Economics Questions PDF

The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is -0.353%. The 1-year forward exchange rate for EUR/CHF is closest to: B. 1.2029 C. 0.8313 A. 1.2022 ANSWER: B Assume the exchange rate between the Trotter (TRT) and the Roeckl (RKL) is 5.50 TRT/RKL and the exchang...

The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is -0.353%. The 1-year forward exchange rate for EUR/CHF is closest to: B. 1.2029 C. 0.8313 A. 1.2022 ANSWER: B Assume the exchange rate between the Trotter (TRT) and the Roeckl (RKL) is 5.50 TRT/RKL and the exchange rate between the Roeckl and the Passage (PSG) is 8.00 RKL/PSG. The cross rate between the PSG and the TRT is closest to: A. 0.0227 PSG/TRT. B. 44.00 PSG/TRT. C. 0.6875 PSG/TRT ANSWER: A Given an exchange rate of USD/CAD 0.9250 and USD/CHF 1.6250, what is the cross rate for CAD/CHF? B. 1.5032 C. 1.7568 A. 0.5692 ANSWER: C If the AUD/CAD exchange rate is 0.9875 and the 60-day forward points are -25, the 60-day AUD/CAD forward rate is closest to: A. 0.9850 B. 0.9900 C. 1.0125 ANSWER: A If the no-arbitrage forward exchange rate for a euro in Japanese yen is less than the spot rate, then the interest rate in: B. Japan is less than in the Eurozone. C. the Eurozone is less than in Japan. A. Japan is the same as in the Eurozone. ANSWER: B The spot exchange rate is 0.6243 USD/GBP and the 1-year forward rate is quoted as 3.016%. The 1-year forward exchange rate for USD/GBP is closest to: A. 0.6054 B. 0.6431 C. 0.6544 ANSWER: B The Japanese yen is trading at JPY/USD 115.2200 and the Danish krone (DKK) is trading at JPY/DKK 16.4989. The USD/DKK exchange rate is: A. 0.1432 B. 0.5260 C. 6.9835 ANSWER: A An analyst observes that one US dollar is worth eight Mexican pesos (MXN) or six Polish zlotys (PLN). The value of one PLN in terms of MXN is closest to: A. 1.3333. B. 7.0000. C. 0.7500. ANSWER: A The USD/EUR spot exchange rate is 1.3500 and 6-month forward points are −75. The 6-month forward exchange rate is: A. 1.3425, and the USD is at a forward discount. B. 1.3425, and the USD is at a forward premium. C. 1.3575, and the USD is at a forward discount. ANSWER: B The spot exchange rate is 1.1132 GBP/EUR and the 1-year forward rate is quoted as +1349 points. The 1-year forward exchange rate for GBP/EUR is closest to: A. 1.1267. B. 1.2481. C. 1.2634. ANSWER: B Given the following quotes, GBP/USD 2.0000 and MXN/USD 8.0000, calculate the direct MXN/GBP spot cross exchange rate. A. 0.2500. B. 4.0000. C. 0.6250. ANSWER: B When forward currency exchange-rate contracts are available, the difference between the spot and forward exchange rates for a pair of currencies is most likely to reflect the difference between the two countries': A. economic growth rates. B. risk-free interest rates. C. annual inflation rates. ANSWER: B The spot exchange rate for Canadian dollars (CAD) per Swiss franc (CHF) is 1.1350 CAD/CHF and the 12-month forward exchange rate is 1.1460 CAD/CHF. The forward quote is a: A. discount of 110 points and the CAD is at a forward discount to the CHF. B. premium of 11 points and the CAD is at a forward premium to the CHF. C. premium of 110 points and the CAD is at a forward discount to the CHF. ANSWER: C The three-month interest rate in the currency MNO is 4% and the three-month interest rate for the currency PQR is 5%. Based only on this information, the three-month forward MNO/PQR exchange rate: A. is less than spot MNO/PQR. B. may be greater than or less than spot MNO/PQR. C. is greater than spot MNO/PQR. ANSWER: A The spot CHF/EUR exchange rate is 1.2025. If the 90-day forward quotation is +0.25%, the 90-day forward rate is closest to: A. 1.2000. B. 1.2050. C. 1.2055. ANSWER: C If the current spot exchange rate for quotes of JPY/GBP is greater than the no-arbitrage 3-month forward exchange rate, the 3-month GBP interest rate is: A. equal to the 3-month JPY interest rate. B. greater than the 3-month JPY interest rate. C. less than the 3-month JPY interest rate. ANSWER: B If the spot exchange rate between the British pound and the U.S. dollar is GBP/USD 0.7775, and the spot exchange rate between the Canadian dollar and the British pound is CAD/GBP 1.8325, what is the USD/CAD spot cross exchange rate? A. 0.70186. B. 0.42428. C. 1.42477. ANSWER: A Country G and Country H have currencies that trade freely and have markets for forward currency contracts. If Country G has an interest rate greater than that of Country H, the no-arbitrage forward G/H exchange rate is: A. equal to the G/H spot rate. B. greater than the G/H spot rate. C. less than the G/H spot rate. ANSWER: B The spot exchange rate between the U.S. dollar and the euro is 1.2749 USD/EUR. The 90-day forward exchange rate is quoted as +12.4 points. The forward exchange rate is closest to: A. 1.2761 USD/EUR. B. 1.3989 USD/EUR. C. 1.4329 USD/EUR. ANSWER: A The exchange rate of the Athelstan riyal (ATH) with the British pound is 9.00 ATH/GBP. The exchange rate of the Mordred ducat (MOR) with the U.S. dollar is 2.00 MOR/USD. If the USD/GBP exchange rate is 1.50, the ATH/MOR cross rate is closest to: A. 12.00 ATH/MOR. B. 3.00 ATH/MOR. C. 6.75 ATH/MOR. ANSWER: B Spot and one-month forward exchange rates are as follows: Exchange | Spot | 1-month forward EUR/DEF: 2.5675, 2.5925 EUR/GHI: 4.3250, 4.2800 EUR/JKL: 7.0625, 7.0075 Based on these exchange rates, the EUR is closest to a 1-month forward: A. discount of 1% to the JKL. B. premium of 1% to the DEF. C. premium of 1% to the GHI. ANSWER: C If the exchange rate between the U.S. dollar and the Canadian dollar is USD/CAD 0.6403, and the exchange rate between the Canadian dollar and the UK pound sterling is CAD/GBP 2.5207, the exchange rate between the U.S. dollar and the UK pound sterling, stated as GBP/USD, is closest to: A. 1.6140. B. 0.6196. C. 3.9367. ANSWER: B With respect to exchange rate regimes, crawling bands are most likely used in a transition toward: C. floating exchange rates. A. a fixed peg arrangement. B. a monetary union. ANSWER: C Akor is a country that has chosen to use a conventional fixed peg arrangement as the country's exchange rate regime. Under this arrangement, Akor's exchange rate against the currency to which it pegs: A. will be equal to the peg rate. B. may fluctuate around the peg rate. C. is market-determined. ANSWER: B A country's central bank announces a monetary policy goal of a stable exchange rate with the