EconS 327 Review For Test 2 Test 2 Is On Friday, April 24
EconS 327Review for Test 2Test 2 is on Friday, April 24Test 2 has 30 multiple choice questions.Test 2 will cover the material assignedduring weeks 1-14. This includeso Material covered on Test 1o Material from weeks 8-14o Outside readings for each weeko Study guides linked for mostweeks.Suggested Study Plano Review Test 1 and quizzes 1through 6o Review study guides listedunder most weeks.o Review the concepts listedbelow to make sure you haven’tmissed something.o Be sure to know the mainpoints of each weekly outsidereading.Here is a list of concepts that students need to understand from weeks 8-14Balance of payments (BOP)Credit on BOPExchange Rates in the Short RunDebit on BOPExchange Rates in the Long RunDouble Entry Accounting (BOP)Exchange Rate OvershootingCurrent AccountImpossible TrinityIncome AccountFixed Exchange RatesFinancial (and Capital) AccountExchange Rate Stabilization FundOfficial ReservesBretton WoodsNominal Exchange RateAdjustable PegsReal Exchange RateFloating Exchange RateLaw of One PriceManaged Exchange RateBig Mac IndexCapital ControlsPurchasing Power ParityCurrency BoardAsset Market ApproachDollarization and SiegniorageChina Trade History - Opium WarTrade in Marxist/Leninist thoughtTrade under planning (1949-78)The Great Leap ForwardMarket and Trade Reforms1980s Tariffs, SEZ’sCurrency DevaluationDouble Air LockChina’s Balance of PaymentsChina’s Exchange Rate Policy and official reservesPPP and the RMBIs China “export led”?
EconS 327Review for Test 2Please fill out the course evaluations for EconS327/IBUS470. Here are the instructions:Thanks, Dr. HLog on to my.wsu.edu with your WSU Network ID and password.The links to surveys are listed under official Notices in myWSU, one per course section. Open yournotice and click on the link to take you to your evaluation.Your responses are completely confidential. A file separate from the course evaluation will save yourname so your faculty can see your name if they have chosen to give extra credit for completing theevaluation. The file with your name is not linked in any way to your confidential survey responses.Please complete evaluations for each of your courses, your responses are very important to your faculty.They give valuable feedback on what is working for you in the course or what needs improvement.If you have any trouble or questions, please enter a support request at this web site:http://support.ctlt.wsu.eduHere are a few sample multiple choice questions for practice.1. In a country’s balance of payments, which of the following transactions are debits (minuses)?a. Domestic bank balances owned by foreigners are decreasedb. Foreign bank balances owned by domestic residents are decreasedc. Assets owned by domestic residents are sold to nonresidentsd. Securities are sold by domestic residents to nonresidents2. The net value of flows of goods, services, income, and unilateral transfers is called the:a. Capital account.b. Current account.c. Trade balance.d. Official reserve balance3. A country experiencing a current account surplus:a. Needs to borrow internationally.b. Is able to lend internationally.c. Must also have had a surplus in its capital account.d. Spent more than it earned on its merchandise and service trade, international incomepayments and receipts and international transfers.4. In recent years the US hasa. Had a current account surplusb. Had a financial (capital) account surplusc. Been a net lender to the worldd. Experienced a dramatic decrease in its official foreign reserves
EconS 327Review for Test 25. Suppose the exchange rate between the Japanese yen and the U.S. dollar is initially 100 yen perdollar and then falls to 80 yen per dollar. As a result the “Yen price” of a product that the USexports for 5 willa. Increase from 500 Yen to 540 Yenb. Decrease from 500 Yen to 400 yenc. Increase from 400 Yen to 500 Yend. Decrease from 540 Yen to 500 Yen6. A decrease in German residents' willingness to invest in dollar-denominated assets will shift thedemand curve for:a. Euros to the rightb. Euros to the leftc. Dollars to the rightd. Dollars to the leftFigure 17.1: The Market for British Pounds / S 2.502.001.50D 55.56 ’s (millions)7. Referring to figure 17.1, if the British government wants to peg the exchange rate of the pound at 2.50 per pound, what action would British monetary authorities have to undertake?a. Sell 1 million pounds and buy 2.5 million dollars.b. Buy 1 million pounds and sell 1 million dollars.c. Buy 1 million pounds and sell 2.5 million dollars.d. Buy 5.5 million pounds and sell 11 million dollars.8. Referring to figure 17.1, if the British pound is pegged at 2.50 per pound the pound will be:a. Overvaluedb. Undervaluedc. Devaluedd. In equilibrium
