Question

1- in the long run, if inflation is higher in India than in the U.S.A., one would expect

  a. the dollar to depreciate relative to the rupee

b. the rupee to depreciate relative to the dollar

c. the rupee to appreciate relative to the dollar

d. two of the above are correct

2- if interest rates rise in Europe (with no change in expected inflation),

a. the dollar will appreciate relative to the euro

b. the dollar will depreciate relative to the euro

c. nothing predictable will happen to the dollar/euro exchange rate

d. the dollar/euro exchange rate will remain the same

3- long-run depreciation of a nation's currency may be indicative of

a. less demand goods made in that nation

b. high inflation in that nation

c. low productivity growth in that nation

d. all of the above

4- today, the fed has chosen as the main policy instrument.

   a. bank reserves

   b. discount loans

   c. the fed funds rate

   d. the monetary base

5- choose the answer that best describes the order of implementation of fed policy.

a. policy instruments; intermediate targets; ultimate goals; policy tools

b. policy instruments; policy tools; intermediate targets; ultimate goals

c. policy tools; intermediate targets; policy instruments; ultimate goals

d. policy tools; policy instruments; intermediate targets; ultimate goals

6- when using short-term interest rates as policy instruments, generally

   a. business cycle conditions will cause the fed to increase money growth during recessions

   b. the fed can achieve both money and interest rate targets at any given time

   c. monetary policy is generally procyclical (destabilizing)

   d. none of the above is true

7- when the federal reserve _______ a government bond in the open market, the money supply _________.

   a) purchases; increase

   b) purchase; decline

   c) purchase; remain unchanged

   d) sells; increase

8- for a given level of the monetary base, a decrease in the currency- deposit ratio will mean

   a) a decrease in currency in circulation and a decrease in the money supply.

   b) a decrease in money supply but no change in reserves.

   c) an increase in the money supply

   d) a decrease in currency in circulation but no change in the money supply.

Answer 1

1- in the long run, if inflation is higher in India than in the U.S.A., one would expect:

Goods and services from India will become expensive and its export competitiveness will go down. As exports go down, demand for Indian rupee will go down and rupee will depreciate. Similarly people may prefer USA made goods as they are less costlier due t low inflation and hence dollar may appreciate.

Correct option is b. the rupee to depreciate relative to the dollar

2- if interest rates rise in Europe (with no change in expected inflation), then more investments will flow towards Europe making more demand for Euros and Euro will appreciate. More dollars will be converted in Euros and as supply of Dollars increases it will depreciate. Hence,

Option b. the dollar will depreciate relative to the euro

3- long-run depreciation of a nation's currency may be indicative of less demand goods made in that nation, high inflation in that nation and ow productivity growth in that nation, hence

option d. all of the above

4- today, the fed has chosen as the main policy instrument.(Assuming current situation)

c. the fed funds rate

Through this rate, interest rates can be changed and money supply be controlled in an economy.