euro, which it defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country's exchange rate regime is best described as a: A. crawling band. B. fixed peg. C. target zone. ANSWER: C Which of the following is least likely a common objective of governmental capital restrictions? A. Keep domestic interest rates high. B. Maintain fixed exchange rates. C. Reduce the volatility of domestic asset prices. ANSWER: A A government that imposes restrictions on capital flows into or out of its country is most likely attempting to: A. implement floating exchange rates. B. encourage competition among domestic industries. C. reduce the volatility of domestic asset prices. ANSWER: C A government that wishes to reduce the volatility of domestic asset prices and protect domestic industries is most likely to: A. adopt voluntary export restraints. B. impose capital restrictions. C. participate in regional trading agreements. ANSWER: B In which of the following exchange rate regimes can a country participate without giving up its own currency? C. Target zone or conventional fixed peg. A. Crawling peg or formal dollarization. B. Monetary union or currency board. ANSWER: C In the context of the foreign exchange market, investment accounts are said to be leveraged if they: A. borrow and sell foreign currencies. B. buy currencies on margin. C. use derivatives. ANSWER: C The difference between Country D's nominal and real exchange rates with Country F is most closely related to: A. Country D's inflation rate. B. the ratio of the countries' price levels. C. the risk-free interest rates of the two countries. ANSWER: B The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms? A. Appreciated by 4.9%. B. Appreciated by 5.1%. C. Depreciated by 4.9%. ANSWER: B Assuming no changes in the prices of a representative consumption basket in two currency areas over the measurement period, changes in the nominal exchange rate: A. are equal to changes in the real exchange rate. B. can be extrapolated to calculate interest rates. C. can be converted to the real exchange rate using interest rates. ANSWER: A At a base period, the CPIs of the countries of Tuolumne (currency is the TOL) and Bodee (currency is the BDE) are both 100, and the exchange rate is 0.90 BDE/TOL. One year later, the exchange rate is 0.75 BDE/TOL, and the CPI has risen to 110 in Tuolumne and 105 in Bodee. The real exchange rate is closest to: A. 0.72 BDE/TOL B. 0.83 BDE/TOL C. 0.79 BDE/TOL ANSWER: C Other things equal, a real exchange rate (states as units of domestic currency per unit of foreign currency) will decrease as a result of an increase in the: A. domestic price level. B. foreign price level. C. nominal exchange rate (domestic/foreign). ANSWER: A If we compare the prices of goods in two countries through time, we can use the price information in concert with the quoted foreign exchange rate to calculate the: B. nominal exchange rate. C. real exchange rate. A. interest rate spread. ANSWER: C In the foreign exchange markets, transactions by households and small institutions for tourism, cross-border investment, or speculative trading comprise the: B. retail market. A. real money market. C. sovereign wealth market. ANSWER: B Participants in foreign exchange markets that can be characterized as "real money accounts" most likely include: A. central banks. B. hedge funds. C. insurance companies. ANSWER: C The exchange rate for Chinese yuan (CNY) per euro (EUR) changed from CNY/EUR 8.1588 to CNY/EUR 8.3378 over a 3-month period. It is most accurate to state that the: C. EUR has appreciated 2.19% relative to the CNY. A. CNY has depreciated 2.19% relative to the EUR. B. EUR has appreciated 2.15% relative to the CNY. ANSWER: C An exchange rate at which two parties agree to trade a specific amount of one currency for another a year from today is best described as a: B. real exchange rate. C. forward exchange rate. A. future exchange rate. ANSWER: C Which of the following would least likely be a participant in the forward market? B. Long-term investors. A. Arbitrageurs. C. Traders. ANSWER: B In the currency market, traders quote the: B. nominal exchange rate. C. real exchange rate. A. base currency rate. ANSWER: B If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD: B. depreciated and Canadians will find US goods cheaper. A. appreciated and Canadians will find US goods cheaper. C. depreciated and Canadians will find US goods more expensive. ANSWER: A The sell side of the foreign exchange markets primarily consists of: C. multinational banks that deal in currencies. A. firms and investors that are hedging their currency risks. B. firms and investors that require foreign currencies for transactions. ANSWER: C The exchange rate for Australian dollars per British pound (AUD/GBP) was 1.4800 five years ago and is 1.6300 today. The percent change in the Australian dollar relative to the British pound is closest to: B. depreciation of 10.1%. C. depreciation of 9.2%. A. appreciation of 10.1%. ANSWER: C Prior to the beginning of summer, the government of Japan places a 150 percent tariff on imported chain saws. Assume for this example that this tariff has a significant impact on the supply of chain saws. The government's action: C. will protect the jobs and high wages of Japanese chain saw industry workers. A. is more harmful than if the government had limited the amount of chainsaws imported. B. benefits the Japanese government and domestic producers. ANSWER: B In the context of foreign trade, limits on the amounts of imports a country allows over some period are best described as: A. quotas. B. subsidies. C. tariffs. ANSWER: A Which of the following arguments in favor of trade restrictions is least likely to be supported by economists? C. Trade with low-wage countries depresses wage rates in high-wage countries. A. Infant industries should be protected. B. National defense industries should be protected. ANSWER: C Two countries trade freely with each other and have agreed to specific tariffs on imports from other countries. The workers in either country may freely cross the common border to work in the other country. The two countries have agreed to common economic policies, but they use separate currencies. This type of cooperation is best described as a(n): A. monetary union. B. economic union. C. customs union. ANSWER: B The form of regional trading agreement (RTA) least