Questions:
Question 1
The average household income in the US is $60,000. The marginal propensity to consume = MPC = .90. If household income increases by 10% to $66,000 then the increase in consumer spending = C, per household will be:
A. $5,400.
B. $5,940
C. $6,000
D. $600
Question 2
The economy's Investment Function, I(i), indicates that when the expected real rate of interest increases agents in the economy respond by:
A. undertaking new and additional investment projects
B. cancelling or postponing investment projects
C. maintaining investment at the previous pace
Question 3
The price of a PC tablet made in Europe is 500 Euros. Let the exchange rate rise from $1.30/Euro to $1.40 /Euro. This increase in the exchange rate represents a depreciation in its value since more US dollars are needed to purchase each Euro. What happens to the import price of this tablet and the number of tablets imported into the US?
A. The US price rises from $650 to $700 and imports into the US increase
B. The US price declines from $700 to $650 and imports into the US increase
C. The US price rises from $650 to $700 and imports into the US decline
D. The price remains at $650 and imports remain constant
Question 4
The effective real exchange rate between the US dollar and foreign currencies increases in level and depreciates in value. What impact will that have on spending patterns by consuming households in the US and abroad?
A. Expenditure Switching from foreign to US products in the US (less US imports) and from foreign to US made goods abroad (more US exports)
B. Expenditure Switching from US to foreign made products in the US (more US imports) and from US to foreign made goods abroad (less US exports)
Question 5
If a basket of goods costs PUS = $100 in the United States and PMex = 400 pesos in Mexico, and if the exchange rate is $1 = 5 pesos: E$/peso = $.20, then what is the real exchange rate and how do the prices for Mexican goods compare to those for US goods?
A. The Real Exchange Rate is 1.25 and US goods are less expensive than Mexican goods
B. The Real Exchange Rate is 0.80 and US goods are less expensive than Mexican goods
C. The Real Exchange Rate is 1.25 and Mexican goods are less expensive than US goods
D. The Real Exchange Rate is 0.80 and Mexican goods are less expensive than US goods
Question 6
Which of the following would lead to an appreciation in the real exchange rate for the US dollar = qUS ? This means that the level q is lower so that foreign-made products are more costly compared to US made products.
A. an increase in E - the nominal exchange rate
B. an increase in P(For) - the level of foreign prices
C. an increase in P(US) - the US price level
Question 7
Operating through the Real Exchange Rate, qUS, what will be the likely impact on the US trade balance, TB = X - M, from the following developments:
(1) an increase in the dollar price of the Euro
(2) a reduction in the US price level
A. exports will increase; imports will decline and the trade balance will improve
B. exports will decline; imports will increase and the trade balance will worsen
C. both exports and imports will increase and the trade balance will remain the same
Question 8
If domestic prices in the US = PUS, and foreign prices among the trading partners of the US, PFor, rise by the same relative amount of 10%, what will happen to the trade balance, TB = X-M? View these effects as operating through the real exchange rate, qUS.
A. It will rise.
B. it should remain constant
C. It will fall.
Question 9
Consider the impact on the trade balance, TB = Exports - Imports, from changes
in national income in the US, YUS, and the foreign countries that are its main trading partners, YEURfor example. If national income in the US rose strongly while national income levels in Japan, China, and Europe stagnated or declined, what would happen to the components of US trade and the net balance?
A. Exports would rise ; Imports would fall ; Trade Balance would improve
B. Exports would rise ; Imports would fall ; Trade Balance would worsen
C. Exports would fall ; Imports would rise ; Trade Balance would improve
D. Exports would fall ; Imports would rise ; Trade Balance would worsen
Question 10
Globalization including cost efficient global supply chains along with the advent of China and it membership into the World Trade Organization (WTO) in 2001 greatly increased the marginal propensity for foreign imports (MPCF) for the US. What has this meant for the US trade balance, TB = X - M ?
A. It has worsened - become more negative
B. It has improved - become less negative
C. It has neither improved nor worsened
Question 11
Let the overall marginal propensity to consume among US households be: MPC = 90% = .90. Let the marginal propensity to consume US made domestic goods be MPCUS = 70% = .70. If disposable personal income for all US households stands at exactly $10.0 trillion, then what is the value of imported foreign goods? (Hint: derive first the marginal propensity to import foreign goods.)
A. $1 trillion
B. $2 trillion
C. $7 trillion
D. $9 trillion
Question 12
Consider the US trade balance from 1976 to 2012 and then separate this into two intervals: 1976 to 2002 and 2002 to 2012. The advent of trade with China and tremendous increases in the price of imported oil have defined this last decade. What has been true about the relationship between the US trade balance and the real effective(multi-lateral)US exchange rate?
