Test 2 is on Friday, April 24 Test 2 has 30 multiple choice questions. Test 2 will cover the material assigned during weeks 1-14. This includes o Material covered on Test 1 o Material from weeks 8-14 o o Outside readings for each week Study guides linked for most weeks. Suggested Study Plan o Review Test 1 and quizzes 1 through 6 o Review study guides listed under most weeks. o Review the concepts listed below to make sure you haven t missed something. o Be sure to know the main points of each weekly outside reading. Here is a list of concepts that students need to understand from weeks 8-14 Balance of payments (BOP) Credit on BOP Debit on BOP Double Entry Accounting (BOP) Current Account Income Account Financial (and Capital) Account Official Reserves Nominal Exchange Rate Real Exchange Rate Law of One Price Big Mac Index Purchasing Power Parity Asset Market Approach China Trade History - Opium War Trade in Marxist/Leninist thought Trade under planning (1949-78) The Great Leap Forward Market and Trade Reforms 1980s Tariffs, SEZ s Currency Devaluation Double Air Lock China s Balance of Payments China s Exchange Rate Policy and official reserves PPP and the RMB Is China export led? Exchange Rates in the Short Run Exchange Rates in the Long Run Exchange Rate Overshooting Impossible Trinity Fixed Exchange Rates Exchange Rate Stabilization Fund Bretton Woods Adjustable Pegs Floating Exchange Rate Managed Exchange Rate Capital Controls Currency Board Dollarization and Siegniorage
Please fill out the course evaluations for EconS327/IBUS470. Here are the instructions: Thanks, Dr. H Log on to my.wsu.edu with your WSU Network ID and password. The links to surveys are listed under official Notices in mywsu, one per course section. Open your notice and click on the link to take you to your evaluation. Your responses are completely confidential. A file separate from the course evaluation will save your name so your faculty can see your name if they have chosen to give extra credit for completing the evaluation. The file with your name is not linked in any way to your confidential survey responses. Please complete evaluations for each of your courses, your responses are very important to your faculty. They give valuable feedback on what is working for you in the course or what needs improvement. If you have any trouble or questions, please enter a support request at this web site: http://support.ctlt.wsu.edu Here are a few sample multiple choice questions for practice. 1. In a country s balance of payments, which of the following transactions are debits (minuses)? a. Domestic bank balances owned by foreigners are decreased b. Foreign bank balances owned by domestic residents are decreased c. Assets owned by domestic residents are sold to nonresidents d. Securities are sold by domestic residents to nonresidents 2. The net value of flows of goods, services, income, and unilateral transfers is called the: a. Capital account. b. Current account. c. Trade balance. d. Official reserve balance 3. A country experiencing a current account surplus: a. Needs to borrow internationally. b. Is able to lend internationally. c. Must also have had a surplus in its capital account. d. Spent more than it earned on its merchandise and service trade, international income payments and receipts and international transfers. 4. In recent years the US has a. Had a current account surplus b. Had a financial (capital) account surplus c. Been a net lender to the world d. Experienced a dramatic decrease in its official foreign reserves
5. Suppose the exchange rate between the Japanese yen and the U.S. dollar is initially 100 yen per dollar and then falls to 80 yen per dollar. As a result the Yen price of a product that the US exports for $5 will a. Increase from 500 Yen to 540 Yen b. Decrease from 500 Yen to 400 yen c. Increase from 400 Yen to 500 Yen d. Decrease from 540 Yen to 500 Yen 6. A decrease in German residents' willingness to invest in dollar-denominated assets will shift the demand curve for: a. Euros to the right b. Euros to the left c. Dollars to the right d. Dollars to the left Figure 17.1: The Market for British Pounds $/ S 2.50 2.00 1.50 5 5.5 6 D s (millions) 7. Referring to figure 17.1, if the British government wants to peg the exchange rate of the pound at $2.50 per pound, what action would British monetary authorities have to undertake? a. Sell 1 million pounds and buy 2.5 million dollars. b. Buy 1 million pounds and sell 1 million dollars. c. Buy 1 million pounds and sell 2.5 million dollars. d. Buy 5.5 million pounds and sell 11 million dollars. 8. Referring to figure 17.1, if the British pound is pegged at $2.50 per pound the pound will be: a. Overvalued b. Undervalued c. Devalued d. In equilibrium
9. In the short run, a drop in short run European interests rates will lead to: a. An inflow of capital to Europe. b. An increase in the demand for euro-denominated financial assets. c. A decrease in the demand for euro-denominated financial assets. 10. states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency. a. Covered interest rate equilibrium b. Trade equilibrium c. The law of comparative advantage d. Purchasing power parity 11. Suppose the average price of a Big Mac in the United States is $4.00 while in Japan the average price is 500 yen. If the price of a dollar is 100 yen per dollar, the purchasing power parity model of exchange rate determination suggests: a. The yen is overvalued. b. The yen is undervalued. c. The price of a Big Mac in Japan will rise. d. The price of a Big Mac in the US will decrease 12. Suppose that US prices rise 4% over the next year while prices in Mexico rise 6%. According to the purchasing power parity theory of exchange rates, what should happen to the exchange rate between the dollar and the peso? a. The dollar should depreciate. b. The peso should appreciate. c. The peso should depreciate. d. The dollar will be revalued. 13. Exchange rates are determined in the long-run by: a. Interest rate differentials. b. Purchasing power parity. c. Financial asset pricing. 14. Pressures in the foreign exchange rate market are such as to cause the British pound to depreciate with respect to the U.S. dollar. If Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar, which of the following interventions will stem the pressures for depreciation of the pound? a. Britain should sell pounds and buy dollars. b. Britain should do nothing as a fixed rate will not change. c. Britain should buy pounds and sell dollars. d. Britain should increase their money supply to create domestic inflation.