likely to have the unintended negative effect of reducing a member country's low-cost imports from a non-member country is a: A. free trade area. B. customs union. C. common market. ANSWER: A The primary benefits derived from tariffs usually accrue to: A. domestic producers of export goods. B. domestic suppliers of goods protected by tariffs. C. foreign producers of goods protected by tariffs. ANSWER: B If a country imposes a tariff on an imported good, which groups will most likely be harmed by the tariff? A. Domestic producers. B. Domestic consumers. C. Foreign consumers. ANSWER: B Which of the items below is NOT a valid reason why nations adopt trade restrictions? To: A. protect industries in which they have a comparative advantage. B. protect industries that are highly sensitive to national security. C. prohibit foreign firms from increasing market share by selling products below cost. ANSWER: A Costs of international trade are most likely borne by: A. consumers who have fewer choices of goods. B. consumers who pay higher prices for consumer goods. C. industries competing with imported goods. ANSWER: C In the context of international trading blocs, the primary feature of an economic union that distinguishes it from a common market is the adoption of a common: A. currency. B. set of economic policies. C. set of trade restrictions with non-members. ANSWER: B Regional trade agreements exist primarily to: A. improve economic welfare for their members. B. lower currency volatility for their members. C. protect their members from unfair trading practices by non-members. ANSWER: A Which of the following lists of trading blocs is most accurately ordered by degree of economic integration, from least to most integrated? A. Customs unions, economic union, monetary union. B. Free trade area, economic union, common market. C. Free trade area, common market, customs union. ANSWER: A Which of the following groups in the country of Minidonia would least likely be helped by the imposition of tariffs on Minidonian imports of transportation equipment? A. Trucking companies. B. Automotive manufacturers. C. Minidonia's government. ANSWER: A In what way does a tariff differ from a quota? A tariff is imposed: A. as a tax on imports, and a quota limits the quantity that can be imported. B. by a single government, and a quota is a worldwide agreement on the total amount of trade allowed. C. by world organizations, and quotas are imposed by individual countries. ANSWER: A David Forsythe and Linda Novak are discussing the advantages and disadvantages of import restrictions. They state the following: Forsythe: One of the groups that benefits from import restrictions is often the government that imposes them. Novak: Import restrictions impose costs on specific groups, such as the country's import industries, but these costs are more than offset by the benefits to other groups and to the economy as a whole. With respect to these statements: A. both are correct. B. only one is correct. C. both are incorrect. ANSWER: B Which group is most likely to benefit from a quota imposed on imports of a good? A. Domestic producers of the good. B. Domestic consumers of the good. C. Foreign consumers of the good. ANSWER: A Country P begins importing goods from Country Q. In the long run, benefits from this trade relationship will most likely accrue to: A. Country Q only. B. Country P only. C. both Country P and Country Q. ANSWER: C Which form of regional trading agreement is least likely to allow free movement of labor? A. Customs union. B. Economic union. C. Common market. ANSWER: A Which of the following statements about the costs and benefits of international trade is most accurate? A. Increased international trade benefits all groups in the trading countries. B. The costs of trade are greater than the benefits with regard to domestic employment. C. The costs of trade primarily affect those in domestic industries that compete with imports. ANSWER: C The most integrated type of trading bloc or regional trade agreement is a(n): A. common market. B. economic union. C. monetary union. ANSWER: C The least likely result of import quotas and voluntary export restraints is: A. a decrease in the quantity of imports of the product. B. a shift in production toward higher-cost suppliers. C. increased revenue for the government. ANSWER: C Who benefits least from tariffs? A. Domestic consumers. B. Domestic producers. C. Foreign consumers. ANSWER: A An anti-dumping restriction on trade: A. prohibits foreign firms from selling products below cost to gain market share. B. keeps some highly sensitive products in the country. C. protects infant industries. ANSWER: A A country that generally engages in bilateralism is best characterized as exhibiting: A. non-cooperation and globalization. B. cooperation and globalization. C. cooperation and nationalism ANSWER: C A high-net-worth investor has a long time horizon of approximately 25 years before he will shift his allocations more in favor of safer, low-risk investments. The likelihood of this investor reacting to an event categorized as a black swan risk by changing his allocations is: B. moderate. C. high. A. low. ANSWER: A Black swan risk refers to exogenous geopolitical risks that have substantial: A. long-term effects and a high probability of occurrence. B. long-term effects and a low probability of occurrence. C. short-term effects and a low probability of occurrence. ANSWER: C Exogenous geopolitical risk factors are best described as those that are: B. unanticipated. A. known in terms of timing but not outcome. C. known or anticipated long-term effects. ANSWER: B The primary goals of the International Monetary Fund (IMF) include: B. reducing global poverty. C. resolving trade-related disputes among nations. A. promoting exchange rate stability. ANSWER: A A geopolitical risk that will have the biggest impact in the environmental, social, and governence realm will most likely have a velocity classification that is: B. medium. C. high. A. low. ANSWER: A A country whose actions reflect nationalism is least likely to behave in ways that exhibit: A. autarky. B. hegemony. C. bilateralism. ANSWER: B A country with little or no external trade is most likely one that practices: B. autarky. C. multilateralism. A. hegemony. ANSWER: B A country joins a free trade agreement with its surrounding countries. The