A. a consistently strong correlation between the two has persisted
B. the correlation was much weaker in the earlier period but has strengthened in the past decade
C. the strong correlation from the earlier interval has led to a much weakened relationship in the past decade
Question 13
Suppose that the United States does 1/2 (50%)of its trade with Canada, 1/4 (25%) with the United Kingdom, and 1/4 (25%) with Mexico. If the dollar real exchange rate rises by 10% with Canada, rises by 20% for the United Kingdom, and falls by 10% for Mexico, what is the percentage change in the real effective exchange rate?
A. 11.5%
B. 10%
C. 7.5%
D. -2.5%
Question 14
Consider a depreciation in the real effective exchange rate for the US. Under the so-called "J Curve" effect what often happens to the US trade balance when a real depreciation does take place?
A. the trade balance actually worsens first and then improves later on
B. the trade balance actually improves initially and then worsens later on
C. the trade balance won't change at all in any time interval
Question 15
Because of the fiscal cliff crises in Washington, D.C., government spending = G is clearly being reduced while taxes = T are clearly rising. What impact will this have on the aggregate demand, AD, in the US economy and the equilibrium level of national production and national income= YUS?
A. aggregate demand, AD, will increase and equilibrium production, Y, will increase
B. aggregate demand, AD, will increase and equilibrium production, Y, will decrease
C. aggregate demand, AD, will decrease and equilibrium production, Y, will increase
D. aggregate demand, AD, will decrease and equilibrium production, Y, will decrease
Question 16
Utilizing the IS-LM-FX model framework, let us analyze the implications of current US economic policies. The federal government and state governments are reducing spending (G) and raising taxes(T) - this is contractionary fiscal policy. At the same time, the FED has renewed its pledge to further expand the supply of money(M) to sustain economic growth(Y). Starting with the IS function only, what will happen to interest rates from this fiscal contraction alone?
A. interest rates rise
B. interest rates decline
C. interest rates do not change
Question 17
Utilizing the IS-LM-FX model framework, let us analyze the implications of current US economic policies. The federal government and state governments are reducing spending (G) and raising taxes(T) - this is contractionary fiscal policy. At the same time, the FED has renewed its pledge to further expand the supply of money(M) to sustain economic growth(Y). Starting with the IS function only, and given the response on interest rates to the previous question, what will happen to the exchange rate and the trade balance from this fiscal contraction alone? ( "currency" = US dollar exchange rate)
(Remember that a rise in the nominal exchange rate is a depreciation and a fall in the level of the nominal exchange rate is an appreciation in its value.)
A. the exchange rate/currency depreciates and the trade balance worsens
B. the exchange rate/currency appreciates and the trade balance worsens
C. the exchange rate/currency depreciates and the trade balance improves
D. the exchange rate/currency appreciates and the trade balance improves
Question 18
Utilizing the IS-LM-FX model framework, let us analyze the implications of current US economic policies. The federal government and state governments are reducing spending (G) and raising taxes(T) - this is contractionary fiscal policy. At the same time, the FED has renewed its pledge to further expand the supply of money(M) to sustain economic growth(Y). Now focus on the LM function only. What impact will the Fed's actions have on interest rates?
A. interest rates will increase due to the Fed's actions
B. interest rates will decrease due to the Fed's actions
C. the Fed's actions will not change interest rates
Question 19
Utilizing the IS-LM-FX model framework, let us analyze the implications of current US economic policies. The federal government and state governments are reducing spending (G) and raising taxes(T) - this is contractionary fiscal policy. At the same time, the FED has renewed its pledge to further expand the supply of money(M) to sustain economic growth(Y). Focusing on the LM function only, and given the response on interest rates to the previous question, what will happen to the exchange rate and the trade balance from this monetary expansion alone? ( "currency" = US dollar exchange rate)
(Remember that a rise in the nominal exchange rate is a depreciation and a fall in the level of the nominal exchange rate is an appreciation in its value.)
A. the currency/exchange rate will depreciate and the trade balance will improve
B. the currency/exchange rate will depreciate and the trade balance will worsen
C. the currency/exchange rate will appreciate and the trade balance will improve
D. the currency/exchange rate will appreciate and the trade balance will worsen
Question 20
Utilizing the IS-LM-FX model framework, let us analyze the implications of current US economic policies. The federal government and state governments are reducing spending (G) and raising taxes(T) - this is contractionary fiscal policy. At the same time, the FED has renewed its pledge to further expand the supply of money(M) to sustain economic growth(Y). Now combine the effects of the two policy actions. Do they reinforce each other or do they counter-act one another as far as interest rates and the trade balance are concerned?
