University of Colorado at Boulder. Department of Economics. ECON 4423: INTERNATIONAL FINANCE Term Test 2 Fall 2005

Transcription

1 University of Colorado at Boulder Department of Economics ECON 4423: INTERNATIONAL FINANCE Term Test 2 Fall 2005 Name: Student ID: Instructions: This test is 1 hour in length. You may use a hand calculator No Cell Phones Answer all questions. Section 1: Multiple Choices. Section 2: Problems. This test is 12 pages long (including cover). 1

2 Section 1: Multiple Choices Each question is worth 5 points, for a total of 50 points. 1. Individuals base their demand for an asset on A. the expected return the asset offers compared with the returns offered by other assets. B. the riskiness of the asset s expected return. C. the asset s liquidity. D. All of the above. E. Only A and B. 2. Which one of the following statements is the most accurate? A. A rise in the average value of transactions carried out by a household or a firm causes its demand for money to fall. B. A reduction in the average value of transactions carried out by a household or a firm causes its demand for money to rise. C. A rise in the average value of transactions carried out by a household or a firm causes its demand for money to rise. D. A rise in the average value of transactions carried out by a household or a firm causes its demand for nominal money to rise. E. A rise in the average value of transactions carried out by a household or a firm causes its demand for real money to rise. 3. A rise in A. real GNP decreases aggregate real money demand for a given interest rate, moving the L(R,Y) schedule to the right. B. real GNP raises aggregate real money demand for a given interest rate, moving the L(R,Y) schedule to the left. C. real GNP raises aggregate real money demand for a given interest rate, moving the L(R,Y) schedule to the right. D. nominal GNP raises aggregate real money demand for a given interest rate, moving the L(R,Y) schedule to the right. E. real GNP raises aggregate nominal money demand for a given interest rate, moving the L(R,Y) schedule to the right. 4. Given P US and Y US, A. an increase in the European money supply causes the euro to appreciate against the dollar, but it does not disturb the U.S. money market equilibrium. B. an increase in the European money supply causes the euro to appreciate against the dollar, and it creates excess demand for dollars in the U.S. money market. C. an increase in the European money supply causes the euro to depreciate against the dollar, and it creates excess demand for dollars in the U.S. money market. D. an increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium. E. None of the above statements is true. 2

3 5. Which one of the following statements is the most accurate? A. A permanent increase in a country s money supply causes a proportional long-run depreciation of its currency against foreign currencies. B. A temporary increase in a country s money supply causes a proportional long-run depreciation of its currency against foreign currencies. C. A permanent increase in a country s money supply causes a proportional long-run appreciation of its currency against foreign currencies. D. A permanent increase in a country s money supply causes a proportional short-run depreciation of its currency against foreign currencies. E. A permanent increase in a country s money supply causes a proportional short-run appreciation of its currency against foreign currencies. 6. Which of the following statements is the most accurate? The law of one price states: A. In competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. B. In competitive markets free of transportation costs and official barriers to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. C. In competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. D. Identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. E. None of the above. 7. Which of the following statements is the most accurate? A. Relative PPP is valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. B. Absolute PPP is valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. C. Relative PPP is valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. D. Relative PPP is not valid when absolute PPP is not. E. None of the above statements is true. 3

4 8. Under the monetary approach to the exchange rate theory, money supply growth at a constant rate A. eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. B. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services. C. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. D. eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. E. None of the above statements is true. 9. Under sticky prices, A. an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. B. an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately. C. an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. D. an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. E. an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 10. The PPP theory fails in reality because A. transport costs and restrictions on trade. B. monopolistic or oligopolistic practices in goods markets. C. the inflation data reported in different countries are based on different commodity baskets. D. A, B, and C. E. A and B only. 4

5 Section 2: Short Questions Each question is worth 10 points, for a total of 80 points. Points allocated to explanation/computation only. Question 1. You have USD 1m today. Where should you invest: at home (US) or abroad (Europe)? You face the following prices: Exchange Rates: Spot: USD /EUR Forward (3-month): USD /EUR 3-month money market interest rate (per annum): Europe Area: percent United States: percent 5

6 Question 2. You (an American college student) require CAD 2000 to buy a ski package for Whistler, BC. You must pay the fee in 3 months. Where should you invest? You face the following prices: Exchange Rates: Spot: CAD /USD Forward (3-month): CAD /USD 3-month money market interest rate (per annum): Canada: percent United States: percent 6

7 Question 3. How does a temporary monetary expansion at home affect home and foreign interest rate, as well as the exchange rate? For this question, use a diagrammatic exposition. Describe the full dynamics. 7

8 Question 4. How does a permanent monetary contraction at home affect home and foreign interest rate, home and foreign prices, and the exchange rate? For this question, use a diagrammatic exposition. Describe the full dynamics. 8

9 Question 5. True, False, or Uncertain: Exchange rate overshooting only occurs when prices are perfectly flexible. 9

10 Question 6. How does the imposition of a tariff on imports from the foreign country by the home country affect the long-run real exchange rate between home and foreign country? 10

11 Question 7. Why are general price levels lower in poorer countries. 11

12 Question 8. True, False, or Uncertain: The Economist reports that (nominal) interest rates are 4.56 percent in the UK and 3.85 percent in the US. The Economist also forecasts that inflation will be 2 percent in the UK and 3 percent in the US. The Economist thus forecasts that the competitiveness of the UK will deteriorate. 12