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This flashcard set delves into advanced macroeconomic concepts, particularly focusing on interest rates, exchange rates, and currency markets, tailored for university-level students. It explores topics like the role of commercial banks in foreign exchange, the impact of interest rate changes on currency values, and the intricacies of balance of payments. The set also covers the differences between GNP and GDP, the dynamics of fixed and floating exchange rates, and the factors influencing exchange rate crises. Ideal for economics students, this flashcard set provides a comprehensive overview of key macroeconomic principles and their real-world applications, helping learners grasp complex theories and their practical implications.

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In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain maintains its exchange rate peg:

the British would be forced to increase their interest rates

the British would increase their money supply

the British would have to lower their interest rates

the British government would have to use expansionary fiscal policy

The greater the degree of economic integration between markets in the home country and the base country:

the greater the volume of transactions and the greater the benefit to the home country of fixed exchange rates

the smaller the volume of transactions and the lesser the benefit to the home country of fixed exchange rates

the greater the volume of transactions and the greater the benefit to the home country of flexible exchange rates

the less important the volume of transactions and the greater the importance of ethnic similarities

Why do symmetric shocks not disturb fixed exchange rate systems?

Symmetric shocks happen only once and cause a one-time shift in interest rates

Symmetric shocks imply differences in rates of interest, which is irrelevant to fixed exchange rate systems

A demand shock can easily be dealt with using domestic policies that do not involve other nations

Symmetric shocks require the same medicine in both economies, so monetary policy will be in a direction to help both situations

What is the most powerful argument against a fixed exchange rate?

The nation must administer the rates at all currency exchange venues, and it is expensive to do

The nation usually gets opposition from other trading partners who are excluded

The nation has to have a large store of gold on hand to exchange at fixed rates

The nation gives up its ability to control its money supply and affect its own interest rates

If the central bank holds no foreign currency reserves, the nation's exchange rate is:

fixed

pegged

under the control of the IMF

floating

Consider an economy with a fixed exchange rate and money supply equal to 2 billion pesos. The country has 1 billion in reserves and 1 billion in domestic credit. If there is a sudden decline in the demand for money, then:

the country needs to reduce its reserves to maintain the exchange rate

the country needs to increase its reserves to maintain the exchange rate

the country will face rising interest rates and, thus, a sharp appreciation of the peso

the country will see a sharp increase in demand for loans

Which statement below is correct?

The likelihood of an exchange rate crisis increases if a country is having a banking crisis.

The likelihood of an exchange rate crisis decreases if a country is having a banking and default crisis

There is no relationship between an exchange rate crisis and banking or default crises

When a banking or default crisis occurs, countries typically are forced to appreciate their currencies

Which of the following statements is correct?

Exchange rate crises typically impose larger costs on advanced countries than on emerging-market countries

Exchange rate crises typically impose larger costs on emerging-market countries than on advanced countries

Exchange rate crises typically impose the same costs on advanced countries and on emerging-market countries

Exchange rate crises typically do not impose any costs on advanced countries

A country's gross national product (GNP) is

the value of all final goods and services produced by its factors of production and sold on the market in a given time period.

the value of all intermediate goods and services produced by its factors of production and sold on the market in a given time period

the value of all final goods produced by its factors of production and sold on the market in a given time period

the value of all final goods and services produced by its factors of production and sold on the market

the value of all final goods and services produced by its factors of production, excluding land, and sold on the market in a given time period.

An example of how GNP accounts for services provided by foreign-owned capital (and GDP does not) is

earnings of Spanish factory with British owners counts only in Spain's GDP

earnings of Spanish factory with British owners counts only in Britain's GNP

earnings of Spanish factory counts in Spain's GNP but are part of Britain's GDP

earnings of Spanish factory counts in Spain's GDP but are part of Britain's GNP.

None of the above.

GNP equals GDP

minus net receipts of factor income from the rest of the world.

plus receipts of factor income from the rest of the world.

minus receipts of factor income from the rest of the world

plus net receipts of factor income from the rest of the world

None of the above.

In open economies

saving and investment are necessarily equal

as in a closed economy, saving and investment are not necessarily equal

saving and investment are not necessarily equal as they are in a closed economy

saving and investment are necessarily equal contrary to the case of a closed economy

None of the above.

Which of the following is true?

A country with a current account surplus is earning more from its exports than it spends on imports.

A country could finance a current account deficit by using previously accumulated foreign wealth to pay for its imports.

A country with a current account deficit must be increasing its net foreign debts by the amount of the deficit.

We can describe the current account surplus as the difference between income and absorption

All of the above are true

An open economy

can save only by building up its capital stock

can save only by acquiring foreign wealth.

cannot save either by building up its capital stock or by acquiring foreign wealth

can save either by building up its capital stock or by acquiring foreign wealth

None of the above

Which of the following is false about private savings and government savings?

SP = Y - T - C

Unlike private saving decisions, government saving decisions are often made with an eye toward their effect on output and employment

Total savings (S) = SP + Sg

The national income identity can help us to analyze the channels through which government saving decisions influence macroeconomic conditions

None of the above; all statements are true

Every international transaction automatically enters the balance of payments

once either as a credit or as a debit.

twice, once as a credit and once as a debit

once as a credit.

twice, both times as debit.

None of the above

An American buys a Japanese car, paying by writing a check on an account with a bank in New York. How would this be accounted for in the balance of payments ?

current account, a Japanese good import

current account, a U.S. good import

financial account, a U.S. asset import

financial account, a U.S. asset export

When a country's currency depreciates,

foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive

foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper

foreigners find that its exports are cheaper; however, domestic residents are not affected

foreigners are not affected, but domestic residents find that imports from abroad are more expensive

None of the above

Forward and spot exchange rates

are necessarily equal

do not move closely together.

are always such that the forward exchange rate is higher

do move closely together, but are not necessarily equal

None of the above

The following is an example of Radio Shack hedging its foreign currency risk:

needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to buy yen.

needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to sell yen.

needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a spot-exchange 1 month from now.

needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a spot-exchange 1 month from now

None of the above

Which major actor is at the center of the foreign exchange market?

corporations

central banks

commercial banks

non-bank financial institutions

None of the above

Which of the following statements is true about a vehicle currency?

It is widely used to denominate contracts made by parties who reside in the country that issues the vehicle currency

The dollar is sometimes called a vehicle currency because of its pivotal role in many foreign exchange deals.

There is much skepticism that the euro will ever evolve into a vehicle currency on par with the dollar

The pound sterling, once second only to the dollar as a key international currency, is beginning to rise in importance

Only A and C.

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then

an investor should invest only in dollars

an investor should invest only in euros

an investor should be indifferent between dollars and euros

It is impossible to tell given the information

All of the above.

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

an investor should invest only in dollars

an investor should invest only in euros.

an investor should be indifferent between dollars and euros.

It is impossible to tell given the information

All of the above

Which one of the following statements is the most accurate?

A rise in the interest rate offered by dollar deposits causes the dollar to appreciate

A rise in the interest rate offered by dollar deposits causes the dollar to depreciate

A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar

For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.

None of the above

The Economist article "Hot Money Roils Growth Currencies argues that

Emerging markets currencies have been appreciating.

Emerging markets have been intervening in the foreign exchange markets

Emerging markets currencies have been appreciating because of low interest rates in United State

All of the above

None of the above

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