A. reinforce each other
B. they counter-act one another
Question 21
Utilizing the IS-LM-FX model framework, let us analyze the implications of current US economic policies. The federal government and state governments are reducing spending (G) and raising taxes(T) - this is contractionary fiscal policy. At the same time, the FED has renewed its pledge to further expand the supply of money(M) to sustain economic growth(Y). Now combine the effects of the two policy actions. What if the Fed's actions can only exactly counter-balance the fiscal conduct of the President/Congress. What happens to the equilibrium level of national production/income, Y?
A. it will rise to a higher level
B. it will decline to a lower level
C. it will remain fairly constant
Question 22
Continue to assume that the contractionary effects of recent US fiscal policy, with G and T reducing aggregate demand in the US economy, are exactly counter-balanced by the expansionary effects of the Fed's monetary policies for M. Given the predicted impacts on interest rates and the exchange rate and the predicted impact on national production, Y, from the previous question, what will likely happen to investment and exports?
A. investment decreases ; exports decrease
B. investment decreases ; exports increase
C. investment increases ; exports decrease
D. investment increases ; exports increase
Question 23
Consider the following "shocks" to aggregate demand, AD, in the US:
(1) continued increase in stock prices in the stock market that greatly increase household wealth and the confidence of company owners and managers.
(2) major changes in lending confidence with a renewed willingness of banks to extend credit for real estate purchases and business loans
Focusing on the IS curve within the IS-LM-FX model, what will happen to investment(I), interest rates(i) and national production(Y) as a result of these wealth and confidence effects?
A. interest rates will decrease while investment and national production increase
B. investment, interest rates and national production all decrease
C. investment, interest rates and national production all increase
Question 24
Continue from the previous question. Highly beneficial wealth and investor confidence developments have shifted the entire consumption and investment functions, C(Y) and I(i). This can be modeled as a shift of the IS curve. Given the predicted impact on interest rates in the US economy what will likely happen to the exchange rate and the trade balance, TB = EX - IM?
(Remember that a rise in the nominal exchange rate is a depreciation and a fall in the level of the nominal exchange rate is an appreciation in its value.)
A. the currency/exchange rate will depreciate and the trade balance will worsen
B. the currency/exchange rate will appreciate and the trade balance will worsen
C. the currency/exchange rate will appreciate and the trade balance will improve
D. the currency/exchange rate will depreciate and the trade balance will improve
Question 25
National governments in both Europe and Asia are considering policies that would reduce interest rates inside their economies. This would represent a reduction in the foreign interest rate, ifor, for the US economy. Consider an analysis of this within the IS-LM-FX framework. First, what will happen to theforeign return, FR, in the FX setting and the US dollar exchange rate?(Remember that a rise in the US dollar exchange rate is a deprecia-tion in its value and a fall in the nominal exchange rate is an appreciation in its value.)
A. the foreign return will decline and the US dollar will appreciate in value
B. the foreign return will decline and the US dollar will depreciate in value
C. the foreign return will increase and the US dollar will appreciate in value
D. the foreign return will increase and the US dollar will depreciate in value
Question 26
Continue from the previous question. The foreign interest rate has declined
and there has been some movement in the exchange rate. Given this movement in the exchange rate, what will happen to US exports and imports and the trade balance. Remember that a depreciation will improve the trade balance and an appreciation will worsen the trade balance. Then what will happen to aggregate demand, AD, in the US economy and thus the IS curve?
A. the trade balance will worsen, increasing aggregate demand and shift the IS curve to the right
B. the trade balance will improve, reducing aggregate demand and shift the IS curve to the left
C. the trade balance will improve, increasing aggregate demand and shift the IS curve to the right
D. the trade balance will worsen, reducing aggregate demand and shift the IS curve to the left
Question 27
Preceding from the previous questions, with a reduction in the foreign interest rate their will be a change in the trade balance and a shift in the IS curve. What does this analysis imply for the equilibrium level of national production, Y?
A. National Production will increase
B. National Production will remain constant
C. National Production will decline
Question 28
The habit formation of consumers and the supply contract lock-in effects for companies can reduce expenditure switching in response to movements in exchange rates. What effect does this generally have on the effectiveness of fiscal and monetary policies of national governments?
