If the sum of the financial account and current account is less than zero, there will be

(a) A reduction in international reserves under a flexible exchange rate regime
(b) A reduction in international reserves under a fixed exchange rate regime.
(c) An increase in international reserves under a fixed exchange rate regime.
(d) None of the above.

QUESTION FOUR

If the covered Japanese return is higher than the domestic return, then according to covered interest parity

(a) This will place downward pressure on the forward rate
(b) This will place downward pressure on the spot exchange rate
(c) This will place downward pressure on the domestic rate of interest
(d) This will place upward pressure on the Japanese rate of interest

QUESTION FIVE

In the context of an inter-temporal model, let rA be the closed economy real interest rate of a large country A, rB be the closed economy real interest rate of a large country B and rW be the common real interest rate when these two countries are open to each other. If rA < rW < rB, then:

(a) A will import current consumption and B will export future consumption
(b) A will export current consumption and B will export future consumption
(c) A will import current consumption and B will import future consumption
(d) A will import future consumption and B will export current consumption

QUESTION SIX

Assuming a closed economy, where I= 42-5r and S= r+30, then the cost of one unit of current consumption in country A equals ___ units of future consumption.

(a) 0.98
(b) 1.3
(c) 1.02
(d) 1.20

QUESTION SEVEN

Assuming a closed economy, where I=45-4r and S=r+20, then the cost of one unit of future consumption in country A equals__ units of current consumption

(a) 1.03
(b) 0.97
(c) 1.05
(d) 0.95

QUESTION EIGHT

Assuming covered interest parity holds, if i = 5%, i* = 7%, f = 2.40, then the current
spot exchange rate equals

(a) 3.55
(b) 2.40
(c) 2.70
(d) 2.45

QUESTION NINE

Which of the following is true for the J-curve effect? It:

(a) Suggests that following an increase in the exchange rate a country's trade balance will deteriorate before it improves.
(b) Suggests that following an increase in the exchange rate a country's trade balance will improve before it deteriorates.
(c) Applies to the interest rate effect of a change in the exchange rate.
(d) Applies to the income effect of a change in the exchange rate.

QUESTION TEN

According to the international fisher relationship the economy that has the higher expected rate of inflation will

(a) Have the higher real rate of interest.
(b) Have a lower real rate of interest.
(c) Have the higher nominal rate of interest.
(d) Have the lower nominal rate of interest.

QUESTION ELEVEN

According to the Dornbusch model, following an increase in the rate of growth of the domestic money supply,

(a) The short run response of the exchange rate will be greater than its long run response.
(b) The domestic price level will immediately increase.
(c) Domestic nominal interest rates will increase in the short run to ensure money market equilibrium is restored.
(d) Domestic nominal interest rates will fall in the long run.

QUESTION TWELVE

The monetary model of the exchange rate assumes that

(a) Prices are perfectly flexible
(b) The domestic money supply determines the domestic price level
(c) Absolute purchasing power parity holds
(d) All of the above

QUESTION THIRTEEN

Suppose expected inflation is 5% in Australia and 4% in Singapore. If interest rates in Singapore are 4% then the interest rate in Australia must be ________% .if expected inflation in Australia increases to 6% then the Australian interest rate would have to be _______ for the fisher effect to hold.

(a) 4% : 6%
(b) 5%:7%
(c) 6%:7%.
(d) 7%: 6%.

QUESTION FOURTEEN

Which of the following statements is correct?

(a) A country cannot be a large country in both its export and import markets.
(b) If a country is a large country in the export market, the effect on the foreign currency value of export receipts as a result of an exchange rate change is uncertain.
(c) The flatter the demand curve for exports, the greater the degree of market power the domestic economy has in the export market.
(d) Both (b) and (c) are correct statements.

QUESTION FIFTEEN

A current account surplus results in an increase in the country's net wealth if it is used to

(a) Reduce foreign liabilities.
(b) Sell foreign financial assets.
(c) Reduce the stock of foreign exchange assets of the Central Bank.
(d) All of the above

QUESTION SIXTEEN

A reduction in the real exchange rate will

(a) Decrease the relative price of tradable goods
(b) Increase the relative price of non-tradable goods.
(c) Increase the production of tradables and reduce the consumption of tradables
(d) Increase the production of non-tradables and reduce the consumption of non-tradables.

QUESTION SEVENTEEN

If Australia purchases web services from a New Zealand company, and the New Zealand company deposits the payments in a branch of an Australian bank, it will be reflected in the Australian balance of payments as

(a) A debit in the current account and a credit in the financial account.
(b) A debit in the current account and a debit in the financial account.
(c) A credit in the current account and a debit in the financial account.
(d) A credit in the current account and a credit in the financial account.

QUESTION EIGHTEEN

Assume that Australian exports equal $15,000 while imports equal $23,000, exports of services amount to $10,000 and imports of services equal are $12,000, net unrequited transfers are in deficit amounting to $3,000 and net income is in surplus equal to $6,000. The current account balance is therefore equal to:

(a) A surplus of $1,000
(b) A deficit of $3,000
(c) A surplus of $9,000
(d) A deficit of $7,000

QUESTION NINETEEN

If Australia sells a good or service overseas then which of the following is likely to follow

(a) domestic financial claims on foreign assets decrease.
(b) claims by foreigners on domestic financial assets will decrease.
(c) claims by foreigners on domestic financial assets will increase .
(d) capital inflow will occur.

QUESTION TWENTY

Which of the following statements is incorrect?

(a) The level of net foreign debt is determined by the Current Account of the Balance of Payments.
(b) If a Current Account deficit is financed by the Central Bank the economy's level of wealth remains unchanged.
(c) A debit item on the Financial Account may be counterbalanced by a credit item on the same account.
(d) None of the above.

