1. The supply of euros would come from

a.American demand for European real estate.

b. European demand for U.S. government bonds.

c.Americans vacationing in Barcelona, Spain.

d. French supplies of wine to U.S. importers.

2. Can the U.S. dollar and the European euro both appreciate relative to each other?

a. Yes, both countries can gain in this manner.

b. Yes, provided the central banks permit it.

c. No, unless there is a system of fixed exchange rates.

d. No, if one currency appreciates, the other must depreciate.

3. If a currency decreases in value as a result of government decree rather than market forces, the process is known as

a. devaluation.

b. depreciation.

c. deflation.

d. degeneration.

4. If market forces change the exchange rate value of one dollar from 80 yen to 83.25 yen, then the dollar has

a.appreciated.

b. depreciated.

c.been revalued.

d. been devalued.

5. An increase in the value of the U.S dollar relative to the Japanese yen will

a. increase aggregate demand in the United States.

b. decrease aggregate supply in the United States.

c. increase aggregate demand in Japan.

d. increase aggregate supply in Japan.

6. If Mexico experiences a period of stable prices while the United States experiences rapid inflation, what will happen in the United States?

a. an increase in U.S. imports

b. an increase in U.S. exports

c. a decrease in U.S. imports

d. an increase in U.S. net exports

7. When the U.S. dollar appreciates,

a. U.S. exports rise.

b. U.S. imports decline.

c. aggregate demand shifts inward.

d. aggregate demand shifts outward.

8. Which of the following would lead to a depreciating dollar?

a. a higher federal deficit

b. lower interest rates

c. higher interest rates

d. contractionary monetary policy

9. If?U.S. interest rates rise while foreign interest rates remain unchanged,

a. GDP will not change since the shift in aggregate supply cancels the positive effects on aggregate demand.

b. the dollar will depreciate and thus reduce prices and output.

c.foreign capital will be attracted to the United States and the dollar will appreciate.

d. net exports will increase and the economy will expand.

10. A rise in the domestic interest rate leads to capital

a.outflows and exchange rate appreciation.

b. outflows and exchange rate depreciation.

c.inflows and exchange rate depreciation.

d. inflows and exchange rate appreciation.

SHORT ANSWER SECTION (80 Points) Question 1:

Explain three factors that would cause the dollar to appreciate. ANSWER:

Question 2:

In each of the following scenarios, explain why the euro will appreciate or depreciate in a system of floating exchange rates. A) A recession in Germany cuts German purchases of American goods. B) American investors are attracted by prospects for profit on the Frankfurt Stock Exchange. C) Interest rates on government bonds rise in the U.S. but remain stable in Germany.

Question 3:

Define the following terms and explain their importance to the study of macroeconomics:

a.open economy

b. closed economy

c.budget deficits and trade deficits

d. international capital flows

Question 4:

How are floating exchange rates determined in the economy?

ANSWER:

Question 5:

What is a trade deficit?

Question 6:

Why is currency depreciation inflationary and expansionary?

Question 7:

What is the effect of interest rates on international capital flows?

Question 8:

Why international capital flows increase the power of monetary policy?