country also enacts a law prohibiting its domestic manufacturers from exporting military technology. In terms of geopolitics, which of these actions is considered cooperative? A. Only one of these actions. B. Neither of these actions. C. Both of these actions. ANSWER: A Geopolitical risks are best described as having: A. broad impacts on countries or regions, rather than discrete impacts on specific companies. B. impacts that are not typically captured by scenario analysis. C. greater impacts during recessionary phases of business cycles. ANSWER: C Promoting international monetary cooperation, promoting exchange stability, and assisting members experiencing balance of payments difficulties are the goals of the: B. World Trade Organization. C. World Bank. A. International Monetary Fund. ANSWER: A With respect to analyzing geopolitical risk, velocity most likely refers to the speed with which: A. geopolitical events occur. B. investment values reflect the effects of a risk. C. mitigation strategies can be put into place. ANSWER: B If the country of Smithia enacts sanctions against the political leaders of Jonesia, Smithia is said to be using: C. a national security tool of geopolitics. A. an economic tool of geopolitics. B. a financial tool of geopolitics. ANSWER: B The most accurate description of the relative roles played by the International Monetary Fund, World Bank, and World Trade Organization is that the only one explicitly focused on: C. reducing poverty is the World Bank. A. expanding international trade is the World Trade Organization. B. providing funding to member nations is the International Monetary Fund. ANSWER: C Settling trade disputes and establishing agreements between trading partners most accurately describe the activates of the: A. International Monetary Fund. B. World Bank. C. World Trade Organization. ANSWER: C A central bank has operational independence if it can independently determine: A. the policy rate. B. the horizon over which to achieve its inflation target. C. how inflation is calculated. ANSWER: A Central banks that are able to define how inflation is computed and determine its desired level are best described as having: A. operational independence. B. target independence. C. transparency. ANSWER: B A central bank follows an inflation targeting monetary policy. If the permissible band is plus-or-minus 2% around the target inflation rate, the central bank is most likely to choose a target inflation rate of: A. 0% B. 1% C. 3% ANSWER: C The government is reducing its spending to balance the budget, while the central bank is lowering its official policy rate. What will most likely be the combined effect on the economy? A. The private sector as a percentage of GDP will increase. B. The public and private sectors as a percentage of GDP will neither decrease nor increase. C. The public sector as a percentage of GDP will increase. ANSWER: A If a central bank implements an exchange rate targeting policy successfully, the country's inflation rate is most likely to be: A. the same as that of the target currency. B. greater than that of the target currency. C. less than that of the target currency. ANSWER: A An economy's long-term trend rate of real GDP growth is 3% and the central bank's target inflation rate is 2%. If the policy rate is 6%, monetary policy is: A. contractionary. B. expansionary. C. neutral. ANSWER: A What are the three essential qualities an effective central bank should possess? A. Independence, credibility, and transparency. B. Credibility, relevance, and reliability. C. Transparency, independence, and consistency. ANSWER: A Which one of the following Federal Reserve monetary policies, when pursued in line with the U.S. government's fiscal policies, would help increase aggregate demand during a period of high unemployment? A. A decrease in the discount rate. B. The sale of bonds by the Fed. C. An increase in the reserve requirements for financial institutions. ANSWER: A Which of the following is currently the most-used target for central banks? A. Inflation targeting. B. Interest rate targeting. C. Money supply targeting. ANSWER: A Which of the following fiscal and monetary policy scenarios is most likely to increase the size of the public sector relative to the private sector? A. Contractionary fiscal and monetary policy. B. Expansionary fiscal policy and contractionary monetary policy. C. Expansionary monetary policy and contractionary fiscal policy. ANSWER: B Which of the following policy combinations would most likely lead to private sector growth and a decreasing government share of GDP? A. Expansionary fiscal policy and contractionary monetary policy. C. Contractionary fiscal policy and expansionary monetary policy. B. Contractionary fiscal policy and contractionary monetary policy. ANSWER: C A central bank is said to have credibility if: B. it issues inflation reports monthly. A. economic actors base decisions on the central bank's stated inflation targets. C. it determines both the policy rate and the method for computing the inflation rate. ANSWER: A Which of the following conditions is difficult for monetary policy to address because a central bank cannot reduce its nominal policy rate much below zero? A. Deflation. C. Stagflation. B. Inflation. ANSWER: A An analyst has determined the projected trend rate of real GDP growth is 2.5% and the central bank's inflation target is 2.5%. If the central bank policy rate is 5.0%, monetary policy is most likely: C. contractionary. A. neutral. B. expansionary. ANSWER: A To determine whether monetary policy is expansionary or contractionary, an analyst should compare the central bank's policy rate to the: A. neutral interest rate. B. target inflation rate. C. trend rate of real growth. ANSWER: A The most likely reason for deflation to persist despite expansionary monetary policy is: C. inelastic demand for money. A. a liquidity trap. B. bond market vigilantes. ANSWER: A Which of the following statements regarding the monetary policy transmission mechanism is most accurate? A. Central banks can control long-term interest rates directly because decisions by consumer and businesses are based on these rates. B. Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control. C. Central banks can control short-term interest rates by increasing the money supply to increase interest rates or by decreasing the money supply to decrease interest rates. ANSWER: B If a bank needs to borrow funds from the Federal Reserve to fund a temporary shortage in reserves, it would borrow funds at the: A. federal funds rate. B. discount rate. C. prime rate. ANSWER: B If a monetary policy is focused on combating inflation, which open market actions by the Federal Reserve will most effectively accomplish this? A. Sell Treasury securities, causing aggregate demand to decrease. B. Sell Treasury securities, causing aggregate demand to increase. C. Purchase Treasury securities, causing aggregate demand to decrease. ANSWER: A If a central bank's targeted inflation rate is above the current rate, the central bank is most likely to: A. increase the reserve requirement. B. increase the overnight lending rate. C. buy government securities. ANSWER: C Which of the following is least likely a function or objective of a central bank? A. Issuing currency. B. Keeping inflation within an acceptable range. C. Lending money to government agencies. ANSWER: C If the US Federal Reserve decides to decrease the money supply, which of the following is most likely to occur in the short run? A. A decrease in the unemployment rate. B. An increase in the real rate of interest. C. An increase in the velocity of money similar to decrease in the money supply. ANSWER: B Which of the following policy tools is the least likely to be available to the US Federal Reserve Board? A. Buying and selling Treasury securities in the open market. B. Requiring the banking system to tighten or loosen its credit policies. C. Setting the discount rate at which banks can borrow from the Federal Reserve. ANSWER: B Which of the following statements regarding US Federal Reserve open market operations is least accurate? A. If the Fed wants to stimulate the economy, it will sell Treasury securities to banks. B. When the Fed buys Treasury securities, short-term interest rates will generally decrease. C. When the Fed sells Treasury securities, excess reserves decrease. ANSWER: A When the Federal Reserve sells government securities on the open market, bank reserves are: A. decreased, which reduces the amount of money banks are able to lend, causing a decrease in the federal funds rate. B. decreased, which reduces the amount of money banks are able to lend, causing an increase in the federal funds rate. C. increased, which increases the amount of money banks are able to lend, causing a decrease in the federal funds rate. ANSWER: B Contractionary monetary policy is least likely to decrease consumption spending by decreasing: A. expectations for economic growth. B. securities prices. C. the foreign exchange value of the currency. ANSWER: C If the Federal Reserve wishes to lower market interest rates without changing the discount rate, it can: A. buy Treasury securities. B. increase bank reserve requirements. C. raise the yield on Treasury securities. ANSWER: A The primary objective of a central bank is typically to: A. control inflation. B. achieve full employment. C. stabilize exchange rates. ANSWER: A Which of the following is least likely to be a function of the central bank? A. Regulate the banking system. B. Collect tax payments. C. Issue currency. ANSWER: B A central bank that wants to increase short-term interest rates is most likely to: A. decrease bank reserve requirements. B. sell government securities. C. issue long-term bonds. ANSWER: B The open market sale of Treasury securities by the Federal Reserve is least likely to result in: B. increased longer-term interest rates. A. increased exports of US goods. C. a decreased rate of inflation. ANSWER: A A country is experiencing a core inflation rate of 7% during a recessionary period of real GDP growth. If the central bank has a single mandate to achieve price stability and uses inflation targeting with an acceptable range of zero to 4%, its monetary policy response is most likely to decrease: C. the foreign exchange value of the country's currency. A. GDP growth in the short run. B. short-term interest rates. ANSWER: A Central banks are most likely to pursue a target inflation rate: A. equal to 0%. B. between 0% and 2%. C. between 2% and 3%. ANSWER: C Central banks pursuing expansionary policies may: A. decrease the policy rate and make open market purchases of securities. B. decrease the policy rate and make open market sales of securities. C. increase the policy rate and make open market purchases of securities. ANSWER: A Assume the US economy is undergoing a recession. In its efforts to stimulate the economy by trying to influence short-term interest rates the Fed is most likely to take which two actions? C. Sell Treasury securities and increase bank reserve requirements. A. Buy Treasury securities and decrease bank reserve requirements. B. Sell Treasury securities and decrease bank reserve requirements. ANSWER: A If a country's economy is growing at an unsustainably rapid rate and the central bank decreases its target overnight interest rate, the country's: B. inflation rate is likely to increase. A. expected rate of inflation is likely to decline. C. long-term rate of economic growth will increase. ANSWER: B Xanadu attempts to decrease its inflation rate by implementing contractionary monetary policy. Which of the following is most likely to be the long-run effect on Xanadu's trade balance as a result of the monetary policy change? B. Remain the same. C. Worsen. A. Improve. ANSWER: C Silvano Jimenez, an analyst at Banco del Rey, is reviewing recent actions taken by the US Federal Reserve (the Fed) in setting monetary policy. Recently, the Fed decided to increase the money supply, which has resulted in a decrease in real interest rates. At a staff meeting, Jimenez brings this matter to the attention of his colleagues and makes the following statements: Statement 1: Although the money supply increase has led to a decrease in real interest rates, we should begin to see US investors decrease their investments abroad and the US dollar will appreciate in the foreign exchange market. Statement 2: The Fed's increase in the money supply will increase the amount of imports into the US. Statement 1, Statement 2: A. Incorrect, Correct B. Correct, Incorrect C. Incorrect, Incorrect ANSWER: C Which of the following is the most likely result of a central bank's shift to an expansionary monetary policy? A. Domestic currency appreciates. B. Exports