ECON 436 Quiz 2
Name___________________________________
Number_______________________
Honor Pledge: I swear on my honor that I have not received any help from anyone during this quiz.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Assume the interest rate is 7 percent on euro-denominated assets and 5 percent on
dollar-denominated assets, and assume that the dollar is expected to appreciate 4 percent against
the euro next year. Then for French investors the expected relative rate of return from holding
dollar-denominated assets relative to euro-denomainated assets is
1)
A) 8 percent.
B) 2 percent.
C) 5 percent.
D) 3 percent.
E) 16 percent.
Answer: B
2) Suppose that the Federal Reserve Bank of U.S. decreases the interest rate and enacts expansionary
policy. Everything else held constant, this will cause the demand for TL denominated assets to
________ and the TL to ________.
A) increase; depreciate
B) decrease; depreciate
C) decrease; appreciate
D) increase; appreciate
2)
Answer: D
3) Suppose that the new Social Security Law went into effect and cost of labor decreased significantly
in Turkey. This development will _________ prices of exported goods produced in Turkey. Also,
TL will _________ against other currencies.
3)
A) increase / depreciate
B) decrease / appreciate
C) decrease / the answer depends on current exchange rate of TL against Euro.
D) increase/ not change
Answer: B
4) An increase in the real interest rate paid on TL assets causes the demand for TL denominated assets
to ________ and the TL to ________, everything else held constant.
A) increase; appreciate
B) decrease; appreciate
C) increase; depreciate
D) decrease; depreciate
Answer: A
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4)
5) Suppose a report was released today that showed the Euro-Zone (group of countries that use Euro
as their currency) inflation rate is running above the European Central Bank's inflation rate target.
Everything else held constant, the release of this report would immediately cause the demand for
U.S. assets to ________ and the U.S. dollar will ________.
A) increase; depreciate
B) decrease; depreciate
C) decrease; appreciate
D) increase; appreciate
5)
Answer: D
6) Assume that the following are the predicted inflation rates in these countries for the year: 2% for
the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing
power parity and everything else held constant, which of the following would we expect to
happen?
6)
A) The Brazilian real will depreciate against the U.S. dollar.
B) The Canadian dollar will depreciate against the Mexican peso.
C) The Mexican peso will depreciate against the Brazilian real.
D) The U.S. dollar will depreciate against the Canadian dollar.
Answer: A
7) Suppose that there is a positive development in Turkey-EU relations and the expected value of TL
against Euro in December 2008 increases. Everything else held constant, this will cause the demand
for TL denominated assets to ________ and the TL to ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; depreciate
D) decrease; appreciate
7)
Answer: C
8) Suppose that Central Bank of Turkey decreases the interest rate due to pressures from textile
exporters. Everything else held constant, this will cause the demand for TL denominated assets to
________ and the TL to ________.
A) increase; depreciate
B) decrease; appreciate
C) decrease; depreciate
D) increase; appreciate
8)
Answer: C
9) Suppose that the Turkish government reduces the tariffs on foreign cars imported into the country.
Everything else held constant, this will cause the TL to ____________.
A) appreciate
B) the answer depends on current exchange rate of TL against Euro.
C) depreciate
D) not change
Answer: C
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9)
10) Suppose that the European Central Bank conducts an open market sale and reduces the supply of
Euro. Everything else held constant, this would cause the demand for TL assets to ________ and
the TL will ________against Euro.
A) increase; appreciate
B) increase; depreciate
C) decrease; depreciate
D) decrease; appreciate
10)
Answer: C
11) Suppose that there is a negative development in Turkey-EU negotiations due to the lawsuit that
was opened against AK party. Suppose also that this development caused expected annual rate of
inflation in Turkey in year 2008 to increase from 8% to 11%. Everything else held constant, this
will cause the demand for TL denominated assets to ________ and the TL to ________.
A) decrease; appreciate
B) decrease; depreciate
C) increase; appreciate
D) increase; depreciate
11)
Answer: B
12) Suppose that a Whopper menu at Burger King is 7 Euros in Germany and 10 TL in Turkey. Then,
according to law of one price, the TL/Euro exchange rate should be equal to
A) 1.90 TL/Euro
B) 0.70 TL/Euro
C) 3 TL/Euro
Answer: C
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D) 1.43 TL/Euro
12)