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ECON 102 Study Guide - Final Guide: Exchange Rate, Real Interest Rate, Import Quota

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School
U of M
Department
Economics
Course
ECON 102
Professor
Adam Stevenson

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ECON 102 Full Course Notes
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ECON 102 Full Course Notes
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Document Summary

When the money market is drawn value of money on vertical axis (y axis), if price level is above equilibrium level > there is an excess demand for money, price level will fall. People go to bank more frequently >increase in in ation reduces money demand. High and unexpected in ation has greater cost for savers in high income tax brackets than savers in low income tax brackets. Us exports as percent of gfp trippled since 1950, us currently has trade dec tic. Investors compare real interest rates offered on different bonds net capitol out ow. Appreciation of dollar, dollar buys more of other. Purchasing-power parity > the nominal exchange rate is the ration of foreign prices to us prices. > ppp% change in exchange rate = % change in price level. If you want to nd change in nominal exchange rate. Nominal exchange rate = price level change (us) price level change (other)

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Related Questions

1.Purchasing power parity implies that

a. the real exchange rate is equal to 1.

b. the law of one price does not hold.

c. inflation rates are equal across countries.

d. the real exchange rate is equal to 0.

e. if the domestic country has low prices, then the domestic currency will depreciate until foreign citizens can buy the same amount of goods as domestic citizens.

Ā 

2.Which of the following is a prediction from the PPP model of exchange rates?

A. An increase in the US money supply leads to an appreciation of the dollar in the long run.

B. An increase in US production leads to a depreciation of the dollar.

C. An increase in US production will lead to a proportional increase in the inflation rate.

D, An increase in the US money supply leads to a depreciation of the dollar in the long run.

E.An increase in the US interest rates leads to a fall in prices.

Ā 

3.Relative purchasing power parity predicts that

A.the difference between the inflation rates in the two countries should equal the ratio of the interest rates in the two countries.

B. the difference between the inflation rates in two countries should equal the per cent change in the exchange rate.

C.inflation rates should be equal across countries.

D.the real exchange rate should equal one.

E.relative price levels in the two countries should be equal when expressed in the same currency.

Ā 

4.Which of the following is NOT a valid explanation for the failure of purchasing power parity?

a. Differences in monetary policies across countries

b. Lack of competition

c. Transportation costs

d. Trade barriers

Ā 

5.If P represents (the level of) domestic prices, P* represents (the level of) foreign prices and E represents the exchange rate as units of domestic currency per units of foreign currency, then the real exchange rate equals

a. EP/P*

b. P*/EP

C. E/PP*

d. EP*/P

e. P/P*

 Ā 

6.The difference between nominal and real interest rates is that

A.Nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms

B.Nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output

C.Nominal interest rates can fluctuate, while real interest rates always remain fixed

D.Real interest rates can fluctuate, while nominal interest rates always remain fixed

E.Real interest rates are the same in every country, while nominal interest rates are different for every country

Ā 

7.Which of the following is predicted to cause the value (or price or cost) of U.S. goods to appreciate relative to the value (or price or cost) of foreign goods in the long run?

a. An increase in the growth rate of U.S. GNP. b. A decrease in the growth rate of U.S. GNP.

c. A decline in the growth rate of the U.S. money supply.

d. An increase in the price of petroleum that reduces world demand for American cars. e. An appreciation of the dollar.

a) According to the monetary approach to the exchange rate, with real money demands being constant in Sweden and the US, if Sweden's money supply is increasing at the annual rate of 5% and the US money supply is increasing at the annual rate of 2%, then:

a. the Swedish krona should be appreciating against the US dollar at an annual rate of less than 3% to take into account overshooting.

b. the Swedish krona should be appreciating against the US dollar at the annual rate of 3%.

c. the Swedish krona should be depreciating against the US dollar at an annual rate of greater than 3% to take into account overshooting.

d. the Swedish krona should be depreciating against the US dollar at the annual rate of 3%.

e. the Swedish krona should be depreciating against the US dollar at an annual rate of less than 3% to take into account undershooting.