increase. C. Interest rates increase. ANSWER: B The Federal Reserve has decided to increase the federal funds rate (the interest rate that banks charge each other for overnight loans). To implement this policy, the Federal Reserve will most likely: A. sell government securities in the open market. B. increase currency exchange rates (cause domestic currency to appreciate). C. set a lower price on Treasury bills and notes that it is auctioning. ANSWER: A The country of Zurkistan is experiencing both high interest rates and high inflation. The government passes laws that reduce government spending and increase taxes. It takes many months before interest rates fall and inflation is reduced. This is an example of: A. recognition lag in discretionary fiscal policy. B. action lag and automatic stabilizers. C. impact lag in discretionary fiscal policy. ANSWER: C Which of the following statements about achieving proper timing in fiscal policy is least accurate? A. Improvements in quantitative methods have made the occurrence of recessions or expansions quite predictable. B. Policy errors are inevitable due to unpredictable events. C. There is usually a time lag between when a change in policy is needed and when the need is recognized by policy makers. ANSWER: A A government that is implementing a contractionary fiscal policy is most likely to: A. increase spending on public works. C. decrease income tax rates. B. decrease transfer payments to households. ANSWER: B Assuming the economy currently is experiencing high inflation, an example of appropriate discretionary fiscal policy is: B. reduce government expenditures on major government construction projects. C. reduce the money supply. A. increase the federal funds target rate. ANSWER: B Which of the following statements best explains the importance of the timing of changes in discretionary fiscal policy? Changes in discretionary fiscal policy must be timed properly if they are going to: C. help the government achieve a balanced budget. A. enable the government to control the money supply. B. exert a stabilizing influence on an economy. ANSWER: B Assuming the federal government maintains a balanced budget, the most likely effects of a tax increase on government expenditures and real GDP are: Government Expenditures, Real GDP: A. Decrease, Decrease B. Increase, Decrease C. Increase, Increase ANSWER: C The government budget deficit of Country M is increasing. At the same time, the government budget surplus of Country N is decreasing. Are the fiscal policies of these countries expansionary or contractionary? A. Both are contractionary. B. Both are expansionary. C. One is expansionary and one is contractionary. ANSWER: B The time it takes for policy makers to enact a fiscal policy action is best described as: A. implementation lag. B. legislative lag. C. action lag. ANSWER: C Robert Necco and Nelson Packard are economists at Economic Research Associates. ERA asks Necco and Packard for their opinions about the effects of fiscal policy on real GDP for an economy currently experiencing a recession. Necco states that real GDP is likely to increase if both government spending and taxes are increased by the same amount. Packard states that if both government spending and taxes are increased by the same amount, there is no expected net effect on real GDP. Are the statements made by Necco and Packard CORRECT? Necco, Packard: A. Correct, Incorrect B. Incorrect, Correct C. Incorrect, Incorrect ANSWER: A The time it takes for policy makers to determine that the economy requires a fiscal policy action is best described as: A. impact lag. B. recognition lag. C. action lag. ANSWER: B An example of a contractionary fiscal policy change is a(n): B. increase in a fiscal deficit. C. decrease in a fiscal surplus. A. increase in a fiscal surplus. ANSWER: A The time it takes for a fiscal policy action to affect the economy is best described as: A. action lag. B. recognition lag. C. impact lag. ANSWER: C Policies used with the goal of maintaining stable prices and producing economic growth include: A. fiscal policy only. B. both fiscal and monetary policy. C. monetary policy only. ANSWER: B Discretionary fiscal policy refers to: A. buying or selling securities in the open market to influence interest rates. B. active decisions regarding spending and taxation to affect economic growth. C. government spending programs that counteract the business cycle without the intervention of policymakers. ANSWER: B An argument against being concerned with the size of a fiscal deficit is that a deficit can: A. cause government borrowing to crowd out private borrowing. B. lead to higher future taxes that will increase government revenues. C. aid in increasing GDP and employment if the economy is operating at less than potential GDP. ANSWER: C Policies that can be used as tools for redistribution of wealth and income include: A. both fiscal and monetary policy. B. fiscal policy only. C. monetary policy only. ANSWER: B Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote: A. a budget deficit during a recession but do not promote a budget surplus during an inflationary expansion. B. a budget deficit during a recession and a budget surplus during an inflationary expansion. C. a budget surplus during a recession and a budget deficit during an inflationary expansion. ANSWER: B Monetary policy is most accurately described as actions that influence economic activity by increasing or decreasing: A. tax rates on income and consumption. B. the supply of money and credit. C. currency exchange rates. ANSWER: B When the central bank increases short-term interest rates, its monetary policy is best described as: A. contractionary. B. accommodative. C. expansionary. ANSWER: A Arguments against being concerned about the size of a fiscal deficit include: A. higher tax rates. B. Ricardian equivalence. C. the crowding-out effect. ANSWER: B The crowding-out effect suggests that: A. greater government deficits will drive up interest rates, thereby reducing private investment. B. as government spending increases, so will income and taxes, and the higher taxes will reduce both aggregate demand and output. C. government borrowing will lead to an increase in private savings. ANSWER: A A distinction between fiscal policy and monetary policy is that fiscal policy: A. is aimed at promoting economic growth, while