1. In a world with two products, wheat (W) and coffee (C), nation Alpha produces
ID: 1207195 • Letter: 1
Question
1. In a world with two products, wheat (W) and coffee (C), nation Alpha produces wheat and nation Beta produces coffee. Nation Alpha prefers an exchange rate of 1W = 2C and nation Beta prefers an exchange rate of 1W = 1C. The exchange rate preferred by nation:
Beta will prevail if world demand for coffee is great relative to its supply
Alpha will prevail if world demand for coffee is great relative to its supply
Beta will prevail if world demand for wheat is great relative to its supply
Alpha will prevail if world demand for wheat is weak relative to its supply
2. A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond increases by $2500, the interest rate in effect will:
Increase by 2 percentage points
Increase by 1 percentage point
Decrease by 1 percentage point
Decrease by 2 percentage points
3. After the Great Recession when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy because of the following reasons, except:
The time lags of monetary policy
Interest rates had already been cut to very low levels
Monetary policy's cyclical asymmetry
The banking system fell into a liquidity trap
4. Consider the currency market for British pounds and U.S. dollars. An increase in the demand for British pounds results in:
A depreciation of the pound and an appreciation of the dollar
A depreciation of the pound and a depreciation of the dollar
An appreciation of the pound and a depreciation of the dollar
An appreciation of the pound and an appreciation of the dollar
Buy and add more to its dollar reserves
Sell pounds in exchange for U.S. dollars
Sell some of its dollar reserves
Encourage the British to import more U.S. products
6. What percent of the money that a typical modern bank invests comes from borrowing?
About 33%
About 50%
About 75%
About 95%
7. A nation with abundant capital resources tends to be an exporter of:
Labor-intensive products
Natural resource-based products
Consumer products
Capital-intensive products
8. Assume that the required reserve ratio is 20 percent. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the reserves at Bank A and Bank B?
Increase by $10,000 at Bank A, and decrease by $10,000 at Bank B
Reserves stay the same in both banks
Increase by $50,000 at Bank A, and decrease by $50,000 at Bank B
Increase by $10,000 at Bank A, and decrease by $50,000 at Bank B
9. The transactions demand for money will shift to the:
Left when nominal GDP increases
Right when the interest rate increases
Right when nominal GDP decreases
Left when nominal GDP decreases
$600
$800
$1,200
$400
Explanation / Answer
(1) Beta will prevail if world demand for coffee is great relative to its supply
If demand for coffee exceeds supply of coffee, relative price of coffee will be higher.
(2) Decrease by 2%
For a perpetual bond,
Bond price = Annual fixed payment / Interest rate
Interest rate = Fixed payment / Bond price
Initially, interest rate = $1000 / $10000 = 0.1 = 10%
When price increases by $2500 to $12,500, interest rate = $1000 / $12500 = 0.08 = 8%
So interest rate decreases by (10 - 8)% = 2%
(3) Monetary policy's cyclical asymmetry was not a reason.
(4) An appreciation of the pound and a depreciation of the dollar
Higher demand for pounds increases the price of pound (Pound appreciates) and so, dollar depreciates
(5) Sell some of its dollar reserves
As more dollars are sold, the pound price of dollar falls and exchange rate falls to previous level.
NOTE: First 5 questions are answered.
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