Ā 

b) Purchasing power parity is more likely to hold true when:

a. there are a large amount of non-traded goods.

b. there are high tariffs.

c. exchange rates are fixed and stable over a reasonably long time period.

d. exchange rates are flexible.

e. there are high transportation costs.

Ā 

c) Suppose the basket of goods used for calculating the national price level, P, is the same as the basket of goods used for calculating P*. The formula P = EP* represents the existence of:

a. a real exchange rate value that, based on these measures for E, P, and P*, is not equal to one.

b. relative purchasing power parity but not absolute purchasing power parity.

c. absolute purchasing power parity but not relative purchasing power parity.

d. absolute purchasing power parity and relative purchasing power parity.

e. neither absolute purchasing power parity nor relative purchasing power parity.

Question 1

The higher the capital utilization rate, the greater the depreciation rate.

True
False

Question 2

Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply

operating at inconvenient times.
paying overtime to employees operating the machines.
operating when complementary services like transporters are unavailable or more expensive.
All of the above.

Question 3

If the rental price of capital increase, the capital utilization rate

increases.
decreases.
remains the same.

depends on whether the substitution rate is greater than the income effect

Question 4

The vacancy rate in the labor market is

the number of job openings divided by the number of unemployed people in the labor force.
the number of job openings divided by the number of workers in the labor force.
the ratio of open jobs to filled jobs.
the ratio of open jobs to the total number of jobs that employers want occupied.

Question 5

Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.

True
False

Question 6

A decrease in workersĆ¢Ā€Ā™ effective real incomes while they are unemployed will

lower the job finding rate and raise the expected duration of unemployment.
lower the job finding rate and the expected duration of unemployment.
raise the job finding rate and lower the expected duration of unemployment.
raise the job finding rate and the expected duration of unemployment.

Question 7

In the Barro model, the natural rate of unemployment is

positively related to the job separations rate.
zero.
fixed.
positively related to the job finding rate.

Question 8

If the interest rate increases, the real demand for money also increases

True
False

Question 9

Commodity money is money that has value because

of the intrinsic value of the commodity.
it is legal tender.
the government says so.
All of the above.

Question 10

High-powered money is

money held by business for investment.
total currency in circulation plus depository institution deposits at the Fed.
total currency in circulation.
government bonds held by the public and depository institutions.

Question 11

U.S. M1 money includes

currency held by the public.
checkable deposits.
travelerĆ¢Ā€Ā™s checks.
All of the above.

Question 12

U.S. M2 money includes

currency, time deposits, and government bonds.
savings deposits, small time deposits, and private bonds.
checkable deposits, savings deposits, and small time deposits.
retail money market mutual funds, small time deposits, and government bonds.

Question

Money is different from other assets like capital and bonds in that

money does not pay interest.
money has intrinsic value.
money is a better long term store of value.
All of the above.

Question

If a personĆ¢Ā€Ā™s income doubles, we expect their cash holdings to

double
more than double.
less than double.
decrease.

Question 15

Real money demand does not change when

nominal GDP changes.
the interest rate changes.
the price level changes.
All of the above.

Question 16

All else constant, the price level rises when the supply of money increases.

True
False

Question 17

If the nominal interest rate were to increase, then

money demand decreases and the price level increases.
money demand increases and the price level decreases.
the money supply and the price level would increase.
the money supply and the price level would decrease.

Question 18

Real money demand is a function of real GDP and the nominal interest rate.

True
False

Question 19

The real return on money is zero.

True
False

Question 20

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is

1%
9%
-1%
1.25%

Question 21

When the rate of growth of money is constant

the inflation rate equals the growth rate of money.
the nominal interest rate rises.
real money balances are declining.
All of the above.

Question 22

A decrease in the money growth rate in the market clearing model causes

a decrease in the nominal interest rate.
an increase in money demand.
a decrease in the price level.
All of the above.

Question 23

A decrease in the money growth rate in the market clearing model causes

an increase in the nominal interest rate.
an increase in money demand.
an increase in the price level.
All of the above.

Question 24

Under price level targeting the money supply becomes

neutral
endogenous
exogenous
predetermined

Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.

True
False