9. Consider the following information for a family. The income for the family is $58,000; if the MPC (marginal propensity to consume) is 0.6, and income increases by $13,000, then the increase in savings for the family is: (a) $5400. (b) $5200. (c) $420. (d) $7800. 10. The greater the MPC, the DD schedule (a) does not change (b) becomes atter (c) becomes steeper (d) not enough information. 11. If the central bank in a large foreign country increases its interest rate, then the AA curve of a domestic economy that takes the foreign interest rate as given will: (a) shift to the right. (b) shift to the left. (c) will not shift. (d) shift to the right because U.S. exports will decrease. 12. In response to a temporary increase in money supply under a exible exchange rate regime, the increase in GDP is larger (a) the more responsive is the current account to changes in the exchange rate (b) the more responsive is consumption to changes in output (c) the less responsive is consumption to changes in output (d) both a. and b. 13. During the Asian currency crisis in which foreign demand for its products fell, the Australian economy withstood the economic impact by: (a) decreasing the money supply. (b) increasing the taxes. (c) increasing the money supply. 3

(d) appreciating its currency. 14. If the German Deutsche Mark and the British pound exchange rates are xed, and the German Bundesbank conducts a tight monetary policy to counteract an expansion in German GDP, interest rates in Germany will , which will force Britain to . (a) fall; default (b) rise; raise its rates to maintain interest parity and the xed exchange rate (c) fall; sell gold (d) rise; lower its rates to maintain interest parity and the xed exchange rate 15. Symmetric shocks pose fewer problems for nations linked by xed exchange rates to a base currency. In general: (a) because there are common problems, the economic policy taken by the base currency nation is benecial for both nations. (b) it gives the nation maintaining the peg more autonomy to deal with nancial crises. (c) the base currency nation can just do nothing, and the issue will resolve itself. (d) when there are symmetric shocks, the home nation unlinks its exchange rate from the base. 16. Many large developing countries with large dollar-denominated external liabilities experienced large depreciations of their currencies between 1990 and 2003. What eects, if any, did these depreciations have upon these countries external wealth and their GDPs? (a) Both their external wealth and their GDPs fell. (b) Their external wealth fell and their GDPs rose. (c) Their external wealth rose and their GDPs fell. (d) The depreciations reduced their external wealth but had no eect on their GDPs. 17. A nation whose labor market is highly integrated with other nations in a currency union is more to join because . (a) unlikely; workers would suer real wage declines if they have competition from foreign workers (b) unlikely; rms would nd it expensive to hire workers if they have to pay in the common currency (c) likely; labor market integration means that when there are asymmetric demand shocks the adjustment can be eased by migration of workers (d) likely; labor force rules and policies can be harmonized more easily Answers: 1. d , 2. b , 3. a , 4. b., 5. c , 6. d, 7. a., 8. c, 9. b , 10. b, 11. a, 12. d, 13. c., 14. b, 15. a, 16. a., 17. c 4