Figure 20.1: The Foreign Exchange Market $/ S (spring - summer) $2.20 S (autumn - winter) $1.90 $1.60 30 40 50 60 70 D (billions) 15. Referring to figure 20.1, assuming that the British government is committed to maintaining a fixed exchange rate at $1.90 per pound. In the spring-summer period, what type of intervention must British monetary authorities engage in? a. Sell 20 billion pounds at $1.60. b. Sell 20 billion pounds at $1.90. c. Sell 10 billion pounds at $2.20. d. Buy 20 billion pounds at $1.90. 16. Suppose country A has abundant labor and scarce capital. Product L requires labor intensive production. Product K requires capital intensive production. A result of free trade, in the long run a. Wages will decrease in country A b. The price of capital will decrease in country A c. The price of Product L will decrease in country A d. The price of Product K will increase in country A 17. There are only two countries. Country A imports zimboes from Country B. Country A also produces some of its own zimboes. If country B imposes a trade embargo on country A then as a result, a. The price of zimboes in country A will decrease b. Producers surplus (for zimbo producers) in country A will decrease c. Consumer surplus (for zimbo consumers) in country A will increase d. The producer surplus (for zimbo producers) in country B will decrease 18. If a large country imposes a tariff on imports of good A, the world price of good A will and the domestic price of good A will. a. Rise, rise b. Fall, rise c. Stay constant, rise
d. Stay constant, fall 19. In country A is a small country that produces, consumes and exports some its production of the grain, millet. Increases in world grain and petroleum prices cause two things to happen that affect country A. (1) The world price of millet increases along with other grain prices, and (2) petroleum price increases cause the world price of nitrogen fertilizer to double. Country A imports fertilizer to be used in its production of millet. The trade model for a small country predicts unambiguously (for sure) a. Country A s production of millet will decrease b. Country A s production of millet will increase c. Country A s exports of millet will increase d. Country A s consumption of millet decrease 20. China s Great Leap Forward was an example of a. The gains from intraindustry trade b. Potential losses when trade by comparative advantage are not allowed c. The use of subsidies to promote exports d. The advantages of specialization according to comparative advantage 21. During the planning stage of the Chinese economy (roughly 1949-1978) China s approach to international trade was a. Consistent with Mercantilist theory b. To export primary products like oil so they could import capital goods c. To peg the Chinese currency to the Japanese Yen d. To export products that were labor intensive in production 22. Using the most recent trade statistics (2007), apparel was the 4 th largest category of Chinese exports to the US. The largest category of Chinese exports to the US was a. Footwear b. Toys and dolls c. Computer equipment d. Auto parts 23. In 2005, the Chinese switched from a fixed exchange rate to a managed crawling peg. During subsequent period (July, 2005 April, 2008), the exchange rate (RMB/US$) a. Remained about the same at 8.27RMB/US$ b. Appreciated from 8.27RMB/US$ to about 7RMB/US$ c. Depreciated from about 8.27RMB/US$ to about 10RMB/US$ d. Depreciated from about 8.27RMB/US$ to about 8.5RMB/US$ 24. Currently the exchange rate for the Chinese currency (RMB/US$) a. Is set so that the RMB is undervalued (against the US$) b. Leads to an excess demand of US$ c. Is partly responsible for the flow of financial capital into China d. Is pegged to the Euro 25. According to Naughton, Chinese market reforms started around 1978. In the early part of these reforms (late 70s and early 80s) a. Oil was China s largest import category b. Oil was China s largest export category c. Rice was China s largest export category d. Rice was China s largest import category
26. According to Naughton, during the opening of trade in the 1980s China used a double air lock to insulate their domestic markets from surges of imports. These double air locks included a. Regulations that required all trade to first be unloaded in Hong Kong b. Regulations requiring that all imports must be labeled using Chinese characters c. Regulations that required all trade to pass through government operated foreign trade companies d. Regulations that required foreign importers to post a performance bond that would be forfeited in the event that the importer also did business in Taiwan 27. During the early part of the Chinese economic reforms (late 1980s to early 90s) a. The RMB appreciated b. Chinese exports shifted away from oil and extractive industries to labor intensive light industries c. China joined the WTO d. Chinese exports and imports (as a % of GDP) fell below the levels of the 1970s 28. The central feature of the Bretton Woods system was: a. Floating exchange rates. b. Fully fixed exchange rates. c. Capital controls. d. Adjustable pegs. 29. During the period 2006-2008 the Chinese trade surplus with the US averaged around $250 billion. During that period China s official foreign reserves increased dramatically. The connection between these data is a. The Bank of China issued Chinese currency to purchase foreign exchange b. The Bank of China devalued the RMB in 2006-2008 c. The Bank of China reduced their holdings of US Treasury bills d. The exchange rate of the RMB was pegged to the Euro over this period