EconS 327Review for Test 29. In the short run, a drop in short run European interests rates will lead to:a. An inflow of capital to Europe.b. An increase in the demand for euro-denominated financial assets.c. A decrease in the demand for euro-denominated financial assets.10. states that a bundle of tradable products will have the same cost indifferent countries if the cost is stated in the same currency.a. Covered interest rate equilibriumb. Trade equilibriumc. The law of comparative advantaged. Purchasing power parity11. Suppose the average price of a Big Mac in the United States is 4.00 while in Japan the averageprice is 500 yen. If the price of a dollar is 100 yen per dollar, the purchasing power parity modelof exchange rate determination suggests:a. The yen is overvalued.b. The yen is undervalued.c. The price of a Big Mac in Japan will rise.d. The price of a Big Mac in the US will decrease12. Suppose that US prices rise 4% over the next year while prices in Mexico rise 6%. According to thepurchasing power parity theory of exchange rates, what should happen to the exchange ratebetween the dollar and the peso?a. The dollar should depreciate.b. The peso should appreciate.c. The peso should depreciate.d. The dollar will be revalued.13. Exchange rates are determined in the long-run by:a. Interest rate differentials.b. Purchasing power parity.c. Financial asset pricing.14. Pressures in the foreign exchange rate market are such as to cause the British pound todepreciate with respect to the U.S. dollar. If Britain is trying to maintain a fixed exchange ratewith respect to the U.S. dollar, which of the following interventions will stem the pressures fordepreciation of the pound?a. Britain should sell pounds and buy dollars.b. Britain should do nothing as a fixed rate will not change.c. Britain should buy pounds and sell dollars.d. Britain should increase their money supply to create domestic inflation.
EconS 327Review for Test 2Figure 20.1: The Foreign Exchange Market / S (spring - summer) 2.20S (autumn - winter) 1.90 1.60D 3040506070 (billions)15. Referring to figure 20.1, assuming that the British government is committed to maintaining afixed exchange rate at 1.90 per pound. In the spring-summer period, what type of interventionmust British monetary authorities engage in?a. Sell 20 billion pounds at 1.60.b. Sell 20 billion pounds at 1.90.c. Sell 10 billion pounds at 2.20.d. Buy 20 billion pounds at 1.90.16. Suppose country A has abundant labor and scarce capital. Product L requires labor intensiveproduction. Product K requires capital intensive production. A result of free trade, in the longruna. Wages will decrease in country Ab. The price of capital will decrease in country Ac. The price of Product L will decrease in country Ad. The price of Product K will increase in country A17. There are only two countries. Country A imports zimboes from Country B. Country A alsoproduces some of its own zimboes. If country B imposes a trade embargo on country A then as aresult,a. The price of zimboes in country A will decreaseb. Producers surplus (for zimbo producers) in country A will decreasec. Consumer surplus (for zimbo consumers) in country A will increased. The producer surplus (for zimbo producers) in country B will decrease18. If a large country imposes a tariff on imports of good A, the world price of good A willand the domestic price of good A will .a. Rise, riseb. Fall, risec. Stay constant, rise
