Economics 190.

1
Homework No 4

Name___________________________ 28 Sept 2010

Encircle THR THU
Choose and Encircle the BEST answer:

1. Adjustments in the BOP under the elasticities approach require that

(a) the elasticities of the demand for a country’s exports and of its imports are
fairly elastic
(b) the tradable sector is significant in the economy
(c) the elasticities of the demand for a country’s exports and of its imports are
fairly inelastic
(d) none of the above

2. The automatic adjustment under the gold and gold standard hinges on

(a) money supply would increase in the deficit nation and fall in the surplus nation
(b) prices would be sticky downward but flexible upward
(c) continuous increases in gold to support the BOP
(d) none of the above

3. The absolute purchasing power parity theory says that

(a) exchange rates between two currencies is the ratio of price levels in the two
countries
(b) price of products (tradable / non-tradable) is the same when in same currency
(c) increase in price in one country leads to appreciation of country’s currency
(d) all of the above

4. The foreign exchange market is in equilibrium when

(a) the demand for and supply of foreign currency are stable
(b) capital flows are fully liberalized
(c) rates of returns to all deposits of different currencies are the same
(d) none of the above

5. When the BOP is viewed as a monetary problem it means that

(a) deficits are due to excessive reserves

(b) the current account balance is in deficit
(c) the deficit of one country is the surplus of another country
(d) none of the above
6. Suppose the foreign exchange market behavior of a country is described by the
following demand and supply expressions:

Qd = 12.5 - 1.25R

Qs = 3.5 + 1.25R where Qd and Qs are demand for and supply of foreign exchange
and R is the exchange rate (local currency units per unit of foreign currency)
If the monetary authorities keep the exchange rate at 2, Qs

(a) is equal to Qd and the foreign exchange market is in equilibrium

(b) is equal to 6 units of foreign exchange
(c) is the amount the authorities are willing to sell in the market
(d) none of the above

7. At the exchange rate of 2, there is a BOP deficit of

(a) 4 units of foreign exchange

(b) 6 units of foreign exchange
(c) 10 units of foreign exchange
(d) none of the above

8. The equilibrium exchange rate needed in order for the demand for and supply of
foreign exchange to be equal is

(a) 2.5 units of local currency per unit of foreign currency

(b) 3.5 units of local currency per unit of foreign currency
(c) 4.5 units of local currency per unit of foreign currency
(d) none of the above

9. In this behavior of demand for and supply of foreign exchange, the Marshall-Lerner
condition is satisfied

(a) True
(b) False

10. The magnitude of devaluation needed to correct the BOP deficit at the exchange rate
of 2 is

(a) 30 percent
(b) 50 percent
(c) 100 percent (almost)
(d) none of the above