Question

1. If a currency is experiencing relatively high inflation, then it's buying power is decreasing and _______.

Select the correct answer below:

a. international investors will be more eager to hold it

b. international investors will be less eager to hold it

2. Indonesia can produce either 75 barrels of oil or 150 batches of pumpkins. What is the country's opportunity cost of producing 10 batches of pumpkins in terms of barrels of oil? Assume Indonesia experiences constant opportunity costs.

Provide your answer below:

3.Which of the following is an example of "dollarization"

Select the correct answer below:

a. a seller in Zimbabwe accepts goods in payment

b. a US tourist in France wants to pay using dollars

c. a seller in Poland accepts dollars in payment

d. a tourist exchanges Euro for dollars.

4. If rates of return in a country look __________, then that country will tend to attract funds from abroad.

Select the correct answer below:

a. high

b. low

c. relatively high

d. relatively low

5. When increased government spending is financed through the issuing of new money, which of the following is mostly likely to occur?

Select the correct answer below:

a. sustained economic growth

b. high inflation

c. high unemployment

d. a balanced budget

6. Movements in exchange rates can have a powerful effect on incentives to export and import, and thus on ________________ in the economy as a whole.

Select the correct answer below:

a. aggregate demand

b. aggregate supply

c. money supply

d. trade balance

Answer 1

1. If a currency is experiencing high inflation, then its purchasing power is declining rapidly and hence, people will avoid holding it as the value of such currency is diminishing.

Ans: b. international investors will be less eager to hold it

2. Indonesia can produce either 75 barrels of oil or 150 batches of pumpkins.

Therefore, the opportunity cost of producing 1 batch of pumpkin = 75/150 barrels of oil = 0.5 barrels of oil

Hence, the opportunity cost of producing 10 batched of pumpkins = 10 x 0.5 barrels of oil = 5 barrels of oil

Ans: 5 barrels of oil

3. Dollarisation is the usage of the U.S. dollar is accepted as an additional or the main currency in another country. Such countries depend on the stability of the dollar for their own economic stability.

a. a seller in Zimbabwe accepts goods in payment - A kind of barter

b. a US tourist in France wants to pay using dollars - The sellers in France may or may not accept dollars. Hence, it is not dollarisation.

c. a seller in Poland accepts dollars in payment - Example of Dollarisation

d. a tourist exchanges Euro for dollars - A mere exchange transaction between Euro and dollars

Ans: c. a seller in Poland accepts dollars in payment

4. When an investment in a country looks attractive due to the relatively high returns, the country will attract funds from abroad. Absolute usage of "high" returns is not an apt way to describe as people always compare between the alternatives and choose the investment destination with relatively high returns.

Ans: c. relatively high

5. When increased government spending is financed through the issuing of new money, the money supply in the economy increases while the real output does not increase so abruptly. Therefore, it results in a situation of high inflation.

Increased government spending might increase the aggregate demand in the economy, but in the long run, as explained by the principle of monetary neutrality, it does not affect the real output and hence does not result in sustained economic growth.

Inflation and unemployment face a trade-off in the short as explained by the Philips curve and hence the unemployment rate would decrease.

Printing money is a way of dealing with deficit budget and hence, the situation of balance budget does not occur.

Ans: b. high inflation