ECO610 Quizzes Week 4 Quiz

Question 1

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 8 percent, then

Correct Answer

an investor should invest only in euros an investor should invest only in dollars if the expected dollar depreciation against the euro is 8 percent.

an investor should be indifferent between dollars and euros an investor should invest only in dollars if the expected dollar depreciation against the euro is 8 percent.

You Answered

an investor should invest only in euros.

an investor should invest only in dollars if the expected dollar depreciation against the euro is 8 percent.

an investor should invest only in dollars.

Question 2

If there is initially

excess supply of money, the interest rate increases, and if there is initially an excess demand, it falls.

excess demand for money, the interest rate falls, and if there is initially an excess supply, it rises.

excess supply of money, the interest rate falls, and if there is initially an excess demand, it further falls.

excess supply of money, the interest rate increases, and if there is initially an excess demand, it falls.

Correct Answer

excess supply of money, the interest rate falls, and if there is initially an excess demand, it rises.

Question 3

The long run effects of money supply change:

no effect on the long-run values of the interest rate or real output, no change in the price level’s long-run value.

Correct Answer

no effect on the long-run values of the interest rate or real output, a proportional change in the price level’s long-run value in the same direction.

ambiguous effect on the long-run values of the interest rate or real output, a proportional change in the price level’s long-run value in the opposite direction.

ambiguous effect on the long-run values of the interest rate or real output, A disproportional change in the price level’s long-run value in the same direction.

proportional effect on the long-run values of the interest rate or real output, a proportional change in the price level’s long-run value in the same direction.

Question 4

If the dollar interest rate is 4 percent, the euro interest rate is 6 percent, then

Correct Answer

invest only in euros if the exchange rate is expected to remain constant.

an investor should invest only in euros.

an investor should invest only in dollars.

an investor should be indifferent between dollars and euros.

invest only in dollars if the exchange rate is expected to remain constant.

Question 5

Which one of the following statements is the most accurate?

An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the output level.

A decrease in the money supply lowers the interest rate while an increase in the money supply raises the interest rate, given the price level and output.

An increase in the money supply does not usually affect the interest rate.

An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level.

Correct Answer

An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level and output.

Question 6

In the short run, a permanent increase in the domestic money supply

has stronger effects only on the exchange rate but not on output than an equal temporary increase.

has stronger effects on output, but lower effect the exchange rate than an equal temporary increase.

Correct Answer

has stronger effects on the exchange rate and output than an equal temporary increase.

has weaker effects only on the exchange rate than an equal temporary increase.

has weaker effects on the exchange rate and output than an equal temporary increase.

Question 7

The PPP theory fails in reality because

A. transport costs and restrictions on trade.

B. monopolistic or oligopolistic practices in goods markets.

C. inflation rates are unrelated to money supply growth.

D. the inflation data reported in different countries are based on different commodity baskets.

Correct Answer

A, B, and C

Question 8

By April 2007,

only about 24 percent of foreign exchange trades were against euros.

only about 10 percent of foreign exchange trades were against euros.

only about 60 percent of foreign exchange trades were against euros.

only about 42 percent of foreign exchange trades were against euros.

Correct!

only about 37 percent of foreign exchange trades were against euros.

Question 9

A central bank’s international reserves include

any gold that it owns.

Correct!

any gold that it owns and foreign and domestic assets.

any silver that it owns and foreign and domestic assets.

any silver that it owns.

only foreign and domestic assets.

Question 10

Under fixed rates, which one of the following statements is the most accurate?

Fiscal policy can affect only employment.

Fiscal policy can affect only international reserves.

Fiscal employment can affect only output and international reserves.

Correct!

Fiscal policy can affect output, employment and international reserves at the same time.

Fiscal policy can affect only output and employment.