monetary policy is aimed at promoting price stability. B. is typically expansionary, while monetary policy is typically contractionary. C. concerns taxes and government spending, while monetary policy concerns the money supply. ANSWER: C The term "automatic stabilizers" refers to: A. changes in taxes and expenditure programs legislators automatically enact in response to changes the level of economic activity in order to smooth economic cycles. B. increases in transfer payments and decreases in tax revenues that result from an economic contraction without new legislation. C. government expenditures and tax receipts that are required to balance over the course of the business cycle, although they may be out of balance in any single year. ANSWER: B The crowding-out model implies that a: A. budget deficit will increase the real interest rate and thereby retard private investment. B. budget surplus will retard aggregate demand and trigger an economic downturn. C. budget deficit will stimulate aggregate demand and trigger a multiplier effect which will lead to inflation. ANSWER: A Promoting economic growth and price stability are the goals of: A. both fiscal and monetary policy. B. fiscal policy, but not monetary policy. C. monetary policy, but not fiscal policy. ANSWER: A Arguments for being concerned with the size of a fiscal deficit relative to GDP least likely include: A. a likely need for higher future taxes. B. higher interest rates due to government borrowing. C. a high proportion of government debt owed to the country's citizens. ANSWER: C When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to: A. reduce the budget deficit (or increase the surplus). B. enlarge the budget deficit (or reduce the surplus). C. reduce interest rates, thus stimulating aggregate demand. ANSWER: B Attempting to influence economic growth and inflation by changing tax rates and government spending is best described as: A. monetary policy. B. a combination of fiscal and monetary policy. C. fiscal policy. ANSWER: C Unemployment compensation is an example of: A. an automatic monetary policy stabilizer. B. an automatic fiscal policy stabilizer. C. a discretionary fiscal policy stabilizer. ANSWER: B Arguments for being concerned about the size of a fiscal deficit least likely include: A. a reduction in long-term economic growth. B. Ricardian equivalence. C. the crowding-out effect. ANSWER: B Increases in firms' inventory-sales ratios are most likely to occur: A. just before a peak in the economic cycle. B. just after the trough of the economic cycle. C. during an economic contraction. ANSWER: A Average weekly initial claims for unemployment insurance are classified as a: A. leading indicator. B. lagging indicator. C. coincident indicator. ANSWER: A An economy has been producing at its full-employment level of output and the price level has been stable. businesses then begin experiencing unintended decreases in their inventory levels. What does this most likely imply about the short-run outlook for economic growth and inflation? Economic Growth, Inflation: C. Increasing, Decreasing D. Increasing, Increasing B. Decreasing, Increasing ANSWER: D The expansion phase of a business cycle is most likely characterized by: B. the rate of economic growth changing from negative to positive. A. decreasing inflationary pressures. C. increasing employment. ANSWER: C Firms' initial responses to an emerging economic contraction are most likely to be: A. laying off workers. B. reducing overtime hours. C. deferring maintenance of machinery. ANSWER: B As an economic expansion approaches its peak, the economy is most likely to show: C. an increase in the inventory-to-sales ratio. A. a decrease in inventory levels. B. accelerating sales growth. ANSWER: C During an economic contraction: A. inflation pressures are typically decreasing. B. real GDP growth is greater than its sustainable long-term rate. C. the unemployment rate typically decreases. ANSWER: A A firm's most likely initial response to a cyclical increase in the inventory-to-sales ratio is to adjust their utilization of labor by: A. adding new workers. B. laying off employees. C. reducing overtime. ANSWER: C Which of the following statements about credit cycles is most accurate? C. A typical business cycle includes two or more credit cycles. A. Credit cycles are a potential cause of asset price bubbles. B. Credit cycles tend to dampen business cycles. ANSWER: A The inventory-to-sales ratio for manufacturing and trade is classified as a: A. lagging indicator. B. leading indicator. C. coincident indicator. ANSWER: A Which of the following economic indicators is classified as a leading indicator for the United States economy? A. Average duration of unemployment. B. Index of consumer expectations. C. Industrial production. ANSWER: B Manufacturing and trade sales are best described as a: A. lagging indicator. B. leading indicator. C. coincident indicator. ANSWER: C When the economy enters an expansion phase, the most likely effect on external trade is a(n): A. decrease in exports. B. increase in exports. C. increase in imports. ANSWER: C A peak in the business cycle is most likely associated with: A. the highest level of economic output during the cycle. B. payroll employment turning from positive to negative. C. decreasing inflation pressure. ANSWER: A The most likely limitation of the N-firm and Herfindahl-Hirschman concentration measures in assessing market power is that they: A. are both backward looking. B. are insensitive to mergers within the industry. C. do not explicitly include the effects of potential competition. ANSWER: C Concentration measures are most likely to be used to: A. analyze barriers to entry into an industry. B. identify the market structure of an industry. C. measure elasticity of demand facing an industry. ANSWER: B The most effective way to assess the impact of a potential merger on the market structure of an industry is to: B. analyze barriers to entry. C. calculate the Herfindahl-Hirschman Index. A. calculate the n-firm concentration ratio. ANSWER: C Which of the following is least accurate regarding product development and marketing for firms under monopolistic competition? A. Brand names can provide consumers with information regarding the quality of firm's products B. Firms that bring new and innovative products to the market face relatively more elastic