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Question 01

The nominal exchange rate is 4, the domestic price level is 1 and the foreign price level is 2. The real exchange rate is:

a) 0.5

b) 1.0

c) 2.0

d) 4.0

Question 02

The real effective exchange rate is:

a) the real exchange rate adjusted for the effect of capital controls.

b) the actual exchange rate used in foreign exchange markets.

c) a weighted average of the real exchange rates with each trading partner.

d) a weighted average of nominal exchange rates with each trading partner that is then deflated by the effective purchasing power index.

Question 03

The ratio of the price of domestically produced exports to the price of foreign produced import goods is called what?

a) The domestic terms of trade.

b) The effective terms of trade.

c) The internal terms of trade.

d) The external terms of trade.

Question 04

For the production-possibilities-frontier and the relative prices of nontraded goods s and s´, a decline in the relative price of nontraded goods will result in what?

a) A move in consumption and production from P´ to P.

b) A move in consumption and production from P to P´.

c) A move in production from P´ to P.

d) A move in production from P to P´.

Question 05

Consider a two period model where F 2 and F´ 2 are two possible net external positions of a country at the beginning of period 2 and PCA is the value of its primary current account in the second period.
The long-run real exchange rate will have to fall to s´ for which of the following to happen?

a) The relative price of foreign goods to be cheap enough so that PCA is sufficiently in deficit to satisfy the intertemporal budget constraint.

b) The relative price of foreign goods to be high enough so that PCA is sufficiently in surplus to satisfy the intertemporal budget constraint.

c) PCA to be sufficiently in deficit to satisfy the intertemporal budget constraint since the F´ 2 is better than F 2.

d) PCA to be sufficiently in surplus to satisfy the intertemporal budget constraint since the F´ 2 is worse than F 2.

Question 06

For a two period model where r is the interest rate, F 1 is the net external position of the country at the beginning of period 1 and PCA 1 is the value of the primary current account in the first period the expression:

is equal to what?

a) The value of the primary current account in the second period.

b) The present value of the value of the primary account in the second period.

c) Minus the value of the primary current account in the second period.

d) Minus the present value of the value of the primary account in the second period.

Question 07

Which of the following does not belong to the list of fundamental determinants of real exchange rates?

a) Changes in the slope of the traded/nontraded goods production possibilities frontier.

b) Net external position of a country.

c) The rate of inflation.

d) Shifts in domestic absorption of traded vs. nontraded goods.

Question 08

Suppose a country experiences (A)__________. A real exchange rate which maintains constant non-tradable production must (B)__________.

a) (A) an increase in the productivity of its traded goods sector; (B) appreciate.

b) (A) an increase in the productivity of its traded goods sector; (B) depreciate.

c) (A) an increase in the productivity of its non traded goods sector; (B) appreciate.

d) (A) a decrease in the productivity of its traded goods sector; (B) appreciate.

Oxford University Press, Online Resource Centre, Chapter 07.

Chapter 07

Instructions