30. The table below shows balances for the US balance of payments in the years 2000 and 2006. From these data we see that, in the year 2006 US Imports of goods and services was -$2.204 trillion. In the context of the US Balance of Payments this means a. US imports were $2.204 trillion in 2006 b. The US decreased its imports by $2.204 trillion in 2006 c. The US increased its imports by $2.204 trillion in 2006 d. The US trade deficit was $2.204 in 2006 31. The table below shows balances for the US balance of payments in the years 2000 and 2006. From these data we see that, in the year 2006 Foreign-owned assets in the United States was +$1.859 trillion. In the context of the US Balance of payments this means a. Foreigners increased their asset holdings in the US by +$1.859 in 2006 b. Foreigners decreased their asset holdings in the US by +$1.859 in 2006 c. Foreign owned assets in the US totaled +$1.859 in 2006 d. The US trade deficit was +$1.859 in 2006 US Balance of Payments (Credits +; debits -) 2000 2006 Exports of goods and services and income receipts 1421515 2096165 Exports of goods and services 1070597 1445703 Income receipts 350918 650462 Imports of goods and services and income payments -1780296-2818047 Imports of goods and services -1450432-2204225 Income payments -329864-613823 Unilateral current transfers, net -58645-89595 U.S.-owned assets abroad (increase/financial outflow (-)) -560523-1055176 Foreign-owned assets in the United States 1046896 1859597 Financial derivatives, net n.a. 28762 Statistical discrepancy -67937-17794 Memoranda: Balance on goods and services -379835-758522 Balance on income 21054 36640 Unilateral current transfers, net -58645-89595 Balance on current account -417426-811477 32. According to the Financial Times rating of MBA programs, one difficulty in comparing starting salaries for different MBA programs is that a. Many MBAs are unemployed b. Many MBAs earn unreported perks c. Converting salaries using exchange rates doesn t account for price differences in different countries. d. Different countries have different tax rates.
33. Suppose, these are the market prices Today s price of the : $2.00 per pound 90 day interest rate in US 4% 90 day interest rate in UK 4% The US Federal Reserve then announced (unexpectedly) that it would raise US interest rates to 6%. As a result the for the would decrease and the price of the pound would $2.00 per pound. a. Demand; Dollar; fall below b. Demand; Pound; fall below c. Demand; Dollar; rise above d. Supply; Pound, rise above 34. In Country A, the government has a government budget deficit (tax revenues < government expenditures). Country A has a surplus on its current account. {Note: Country A s situation is similar to Japan during the last decade.} Country A will have a in its capital account. a. Deficit b. Depreciation c. Lag d. Balance 35. An increase in U.S. capital inflows will be associated with a. An increase in the US current account surplus b. An increase in US interest rates c. A smaller US trade deficit d. Higher foreign interest rates
36. Which of the following terms describes an exchange rate regime in which the government intervenes in the foreign exchange market in order to influence the market determined exchange rate? a. Fully convertible b. Currency control c. Managed float d. Clean float 37. Hong Kong has a currency board. Under this exchange rate regime a. The Hong Kong $ floats b. The Hong Kong $ follows an adjustable peg to market basket of currencies c. The Hong Kong $ is managed so that Hong Kong s current account must balance d. The Hong Kong $ is fixed against the US $ 38. Ecuador has dollarized. This means that Ecuador a. Has no ability to set domestic monetary policy and interest rates b. Every Ecuadorian dollar is backed by 7.75 US dollars c. Ecuador gains from seigniorage d. Gets a free, interest rate loan from the US 39. According to the Impossible Trinity, it is impossible to do 3 Things at the same time. These 3 Things are a. Free capital flows, free immigration flows, and free trade flows b. Government budget deficit, current account deficit, and negative personal savings c. Free capital flows, independent monetary policy, and fixed exchange rates d. Democracy, economic growth, and low corruption 40. Exchange rate stabilization requires that a country s central bank a. Use an expansionary monetary policy to offset a depreciation of its currency b. Raise interest rates to offset a depreciation of its currency c. Raise taxes to offset a depreciation of its currency d. Raise import tariffs to offset a depreciation of its currency Answers on the next page
1 A 2 B 3 B 4 B 5 B 6 D 7 C 8 A 9 C 10 D 11 A 12 C 13 B 14 C 15 B 16 B 17 D 18 B 19 D 20 B 21 B 22 C 23 B 24 A 25 B 26 C 27 B 28 D 29 A 30 A 31 A 32 C 33 B 34 A 35 B 36 C 37 D 38 A 39 C 40 B