1. The interest rate on a one-year Australian bond is 2.5%. The current exchange rate between the Australian dollar and the Euro is 1.3 $/€ and the market expects that the exchange rate next year will be 1.27 $/€ . If the interest parity condition holds, what must be the current interest rate on a one-year European bond? (Note: round your result to 2 decimal places.)

A) 0. 14%

B) 0. 19%

C) 4.81%

2. In the DD-AA model, a positive shock to investment expenditure (I) causes the current account balanced to be _____, all else equal.

A) lower

B) higher

C) unchanged

3. If the representative basket of U.S. goods and services costs $120, the representative European basket costs 80 euros, and the dollar/euro exchange rate is $1.5 per euro, then the price of the European basket in terms of U.S. basket is

A) 1.5  U.S. basket/European basket

B) 1      U.S. basket/European basket

C) 0.67 U.S. basket/European basket

4. In the short run, a combination of an increase in the foreign money supply and a decrease in the domestic money supply will _____

A)  depreciate the domestic currency.

B)  appreciate the domestic currency.

C)  either appreciate or depreciate the domestic currency, depending on the relative

5. (Multi answer) A country currently has a large current account (CA) deficit and faces an overemployment problem (output above the potential level). Which policy or policy combinations could possibly both reduce the CA deficit and stabilize output at its full-   employment level?

[Note: Choose all the correct answer(s).]

A) A contractionary monetary policy (decrease in money supply)

B) A contractionary fiscal policy (increase in taxes)

C) Contractionary fiscal and monetary policies combination

D) A contractionary fiscal policy, combined with an expansionary monetary policy

E) An expansionary fiscal policy, combined with a contractionary monetary policy

6. When a country is in a liquidity trap with zero nominal interest rate, a temporary foreign money supply increase causes _______ in the short run.

A) the domestic currency to appreciate and output to decrease

B)  the domestic currency to depreciate and output to increase

C)  the domestic currency to appreciate and output to stay fixed

D) the domestic currency to depreciate and output to stay fixed

7. Suppose that the volume effect of exchange rate changes on the current account level is absent: there is only a value effect. In this case, and given our DD-AA model, a temporary expansionary monetary policy by the domestic central bank leads to ________ in the short

run.

A) lower output and domestic currency depreciation

B) lower output and domestic currency appreciation

C) higher output and domestic currency depreciation

D) higher output and domestic currency appreciation

8a. [Drop down menu question] Consider our standard DD-AA model. But now, assume that the current account (CA) does not depend on disposable income, i.e. CA only depends positively on the exchange rate E. Compared to the standard model, this modification leads to a (flatter/steeper/unchanged) DD curve and a

(flatter/steeper/unchanged) AA curve.

8b. [Drop down menu question]  Consider our DD-AA model. But now, assume that investment (I) depends negatively on E, i.e. a domestic currency depreciation leads to lower I, all else equal. Compared to the standard model, this modification leads to a   (flatter/steeper/unchanged) DD curve and a (flatter/steeper/unchanged) AA curve.

9. Which one of the following statements is NOT TRUE regarding the level of domestic nominal interest rate in the long run, all else equal?

A) An increase in domestic inflation increases the domestic nominal interest rate.

B)  A permanent decrease in the domestic money supply growth reduces the domestic nominal interest rate.

C)  If the foreign inflation rate is 2% higher than the domestic inflation rate, the domestic nominal interest rate is 2% higher than the foreign nominal interest rate.

10. All else equal, a (domestic) country will experience a depreciation of its currency in the short run if _____

A) foreign countries follow an expansionary monetary policy that reduces foreign interest rates in the short run

B) financial markets expect a future appreciation of the domestic currency.

C) there is a decrease in the willingness to consume domestic goods relative to foreign goods.

11. (Multi answer) Assuming that the purchasing power parity (PPP) holds in absolute and relative terms in the long run, which of the following(s) lead to a higher price level in the long run, all else equal?

[Note: Choose all the correct answer(s).]

A) A one-time permanent increase in the money supply.

B) A decrease in labour productivity which leads to a permanently lower output level in the long run.

C) A temporary decrease in the level of government spending.

12. If the Euro depreciates in real terms against the Australian dollar in a given year by 2% while the inflation rate in the Euro area is 2.5% per annum and that in Australia is   3.5% per annum, the nominal value of the Euro over that year will have ______ against the Australian dollar.

A) appreciated by 1%

B) appreciated by 3%

C) depreciated by 1%

D) depreciated by 3%