Econ 306 International Economics

Assistant Prof. Alper Duman 12/05/2012

Review uestions for !inal
1. "it# imperfect capital mo$ilit%& t#e 'P curve slopes upwar( $ecause& startin) from a
)iven $alance*of*pa%ments e+uili$rium position& a rise in national income will
ten( to cause a & w#ic# must $e counteracte( $% a rise in t#e interest rate
in or(er to cause a t#at will restore ',P e+uili$rium.
a. ',P (eficit- s#ort*term financial capital inflow
$. ',P (eficit- s#ort*term financial capital outflow
c. ',P surplus- s#ort*term financial capital inflow
(. ',P surplus- s#ort*term financial capital outflow
2. In a situation of fle.i$le e.c#an)e rates& ot#er t#in)s e+ual& a s#ift of t#e I/ curve to
t#e left will lea( to of t#e countr%0s currenc% if t#e 'P curve is steeper
t#an t#e 12 curve an( will of t#e countr%0s currenc% if t#e 12 curve is
steeper t#an t#e 'P curve.
a. an appreciation- also lea( to an appreciation
$. an appreciation- lea( to a (epreciation
c. a (epreciation- lea( to an appreciation
(. a (epreciation- also lea( to a (epreciation
3. In a situation of fle.i$le e.c#an)e rates an( w#ere t#e 'P curve is steeper t#an
t#e 12 curve&
a. monetar% polic% is less effective in raisin) national income t#an woul( $e t#e
case un(er fi.e( e.c#an)e rates.
$. e.pansionar% fiscal polic% will $e more effective in raisin) t#e level of national
income t#an woul( $e t#e case un(er fi.e( e.c#an)e rates.
c. e.pansionar% fiscal polic% will lea( to an appreciation of t#e countr%0s
currenc%.
(. t#e 'P curve sta%s fi.e( in t#e same position irrespective of an% s#ifts t#at
occur in t#e I/ an( 12 curves.
3. In a situation of fle.i$le e.c#an)e rates& an e.o)enous increase in forei)n interest
rates will cause of t#e (omestic currenc% an(& most li4el%& a in
t#e (omestic interest rate.
a. a (epreciation- a rise
$. an appreciation- a rise
c. a (epreciation- a fall
(. an appreciation- a fall
5. In t#e view of economists& w#ic# one of t#e followin) statements is true5
a. !iscal polic% is unam$i)uousl% more effective in influencin) national income
un(er fle.i$le e.c#an)e rates t#an un(er fi.e( e.c#an)e rates.
$. !iscal polic% is unam$i)uousl% more effective in influencin) national income
un(er fi.e( e.c#an)e rates t#an un(er fle.i$le e.c#an)e rates.
c. 2onetar% polic% is unam$i)uousl% more effective in influencin) national
income un(er fle.i$le e.c#an)e rates t#an un(er fi.e( e.c#an)e rates.
(. 2onetar% polic% is unam$i)uousl% more effective in influencin) national
income un(er fi.e( e.c#an)e rates t#an un(er fle.i$le e.c#an)e rates.
6. 6#e I//12/!E anal%sis su))ests t#at& if t#e 'P curve is flatter t#an t#e 12 curve
an( t#e e.c#an)e rate is fle.i$le& e.pansionar% fiscal polic% will lea( to
of t#e countr%0s currenc%& w#ic# will ma4e t#e fiscal polic% effective in
influencin) national income t#an if t#e countr% #a( a fi.e( e.c#an)e rate.
a. a (epreciation- more
$. a (epreciation- less
c. an appreciation- more
(. an appreciation- less
7. If& ot#er t#in)s e+ual& a countr% wit# a fle.i$le e.c#an)e rate (ecreases its mone%
suppl%& t#is will lea( to in t#e value of t#e countr%0s currenc%& w#ic#
will ten( to t#e countr%0s national income.
a. a (epreciation- increase
$. a (epreciation- (ecrease
c. an appreciation- increase
(. an appreciation- (ecrease
8. If we consi(er a situation of e.pansionar% monetar% polic% un(er fle.i$le
e.c#an)e rates& t#e monetar% e.pansion will lea( to of t#e #ome
currenc% an( t#us will $e effective in increasin) national income t#an
un(er fi.e( e.c#an)e rates.
a. an appreciation- more
$. an appreciation- less
c. a (epreciation- more
(. a (epreciation- less
9. /uppose t#at countr% A wit# a fle.i$le e.c#an)e rate un(erta4es
e.pansionar% monetar% polic%. Especiall% if s#ort*term fun(s are e.tremel%
mo$ile $etween countries& A0s currenc% will ten( to $ecause of t#is
polic%& an( t#is result su))ests t#at A0s monetar% polic% will $e
effective in influencin) national income t#an if A #a( a fi.e( e.c#an)e rate rat#er
t#an a fle.i$le e.c#an)e rate.
a. appreciate- less
$. appreciate- more
c. (epreciate- less
(. (epreciate- more
10. Proponents of fi.e( e.c#an)e rates woul( fin( t#e most support for t#eir position
in w#ic# one of t#e followin) empirical results re)ar(in) t#e relations#ip $etween
e.c#an)e rate variations an( t#e volume of international tra(e5 :Assume t#at t#e
empirical tests a(e+uatel% account for ot#er factors t#at influence t#e volume of
tra(e.;
a. no (iscerni$le relations#ip $etween e.c#an)e rate variations an( t#e volume of
tra(e
$. a ne)ative relations#ip $etween e.c#an)e rate variations an( t#e volume of
tra(e
c. a mil(l% positive relations#ip $etween e.c#an)e rate variations an( t#e volume
of tra(e
(. a stron)l% positive relations#ip $etween e.c#an)e rate variations an( t#e
volume of tra(e
11. A ma<or a(vanta)e of t#e s%stem of fle.i$le e.c#an)e rates :as oppose( to fi.e(
e.c#an)e rates; is commonl% t#ou)#t to $e
a. t#e li4eli#oo( t#at e.ternal monetar% s#oc4s will not influence (omestic
national income un(er fle.i$le e.c#an)e rates.