EconS 327Review for Test 2d. Stay constant, fall19. In country A is a small country that produces, consumes and exports some its production of thegrain, millet. Increases in world grain and petroleum prices cause two things to happen thataffect country A. (1) The world price of millet increases along with other grain prices, and (2)petroleum price increases cause the world price of nitrogen fertilizer to double. Country Aimports fertilizer to be used in its production of millet. The trade model for a small countrypredicts unambiguously (for sure)a. Country A’s production of millet will decreaseb. Country A’s production of millet will increasec. Country A’s exports of millet will increased. Country A’s consumption of millet decrease20. China’s Great Leap Forward was an example ofa. The gains from intraindustry tradeb. Potential losses when trade by comparative advantage are not allowedc. The use of subsidies to promote exportsd. The advantages of specialization according to comparative advantage21. During the planning stage of the Chinese economy (roughly 1949-1978) China’s approach tointernational trade wasa. Consistent with Mercantilist theoryb. To export primary products like oil so they could import capital goodsc. To peg the Chinese currency to the Japanese Yend. To export products that were labor intensive in production22. Using the most recent trade statistics (2007), apparel was the 4th largest category of Chineseexports to the US. The largest category of Chinese exports to the US wasa. Footwearb. Toys and dollsc. Computer equipmentd. Auto parts23. In 2005, the Chinese switched from a fixed exchange rate to a “managed crawling peg”. Duringsubsequent period (July, 2005 – April, 2008), the exchange rate (RMB/US )a. Remained about the same at 8.27RMB/US b. Appreciated from 8.27RMB/US to about 7RMB/US c. Depreciated from about 8.27RMB/US to about 10RMB/US d. Depreciated from about 8.27RMB/US to about 8.5RMB/US 24. Currently the exchange rate for the Chinese currency (RMB/US )a. Is set so that the RMB is undervalued (against the US )b. Leads to an excess demand of US c. Is partly responsible for the flow of financial capital into Chinad. Is pegged to the Euro25. According to Naughton, Chinese market reforms started around 1978. In the early part of thesereforms (late 70s and early 80s)a. Oil was China’s largest import categoryb. Oil was China’s largest export categoryc. Rice was China’s largest export categoryd. Rice was China’s largest import category
EconS 327Review for Test 226. According to Naughton, during the opening of trade in the 1980s China used a “double air lock”to insulate their domestic markets from surges of imports. These “double air locks” includeda. Regulations that required all trade to first be unloaded in Hong Kongb. Regulations requiring that all imports must be labeled using Chinese charactersc. Regulations that required all trade to pass through government operated foreign tradecompaniesd. Regulations that required foreign importers to post a performance bond that would beforfeited in the event that the importer also did business in Taiwan27. During the early part of the Chinese economic reforms (late 1980s to early 90s)a. The RMB appreciatedb. Chinese exports shifted away from oil and extractive industries to labor intensive lightindustriesc. China joined the WTOd. Chinese exports and imports (as a % of GDP) fell below the levels of the 1970s28. The central feature of the Bretton Woods system was:a. Floating exchange rates.b. Fully fixed exchange rates.c. Capital controls.d. Adjustable pegs.29. During the period 2006 - 2008 the Chinese trade surplus with the US averaged around 250billion. During that period China’s official foreign reserves increased dramatically. Theconnection between these data isa. The Bank of China issued Chinese currency to purchase foreign exchangeb. The Bank of China devalued the RMB in 2006-2008c. The Bank of China reduced their holdings of US Treasury billsd. The exchange rate of the RMB was pegged to the Euro over this period
EconS 327Review for Test 230. The table below shows balances for the US balance of payments in the years 2000 and 2006.From these data we see that, in the year 2006 “US Imports of goods and services” was - 2.204trillion. In the context of the US Balance of Payments this meansa. US imports were 2.204 trillion in 2006b. The US decreased its imports by 2.204 trillion in 2006c. The US increased its imports by 2.204 trillion in 2006d. The US trade deficit was 2.204 in 200631. The table below shows balances for the US balance of payments in the years 2000 and 2006.From these data we see that, in the year 2006 “Foreign-owned assets in the United States” was 1.859 trillion. In the context of the US Balance of payments this meansa. Foreigners increased their asset holdings in the US by 1.859 in 2006b. Foreigners decreased their asset holdings in the US by 1.859 in 2006c. Foreign owned assets in the US totaled 1.859 in 2006d. The US trade deficit was 1.859 in 2006US Balance of Payments (Credits ; debits -)20002006Exports of goods and services and income receipts1421515 2096165Exports of goods and services1070597 1445703Income receipts350918650462Imports of goods and services and income payments-1780296 -2818047Imports of goods and services-1450432 -2204225Income payments-329864-613823Unilateral current transfers, net-58645-89595U.S.