1) The equilibrium price of foreign currency measured in domestic currency is called:
a. The wage b. The interest rate c.The exchange rate d. The forward rate
2) A decrease in the demand for British pounds in the US can be caused by:
a. A decrease in imports from London in the United States b. An increase in imports from London in the United States c. A decrease in US exports to France d. Both a and c
3) An increase in the demand for Euros in the US can be caused by:
a. An increase in Spanish citizens’ investment in US financial assets b. A decrease in US exports to France c. An increase in American imports from Germany d. Both b and c
4) The supply of foreign currency:
a. Comes from imports and quantity demanded increases when the exchange rate rises b. Comes from imports and quantity demanded falls when the exchange rate rises c. Comes from exports and quantity supplied falls when the exchange rate rises d. Is upward sloping
5) The exchange rate between the Brazilian real and the Mexican peso is determined:
a. As the equilibrium price of labor in Mexico measured in Brazilian reales. b. As the equilibrium price of Brazilian reales in the market for foreign currency in Mexico. c. As the equilibrium dollar price of Brazilian reales in the United States. c. As the equilibrium interest rate in Brazilian reales.
6) In the AD equation:
a. G stands for government spending b. C stands for public consumption c. I stands for imports d. X stands for exported investments
7) The interaction between supply and demand forces in the market for all goods and services in any country determines:
a. That country’s GDP b. The general price level, which is an indication of the cost of living for the average citizen in A c. The general price level, which is an indication of the average cost of production for the economy of A d. Both a and b e. Both a and c
8) An increase in aggregate demand in country A:
a. Lowers that country’s rate of inflation. b. Raises that country’s GDP. c. Is always good for their economy d. All of the above
9) An increase in aggregate supply in country A:
a. Lowers that country’s rate of inflation. b. Raises that country’s GDP. c. Might still generate inflation is accompanied with a strong increase in government spending. d. All of the above
10) AD can be calculated as:
a. C + I + G b. C + I + G – (X-IM) c. C + I + G + (X+IM) d. C+I+G+(X-IM) SHORT ANSWER SECTION (70 points)
Question 1: (20 points) The demand for euros in the United States is given by the following equation E = 10 billion – fcd , where E denotes the exchange rate and fcd denotes the quantity demanded of euros. The supply curve is given by the following equation: P = 5 billion + 4fcs , where fcs denotes the quantity supplied of euros. a. Calculate the equilibrium price E* and the equilibrium quantity fc*. (14 points, 7 each) b. What is the unit of measurement of fc? (3 points) c. What is the unit of measurement of E? (3 points)
Question 2: (15 points) You are the chair of the council of Economic Advisors for the State of PA. You propose a reduction in state income taxes as a way to help the local economy out of the recession. The governor (mostly concerned about tax revenue as all politicians) tells you that he is against your policy. His idea is that such a policy would generate growth, which is always inflationary and that this economy cannot bear any higher inflation rates. How do you react? Do you agree or disagree? Why? Explain your answer.
Question 3: (15 points) a) Draw the effects of an increase in economic growth in the market for all goods and services. For full credit, be sure to show what happens to demand, supply, equilibrium price and equilibrium quantity. (10 points) b) Is there inflation as a result? (5 points)
Question 4: (20 points) a) Draw the effects of technological progress on the market for all goods and services. (10 points) b) Draw the effects of contractionary macroeconomic policies (like fiscal consolidation when G falls or taxes are raised) on the market for all goods and services. (10 points) In both cases, for full credit, be sure to show what happens to demand, supply, equilibrium price and equilibrium quantity.