Part I
1.
How does a rise in real income affect aggregate demand?
(a) Y  Yd Im CA AD , but Y  Yd  C  AD  by more
(b) Y  Yd Im CA AD , but Y  Yd  C  AD  by more
(c) Y  Yd Im CA AD , and Y  Yd  C  AD 
(d) Y  Yd Im CA AD , but Y  Yd  C  AD  by less
(e) Y  Yd Im CA AD , but Y  Yd  C  AD  by less
Answer: A
2.
A change in the money supply creates demand and cost pressures that lead to future
increases in the price level from which main sources:
i. Excess demand for output and labor
ii. Inflationary expectations
iii. Raw materials prices
(a) i
(b) ii
(c) ii and iii
(d) i and ii
(e) i, ii and iii
Answer: E
3.
4.
5.
The long run effects of money supply change:
(a) ambiguous effect on the long-run values of the interest rate or real output, A
proportional change in the money supply and price level’s long-run value in the
opposite direction
(b) proportional effect on the long-run values of the interest rate or real output, A
proportional change in the money supply and price level’s long-run value in the same
direction
(c) no effect on the long-run values of the interest rate or real output, A proportional
change in the money supply and price level’s long-run value in the same direction
(d) no effect on the long-run values of the interest rate or real output, no change in the
money supply and price level’s long-run value
(e) ambiguous effect on the long-run values of the interest rate or real output, A
disproportional change in the money supply and price level’s long-run value in the
same direction
Answer: C
After a permanent increase in the money supply,
(a) The exchange rate overshoots in the short run.
(b) The exchange rate overshoots in the long run.
(c) The exchange rate smoothly depreciates in the short run.
(d) The exchange rate smoothly appreciates in the short run.
(e) None of the above.
Answer: A
During hyperinflation, exploding inflation causes real money demand to
(a) fall over time, and this additional monetary change makes money prices rise even more
quickly than the money supply itself rises.
(b) increase over time, and this additional monetary change makes money prices rise even
more quickly than the money supply itself rises.
(c) fall over time, and this additional monetary change makes money prices decrease even
more quickly than the money supply itself rises.
(d) increase over time, and this additional monetary change makes money prices decrease
even more quickly than the money supply itself rises.
(e) fall over time, and this additional monetary change makes money prices decrease even
less quickly than the money supply itself rises.
Answer: A
6.
Which of the following statements is the most accurate? The law of one price states:
(a) In competitive markets free of transportation costs and official barrier to trade,
identical goods sold in different countries must sell for the same price when their prices
are expressed in terms of the same currency.
(b) In competitive markets free of transportation costs and official barrier to trade,
identical goods sold in the same country must sell for the same price when their prices
are expressed in terms of the same currency.
(c) In competitive markets free of transportation costs and official barrier to trade,
identical goods sold in different countries must sell for the same price.
(d) Identical goods sold in different countries must sell for the same price when their
prices are expressed in terms of the same currency.
(e) None of the above
Answer: A
7.
Which of the following statements is the most accurate?
(a) Absolute PPP does not imply relative PPP.
(b) Relative PPP implies absolute PPP.
(c) There is no causality relation between the two.
(d) Absolute PPP implies relative PPP.
(e) None of the above statements is true.
Answer: D
8.
Under the monetary approach to the exchange rate theory, money supply growth at a
constant rate
(a) Eventually results in ongoing price level deflation at the same rate, but changes in this
long-run deflation rate do not affect the full-employment output level or the long-run
relative prices of goods and services
(b) Eventually results in ongoing price level inflation at the same rate, but changes in this
long-run inflation rate do affect the full-employment output level and the long-run
relative prices of goods and services
(c) Eventually results in ongoing price level inflation at the same rate, but changes in this
long-run inflation rate do not affect the full-employment output level or the long-run
relative prices of goods and services
(d) Eventually results in ongoing price level inflation at the same rate, but changes in this
long-run inflation rate do not affect the full-employment output level, only the long-run
relative prices of goods and services
(e) None of the above statement is true.
Answer: C
9.
Which of the following statements is the most accurate? In general, under the monetary
approach to the exchange rate,
(a) The interest rate is not independent of the money supply growth rate in the short run.
(b) The interest rate is independent of the money supply growth rate in the long run.
(c) The interest rate is not independent of the money supply growth rate in the long run,
but independent in the short run.
(d) The interest rate is not independent of the money supply growth rate in the long run.
(e) None of the above statement is true.
Answer: D
10.
Under sticky prices,
(a) An interest rate rise is associated with lower expected deflation and a long-run
currency appreciation, so the currency appreciates immediately.
(b) An interest rate rise is associated with higher expected inflation and a long-run
currency appreciation, so the currency appreciates immediately.
(c) An interest rate rise is associated with lower expected inflation and a long-run currency
depreciation, so the currency appreciates immediately.
(d) An interest rate rise is associated with lower expected inflation and a long-run currency
depreciation, so the currency depreciates immediately.
(e) An interest rate rise is associated with lower expected inflation and a long-run currency
appreciation, so the currency appreciates immediately.
Answer: E
Part II
1.
Analyze the effects of an increase in the European money supply on the dollar/euro
exchange rate.
2.
Explain the effects of a permanent increase in the U.S. money supply in the short run and in
the long run. Assume that the U.S. real national income is constant.
3.
Explain the exchange rate over-shooting hypothesis.
4.
Define the concept of the real exchange rate and explain how it differs from the nominal
exchange rate.
Explain why price levels are lower in poorer countries.
5.