-owned assets abroad (increase/financial outflow (-))-560523 -1055176Foreign-owned assets in the United States1046896 1859597Financial derivatives, netn.a.28762Statistical discrepancy-67937-17794Memoranda:Balance on goods and services-379835-758522Balance on income2105436640Unilateral current transfers, net-58645-89595Balance on current account-417426-81147732. According to the Financial Times rating of MBA programs, one difficulty in comparing startingsalaries for different MBA programs is thata. Many MBAs are unemployedb. Many MBAs earn unreported perksc. Converting salaries using exchange rates doesn’t account for price differences in differentcountries.d. Different countries have different tax rates.
EconS 327Review for Test 233. Suppose, these are the market pricesToday’s price of the : 2.00 per pound90 day interest rate in US 4%90 day interest rate in UK 4%The US Federal Reserve then announced (unexpectedly) that it would raise US interest rates to6%. As a result the for the would decrease and the price of thepound would 2.00 per pound.a. Demand; Dollar; fall belowb. Demand; Pound; fall belowc. Demand; Dollar; rise aboved. Supply; Pound, rise above34. In Country A, the government has a government budget deficit (tax revenues governmentexpenditures). Country A has a surplus on its current account. {Note: Country A’s situation issimilar to Japan during the last decade.} Country A will have a in its capital account.a. Deficitb. Depreciationc. Lagd. Balance35. An increase in U.S. capital inflows will be associated witha. An increase in the US current account surplusb. An increase in US interest ratesc. A smaller US trade deficitd. Higher foreign interest rates
EconS 327Review for Test 236. Which of the following terms describes an exchange rate regime in which the governmentintervenes in the foreign exchange market in order to influence the market determined exchangerate?a. Fully convertibleb. Currency controlc. Managed floatd. Clean float37. Hong Kong has a currency board. Under this exchange rate regimea. The Hong Kong floatsb. The Hong Kong follows an adjustable peg to market basket of currenciesc. The Hong Kong is managed so that Hong Kong’s current account must balanced. The Hong Kong is fixed against the US 38. Ecuador has “dollarized”. This means that Ecuadora. Has no ability to set domestic monetary policy and interest ratesb. Every Ecuadorian dollar is backed by 7.75 US dollarsc. Ecuador gains from seignioraged. Gets a “free, interest rate loan” from the US39. According to the “Impossible Trinity”, it is impossible to do 3 Things at the same time. These 3Things area. Free capital flows, free immigration flows, and free trade flowsb. Government budget deficit, current account deficit, and negative personal savingsc. Free capital flows, independent monetary policy, and fixed exchange ratesd. Democracy, economic growth, and low corruption40. Exchange rate stabilization requires that a country’s central banka. Use an expansionary monetary policy to offset a depreciation of its currencyb. Raise interest rates to offset a depreciation of its currencyc. Raise taxes to offset a depreciation of its currencyd. Raise import tariffs to offset a depreciation of its currencyAnswers on the next page
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EconS 327 Review for Test 2 9. In the short run, a drop in short run European interests rates will lead to: a. An inflow of capital to Europe. b. An increase in the demand for euro-denominated financial assets. c. A decr
EconS 327 Review for Test 1 4 13. The difference between a trade model based on the “small nation assumption” (SNA) and a trade model based on the “large nation assumption” (LNA) is a) SNA assumes that a tariff will not aff
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