$. t#e stron) possi$ilit% t#at t#e )reater e.c#an)e rate ris4 un(er fle.i$le rates
will increase t#e volume of international tra(e.
c. t#e en#ance( effectiveness of monetar% polic% in influencin) national income
un(er fle.i$le e.c#an)e rates.
(. t#e =virtuous circle> t#at fle.i$le rates can $rin) $etween (epreciation an(
inflation.
12. 6#e optimal si?e of international reserves occurs for a countr% at t#e point w#ere
t#e
a. total $enefit of #ol(in) t#e reserves e+uals t#e total cost of #ol(in) t#e
reserves.
$. mar)inal $enefit of #ol(in) t#e reserves e.cee(s t#e mar)inal cost of #ol(in)
t#e reserves $% t#e )reatest amount.
c. mar)inal $enefit of #ol(in) t#e reserves e+uals t#e mar)inal cost of #ol(in) t#e
reserves.
(. mar)inal cost of #ol(in) t#e reserves is ?ero.
13. 6#e I//12/'P anal%sis su))ests t#at an e.ternal real sector s#oc4 suc# as a rise
in national income a$roa( will cause& un(er fixed e.c#an)e rates& a s#ift
in a #ome countr%0s 'P curve :assumin) t#at s#ort*term financial capital is not
perfectl% mo$ile;& a in t#e #ome countr%0s $alance of pa%ments& an(
in t#e #ome countr%0s national income.
a. ri)#twar(- surplus- an increase
$. ri)#twar(- (eficit- a (ecrease
c. ri)#twar(- surplus- a (ecrease
(. leftwar(- (eficit- a (ecrease
13. "#ic# one of t#e followin) is NOT an alle)e( (isa(vanta)e of a fle.i$le
e.c#an)e rate s%stem5
a. possi$ilit% of (esta$ili?in) speculation
$. wasteful resource movements $etween in(ustries
c. increase( nee( for international reserves
(. )reater =insulation> of a (omestic econom% from e.ternal real s#oc4s
15. A situation w#ere a countr% announces a parit% value for its currenc% an( permits
small variations aroun( t#at value& $ut also a(<usts t#e parit% re)ularl% $% small
amounts accor(in) to various in(icators& is 4nown as
a. a (irt% float.
$. a crawlin) pe).
c. a mana)e( float strate)% of =leanin) a)ainst t#e win(.>
(. a =wi(er $an(.>
16. If a countr%0s 'P curve is flatter t#an its 12 curve& t#en an e.ternal financial
s#oc4 of a rise in interest rates a$roa( woul(& un(er fle.i$le e.c#an)e rates& lea(
to in t#e #ome countr%0s national income. If e.c#an)e rates were fi.e(&
t#is e.ternal financial s#oc4 woul( in t#e #ome countr%0s national
income.
a. a (ecrease- lea( to an increase
$. a (ecrease- also lea( to a (ecrease
c. an increase- also lea( to an increase
(. an increase- lea( to a (ecrease
17. If a countr% a(opts a currenc% $oar( arran)ement& a result is t#at t#e countr%0s
mone% suppl% $e increase( $% t#e purc#ase of (omestic assets from t#e
countr%0s citi?ens $% t#e countr%0s central $an4- in t#is arran)ement& t#e countr%0s
mone% suppl%
$e increase( $% t#e purc#ase of forei)n assets from t#e countr%0s
citi?ens $% t#e countr%0s central $an4.
a. can- also can
$. can- cannot
c. cannot- can
(. cannot- also cannot
18. If a countr% #as a currenc% $oar( arran)ement :wit# a 100 percent reserve s%stem;
in place& t#en t#e countr%0s mone% suppl% can $e increase( $% a $% t#e
countr%0s central $an4.
a. purc#ase of (omestic assets from (omestic citi?ens.
$. purc#ase of forei)n :e.ternal; assets from (omestic citi?ens.
c. sale of (omestic assets to (omestic citi?ens.
(. sale of forei)n :e.ternal; assets to (omestic citi?ens.
Essa%s an( Pro$lems@
1. An(er a fle.i$le e.c#an)e rate s%stem& c#an)es in t#e forei)n rate of interest will
affect $ot# t#e financial mar4ets an( t#e real sector. E.plain w#% t#is comes a$out usin)
t#e I//12/'P mo(el. "#at influence& if an%& (oes t#e (e)ree of international capital
mo$ilit% #ave on t#e results5
2. E.plain& in t#e I//12/'P framewor4 wit# fle.i$le e.c#an)e rates& t#e impact of an
autonomous increase in forei)n (eman( for a countr%0s e.ports upon t#e countr%0s
national income& mone% suppl%& an( e.c#an)e rate. If t#ere is no impact on a varia$le&
e.plain w#%.
3. E.plain t#e features of a currenc% $oar( arran)ement. 6#en in(icate )eneral
con(itions un(er w#ic# t#e a(option of a currenc% $oar( $% a countr% woul( $e (esira$le
for t#e countr%.