A. it enhances the effectiveness of these policies
B. it diminishes the effectiveness of these policies
C. it matters little for policy effectiveness
Question 29
Consider the following values for the US economy:
C = Consumer Spending = $8,850 billion
G = Government Spending = $3,250 billion
I = Investment Spending = $2,150 billion
X = Exports = $1,600 billion
M = Imports = $2,350 billion
EXFS = Exports of Factor Services = $750 billion
IMFS = Imports of Factor Services = $500 billion
UTIN = Transfer Payments Incoming = $50 billion
UTOUT = Transfer Payments Outgoing = $200 billion
What is the Current Account Balance = CA?
a. -$650 billion
b. -$700 billion
c. -$800 billion
d. -$850 billlion
Question 30
Consider the following values for the US economy:
C = Consumer Spending = $8,850 billion
G = Government Spending = $3,250 billion
I = Investment Spending = $2,150 billion
X = Exports = $1,600 billion
M = Imports = $2,350 billion
EXFS = Exports of Factor Services = $750 billion
IMFS = Imports of Factor Services = $500 billion
UTIN = Transfer Payments Incoming = $50 billion
UTOUT = Transfer Payments Outgoing = $200 billion
What is the value for Gross Domestic Production = GDP ?
a. $12,500 billion
b. $13,000 billion
c. $13,500 billion
d. $14,000 billion
Question 31
Consider the following values for the US economy:
C = Consumer Spending = $8,850 billion
G = Government Spending = $3,250 billion
I = Investment Spending = $2,150 billion
X = Exports = $1,600 billion
M = Imports = $2,350 billion
EXFS = Exports of Factor Services = $750 billion
IMFS = Imports of Factor Services = $500 billion
UTIN = Transfer Payments Incoming = $50 billion
UTOUT = Transfer Payments Outgoing = $200 billion
What is the value for Gross National Income = GNI ?
a. $13,500 billion
b. $13,750 billion
c. $14,000 billion
d. $14,250 billion
Question 32
Consider the following values for the US economy:
C = Consumer Spending = $8,850 billion
G = Government Spending = $3,250 billion
I = Investment Spending = $2,150 billion
X = Exports = $1,600 billion
M = Imports = $2,350 billion
EXFS = Exports of Factor Services = $750 billion
IMFS = Imports of Factor Services = $500 billion
UTIN = Transfer Payments Incoming = $50 billion
UTOUT = Transfer Payments Outgoing = $200 billion
What is the value for Gross National Disposable Income = GNDI ?
a. $12,600 billion
b. $13,000 billion
c. $13,300 billion
d. $13,600 billion
Question 33
Consider the following values for the US economy:
G = Government spending = $3,250 billion
T = Taxes = $2,750 billlion
I = Investment Spending = $2,150 billion
S = Savings = $1,820 billion
If the National Income Identity holds for the economy what is the implied value for theCurrent Account = CA ?
a. -$500 billion
b. -$720 billion
c. -$830 billion
d. -$880 billion
Question 34
(EXA)H = Export of US Assets = $810 billion
(IMA)H = Import of US Assets = $70 billion
(EXA)F = Export of Foreign Assets = $100 billion
(IMA)F = Import of Foreign Assets = $290 billion
Calculate the Balance for the Financial Account = FA.
a. $550 billion
b. $590 billion
c. $630 billion
d. $680 billlion
Question 35
If the US has a Financial Account surplus or favorable balance of FA = +$700 billion, then what must be true for the Current Account Balance, CA, if the Balance of Payments Identity (BOP) holds and the Capital Account, KA = 0?
a. the Current Account must also have a positive balance of $700 billion
b. the Current Account balance can be any value unrelated to the Financial Account, FA
c. the Current Account balance must counter-balance the FA at CA = -$700 billion
Question 36
Identify the following financial transaction for the Financial Account, FA:US bond fund investors purchase $100 billion of the government bonds that Japan seeks to sell.
a. Export of US Assets Abroad
b. Export of Foreign Assets Abroad
c. Import of US Assets from Abroad
d. Import of Foreign Assets from Abroad
Question 37
Identify the following financial transaction for the Financial Account, FA:
Wealthy investors from China purchase $20 billion worth of apartment buildings and houses in major US cities.
a. Export of US Assets to Abroad
b. Export of Foreign Assets to Abroad
c. Import of US Assets from Abroad
d. Import of Foreign Assets from Abroad
Question 38
Identify the impact of this financial transaction on the Financial Account, FA:
US companies sell $40 billion worth of common stock shares to investors in Asia from their initial public offerings (IPO's).
a. Export of Home Assets to Abroad
b. Export of Foreign Assets to Abroad
c. Import of US Assets from Abroad
d. Import of Foreign Assets from Abroad