1. Suppose the government issues bonds to finance an increase in government spen

Question

1. Suppose the government issues bonds to finance an increase in government spending. In the bond market,

a. the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates.

b. the supply curve shifts left, leading to an increase in bond prices, and an increase in interest rates

c. the demand curve shifts right, leading to an increase in bond prices, and a decrease in interest rates

d. the demand curve shifts left, leading to a decrease in bond prices, and an increase in interest rates

2. Which of the following is an index of exchange rates?

a. foreign price-domestic price ratio

b. import-export ratio

c. trade balance index

d. trade-weighted exchange rate

3. A higher U.S. exchange rate means that

a. foreign products are now more expensive to U.S. citizens.

b. U.S. products are now cheaper to foreign countries.

c. foreign products are now cheaper to U.S. citizens.

d. U.S. products are now more expensive to U.S. citizens.

4. If the supply of bonds in the United States decreases, bond prices will rise. When bond prices rise interest rates will

a. rise, which will make U.S. financial assets more attractive to foreigners

b. rise, which will make U.S. financial assets less attractive to foreigners.

c. fall, which will make U.S. financial assets less attractive to foreigners.

d. fall, which will make U.S. financial assets more attractive to foreigners.

5. Holding everything else unchanged, higher interest rates in foreign countries relative to U.S. interest rates

a. decrease the demand and the supply of dollars leading to an decrease in the exchange rate.

b. increase the demand and reduce the supply of dollars leading to an increase in the exchange rate.

c. decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.

d. increase the demand and the supply of dollars leading to an increase in the exchange rate.

Explanation / Answer

1) Suppose the government issues bonds to finance an increase in government spending. In the bond market

Solution: the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates.
Explanation: There will an increase in the supply because of the government spending resulting to a fall in the bond price and a rise in interest rate

2) Which of the following is an index of exchange rates?

Solution: trade-weighted exchange rate

Explanation: The trade-weighted is an effective exchange rate index

3) Higher U.S. exchange rate means that

Solution: foreign products are now cheaper to U.S. citizens

Explanation: An appreciation of dollar means that the foreign products are now cheaper to U.S. citizens

4) If the supply of bonds in the United States decreases, bond prices will rise. When bond prices rise interest rates will

Solution: rise, which will make U.S. financial assets more attractive to foreigners

Explanation: When bond prices declines, interest rates increases and when bond prices increases, interest rates declines. Higher interest rates make U.S. financial assets more attractive to foreigners

5) Holding everything else unchanged, higher interest rates in foreign countries relative to U.S. interest rates

Solution: increase the demand and reduce the supply of dollars leading to an increase in the exchange rate.
Explanation: Higher interest rates in foreign countries relative to U.S. interest rates will raise the demand because of the cost, and consequently there will be decline in its supply leading to an increase in the exchange rate.

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