Question

Multiple Choice. Choose the one alternative that best completes the statement or answers the question
1. In the Money Market diagram (with the interest rate in the vertical axis), the aggregate real money demand schedule L(R,Y )
(a) slopes downward because a fall in the interest rate raises the opportunity cost of holding money of households and firms in the economy.

(b) slopes upward because a fall in the interest rate raises the opportunity cost of holding money of households and firms in the economy.

(c) slopes downward because a fall in the interest rate reduces the opportunity cost of holding money of households and firms in the economy.

(d) slopes upward because a fall in the interest rate reduces the opportunity cost of holding money of households and firms in the economy.

2. The Canadian dollar rate of return on euro deposits (European financial assets) is
(a) the euro interest rate minus the rate of inflation against the euro.

(b) the rate of appreciation of the dollar against the euro.

(c) the euro interest rate plus the rate of inflation against the euro.

(d) approximately the euro interest rate minus the expeccted rate of depreciation of the dollar against the euro.

(e) approximately the euro interest rate plus the expected rate of depreciation of the dollar against the euro.

3. Assume that the United States faces an 3 percent inflation rate while the inflation in Japan equals -3 (minus 3) percent. Assuming a floating exchange rate, then according to the purchasing-power parity theory, in the long run the dollar would be expected to:
(a) Appreciate by 0 percent against the yen

(b) Depreciate by 0 percent against the yen

(c) Appreciate by 6 percent against the yen

(d) Depreciate by 6 percent against the yen

(e) Remain at its existing exchange rate

4. An increase in the world relative demand for Canadian output causes
(a) only a short-run real depreciation of the Canadian dollar against the euro.

(b) a long-run real depreciation of the Canadian dollar against the euro.

(c) a long-run real appreciation of the Canadian dollar against the euro.

(d) A and B only.

(e) None of the above.

5. In the presence of the Law of One Price (LOOP), if one U.S. dollar exchanges for 1.5 British pounds (E£/$ = £1.5 per dollar) and if a TV costs $200 in the United States, then in Great Britain the TV should cost:
(a) 100 pounds (b) 200 pounds (c) 300 pounds (d) 400 pounds

Answer 1

1) (c) slopes downward because a fall in the interest rate reduces the opportunity cost of holding money of households and firms in the economy

2) (d) approximately the euro interest rate minus the expeccted rate of depreciation of the dollar against the euro

3) (a) Appreciate by 0 percent against the yen

4) (b) a long-run real depreciation of the Canadian dollar against the euro

5) (b) 200 pounds