QUESTION 21

If foreigners are accumulating financial claims on the domestic economy the domestic economy must

(a) Be running a financial account deficit.
(b) Be running a current account deficit.
(c) Have excess national savings.
(d) None of the above.

QUESTION 22

If the sum of the financial account and current account is greater than zero, there will be

(a) An excess demand for foreign exchange.
(b) A reduction in international reserves under a fixed exchange rate regime.
(c) Upward pressure on the price of foreign exchange.
(d) None of the above.

QUESTION 23

If a country can give up one unit of future consumption and as result increase current consumption by 0.94 units its real rate of interest must be

(a) 1.4%
(b) 3.4%
(c) 6.4%
(d) 9.4%

QUESTION 24

If two closed countries have the same real rate of interest

(a) The opportunity cost of one unit of future consumption is the same in both countries.
(b) The opportunity cost of one unit of current consumption is the same in both countries.
(c) There is no incentive to engage in inter temporal trade.
(d) All of the above.

QUESTION 25

Which of the following statements relating to the closed economy real rate of interest is correct?

(a) The lower is the closed economy real rate of interest the lower the opportunity cost of future consumption.
(b) The lower is the closed economy real rate of interest the greater is the opportunity cost of current consumption.
(c) The lower is the closed economy real rate of interest the more likely it is that the country will run a balance of trade deficit when the economy is opened up.
(d) The lower is the closed economy real rate of interest the more likely it is that the country will run a balance of trade surplus when the economy is opened up.

QUESTION 26

In the process of inter-temporal trade

(a) The country that has the higher real rate of interest is worse off.
(b) With everything else being held constant the nation which undertakes relatively more real investment will run a Balance of Trade deficit.
(c) The country that has the lower real rate of interest will be worse off.
(d) A country can increase its future consumption by reducing its own savings and investment.

QUESTION 27

In terms of inter-temporal trade in the context of two large economies, if country B has a relatively high closed economy rate of interest compared to country A, then it is likely that

(a) Country B will run a financial account surplus.
(b) Country B will run a financial account deficit.
(c) Country B has a comparative advantage in current consumption.
(d) Country A has a comparative advantage in future consumption.

QUESTION 28

According to the inter-temporal model, a decrease in the world interest rate will affect the current account of a small economy in the same direction as

(a) A temporary increase in current income.
(b) An expected increase in the price of exports.
(c) A decrease in the preference for present, as compared to future consumption.
(d) All of the above.

QUESTION 29

Capital inflows:

(a) refer to an increase in domestic assets owned by foreigners.
(b) refer to a reduction in foreign assets owned by domestic citizens.
(c) lead to an increase in the country's net foreign liabilities.
(d) all of the above.

QUESTION 30

Assume that a Vietnamese company issues bonds to pay for its import of automobiles from the U.S. How is this transaction recorded in the balance of payments of Vietnam?

(a) Debit in the financial account and credit in the current account.
(b) Credit in the current account and debit in the official reserve.
(c) Debit in the current account and credit in the financial account.
(d) Debit in the current account and credit in the official reserve.

SECTION B: SHORT-ANSWER QUESTIONS

QUESTION ONE

How will the following transactions be recorded in the balance of payments?

PART A

(i). An Australian citizen earns dividend payments USD 500 from holding of Microsoft shares

(ii). If an Australian resident purchases a Japanese car it will be reflected in the Australian balance of payments as

(iii). If an Australian company issues long term corporate bonds and receives the money in USD it will be reflected in Australia's balance of payments as

(iv). If a US company imports machinery from China and pays with a check drawn on a Chinese bank it will reflected in the US balance of payments as

PART B

"In an open economy national savings can be expressed as the sum of domestic investment and the current account. This relationship can be explained in three ways. Explain

PART C

When a country runs a current account surplus, it should be balanced via the financial account deficit. Answer true or false and explain. (Hint: you must consider the role of the official reserve account).

QUESTION TWO

PART A

Assume there are two economies A and B with the following savings and investment functions

SA= 3r-25
IA= 40-2r

SB=4r-10
IB = 15-r

Where r is expressed as a percentage

REQUIRED:

(i) When both economies are closed what are the real interest rates that equate saving and investment in each economy?

(ii) Assume now that both economies are open, what is the real interest rate that equates savings and investment across both economies?

(iii) Explain the implications for the Balance of Payments of each economy as a result of the economies being opened up to each other.

PART B

Using the Metzler diagram - illustrate the gains that each economy can make from engaging in intertemporal trade.

QUESTION THREE

PART A

Assume that the domestic (Australian) interest rate is 10%, the foreign (US) interest rate is 5% and the spot exchange rate is currently 1.5 AUD /USD.

(i) Assuming covered interest parity holds, calculate the forward exchange rate.

(ii) What is the hedged return for an Australian resident who undertakes an investment overseas? Demonstrate?

(iii) Assume there is a fall in the domestic interest rates to 6% how will covered interest parity be restored?

PART B

Consider a Dornbusch sticky-price model and there is an unexpected permanent increase in the level of the domestic money supply. Explain what happens to the exchange rate in the short- and long-run? (Diagrams are not compulsory).

QUESTION FOUR

PART A

Explain what you would expect to happen to the foreign currency value of export expenditure in both a large and small economy if there is a reduction in the value of the domestic currency. Support your answer with diagrammatic analysis.................

PART B

Explain the absorption model below full employment if the spot exchange rate rises

Illustrate

QUESTION FIVE

PART A

How it is possible to have an increase in the real exchange rate but the nominal exchange rate does not change?

PART B

Explain what is meant by the terms tradable and non-tradable goods and how are they applied to determine internal and external balance?

PART C

What automatic mechanisms of adjustments might eliminate and excess demand for non- tradeables?