INTERNATIONAL MACROECONOMICS 11TH
EDITION EXAM PREP QUESTIONS AND
ANSWERS FULLY VERIFIED
◉ Which of the following is NOT a function of money?
A. Capital used to produce goods and services.
B. Store of value.
C. Unit of account.
D. Medium of exchange.
Answer: A. Capital used to produce goods and services.
◉ The opportunity cost of money holdings is
Answer: the alternative interest income foregone from not holding
some other asset.
◉ Which of the following functions corresponds to a liquidity
preference function and correctly identifies the relationship
between the left-hand side variables and the right-hand side
variables? (Note M^d is the quantity of money demanded, P the
price level, i interest rates, Y real income, and f is the function
operator that relates inputs to an output.)
Answer: M^d/P = f (i-, Y+)
,◉ What are the determinants of the aggregate money demand?
Answer: Price level, national income, and interest rate.
◉ How might a zero interest rate complicate the task of monetary
policy?
Answer: It cannot respond to an adverse shock to the economy by
lowering interest rates. One option is to (increase inflation by
purchasing bonds) to stimulate the economy. Increasing inflation
with a constant zero interest rate lowers the real interest rate.
◉ What is the short-run effect on the exchange rate of an increase in
domestic real GNP, given expectations about future exchange rates?
Answer: Money demand increases, the domestic interest rate
increases, and the domestic currency appreciates.
◉ How do we distinguish in the model between the short run and
the long run?
Answer: In the short run price level is fixed; in the long run, it is
flexible.
◉ For a given Euro interest rate, what is the correct causality chain
in the short run?
Answer: The Fed determines real money balances, which in turn
determine the interest rate, given money demand, which, given the
interest parity condition, determines the Euro/dollar exchange rate.
, ◉ What does exchange rate overshooting describe?
Answer: The exchange rate changes in the short run by more than in
the long run.
◉ Which of the following defines the long run effects of change in
the money supply?
Answer: There is no effect on the long-run values of the interest rate
or real output, resulting in a proportional change in the money
supply and price level's long-run value in the same direction
◉ What is the formal representation of the law of one price, if P is
domestic price for good X, P* is foreign price for the same good, and
E is the exchange rate (units of domestic currency per units of
foreign currency)?
Answer: P = E $/e x P*
◉ What does PPP imply?
Answer: The real exchange rate is equal to 1.
◉ Suppose Russia's inflation rate is 15 percent over one year but the
inflation rate in Switzerland is only 10 percent. According to relative
PPP, over the year the Swiss franc's exchange rate against the
Russian ruble should
EDITION EXAM PREP QUESTIONS AND
ANSWERS FULLY VERIFIED
◉ Which of the following is NOT a function of money?
A. Capital used to produce goods and services.
B. Store of value.
C. Unit of account.
D. Medium of exchange.
Answer: A. Capital used to produce goods and services.
◉ The opportunity cost of money holdings is
Answer: the alternative interest income foregone from not holding
some other asset.
◉ Which of the following functions corresponds to a liquidity
preference function and correctly identifies the relationship
between the left-hand side variables and the right-hand side
variables? (Note M^d is the quantity of money demanded, P the
price level, i interest rates, Y real income, and f is the function
operator that relates inputs to an output.)
Answer: M^d/P = f (i-, Y+)
,◉ What are the determinants of the aggregate money demand?
Answer: Price level, national income, and interest rate.
◉ How might a zero interest rate complicate the task of monetary
policy?
Answer: It cannot respond to an adverse shock to the economy by
lowering interest rates. One option is to (increase inflation by
purchasing bonds) to stimulate the economy. Increasing inflation
with a constant zero interest rate lowers the real interest rate.
◉ What is the short-run effect on the exchange rate of an increase in
domestic real GNP, given expectations about future exchange rates?
Answer: Money demand increases, the domestic interest rate
increases, and the domestic currency appreciates.
◉ How do we distinguish in the model between the short run and
the long run?
Answer: In the short run price level is fixed; in the long run, it is
flexible.
◉ For a given Euro interest rate, what is the correct causality chain
in the short run?
Answer: The Fed determines real money balances, which in turn
determine the interest rate, given money demand, which, given the
interest parity condition, determines the Euro/dollar exchange rate.
, ◉ What does exchange rate overshooting describe?
Answer: The exchange rate changes in the short run by more than in
the long run.
◉ Which of the following defines the long run effects of change in
the money supply?
Answer: There is no effect on the long-run values of the interest rate
or real output, resulting in a proportional change in the money
supply and price level's long-run value in the same direction
◉ What is the formal representation of the law of one price, if P is
domestic price for good X, P* is foreign price for the same good, and
E is the exchange rate (units of domestic currency per units of
foreign currency)?
Answer: P = E $/e x P*
◉ What does PPP imply?
Answer: The real exchange rate is equal to 1.
◉ Suppose Russia's inflation rate is 15 percent over one year but the
inflation rate in Switzerland is only 10 percent. According to relative
PPP, over the year the Swiss franc's exchange rate against the
Russian ruble should