demand curves than their competitors. C. Relative to other types of competition, product innovation is critical to the pursuit of economic profits. ANSWER: B Which of the following is most likely to be considered a characteristic of monopolistic competition? A. Inelastic demand curves B. High barriers to entry and exit C. Differentiated products ANSWER: C One way in which monopolistic competition can be distinguished from perfect competition is that in monopolistic competition: A. each firm faces a perfectly elastic demand curve. B. marginal revenue is greater than marginal cost at the quantity produced. C. price is greater than marginal cost. ANSWER: C Monopolistic competition differs from pure monopoly in that: C. monopolistic competitors have low barriers to entry and monopolists do not. A. monopolistic competitors are price takers and monopolists are not. B. monopolists maximize profits and monopolistic competitors do not. ANSWER: C Firms in perfectly competitive markets and firms operating in a market characterized by monopolistic competition have several things in common. Which of the following is least likely one of them? Both: B. maximize economic profit. A. face perfectly elastic demand curves. C. operate in markets that have low or no barriers to entry. ANSWER: A An oligopoly is least likely characterized by: A. a large number of sellers. B. economies of scale. C. barriers to entry. ANSWER: A A key difference between the short-run and long-run outputs under monopolistic competition is that in the long run, the price is: B. equal to average total cost, such that economic profits are zero. A. below average total cost, such that economic profits are negative. C. above average total cost, such that economic profits are positive. ANSWER: B Characteristics of an oligopoly least likely include: A. identical products. B. interdependence among competitors. C. significant barriers to entry. ANSWER: A A market has the following characteristics: -There is a large number of independent sellers. -Each produces a differentiated product. -There are low barriers to entry. -Producers face downward-sloping demand curves. -Demand is highly elastic. This market is best characterized as: B. a monopoly C. an oligopoly A. monopolistic competition ANSWER: A A venture capitalist is interested in providing funding for a new company. The company wants to enter an industry where the market structure is best described as monopolistic competition. The venture capitalist can expect to find an industry where: A. the products are homogeneous. B. firms compete regularly on price. C. the costs to enter the market are low. ANSWER: C Under which market structure are the production and pricing alternatives of a firm most affected by the decisions of its competitors. A. Monopolistic competition. B. Oligopoly. C. Perfect Competition ANSWER: B A firm has the following characteristics: -relatively small in size. -marginal revenue is equal to the selling price. -economic profits will not be earned for any significant period of time. The firm is best described as existing in a(n): A. monopolistic market structure B. price searcher market C. purely competitive market ANSWER: C A market structure characterized by a large number of firms all producing identical products is best described as: B. perfect competition. C. monopoly. A. monopolistic competition. ANSWER: B Which of the following most accurately describes a market with a single seller of a product that has no good substitutes? B. Oligopoly. C. Monopolistic competition. A. Monopoly. ANSWER: A A market that is characterized by monopolistic competition is least likely to feature: A. a small number of independent sellers. B. sellers that produce a differentiated product. C. low barriers to entry. ANSWER: A Which of the following is least likely a characteristic of an oligopoly? A. Relatively small economies of scale. B. There are few sellers. C. Products can be similar or differentiated. ANSWER: A Which of the following is least likely a characteristic of perfect competition? A. The demand curve for an individual firm is a vertical line. B. The products produced within a given market are homogenous. C. The size of each firm is small relative to the size of the overall market. ANSWER: A The market structure in which a firm's optimal pricing strategy depends on the responses of other firms is: A. Monopolistic competition. B. Oligopoly. C. Perfect competition. ANSWER: B Which of the following is most likely a characteristic of perfect competition? C. Different firms sell their output at different prices. A. Barriers to entry are not a significant factor. B. The number of firms in the market is small. ANSWER: A Firm X and Firm Y are two firms in a Cournot duopoly model with identical marginal cost curves. In the long run, equilibrium will occur with both firms selling: C. the same quantity with differing market shares at an equilibrium price equivalent to the price in a monopoly market structure. A. different quantities with different market shares at an equilibrium price above the price in a monopoly market structure. B. the same quantity with an equivalent market share at an equilibrium price above the price in a perfectly competitive market. ANSWER: B Which of the following is most likely to be a characteristic of an oligopolistic industry? A. Many sellers. B. Interdependence among firms. C. Low barriers to entry. ANSWER: B A firm operating as a price taker will produce the quantity at which: A. it earns long-run economic profit. B. marginal revenue equals marginal cost. C. revenue is maximized. ANSWER: B Which of the following regarding monopolistic competition is most accurate? C. Zero barriers to entry and exit exist. A. Each firm produces a differentiated product. B. There are very few independent sellers. ANSWER: A An industry characterized by monopolistic competition contains approximately 25 different companies. Each individual company is most likely to: A. focus on average market price rather than individual competitor prices. B. have significant power over pricing. C. attempt to engage in price-fixing, as it will generate reasonable profits. ANSWER: A For profitable firms in an industry characterized by monopolistic competition, over a long time period, positive economic profits will tend to: A. increase, along with accounting profits. B. remain constant, regardless of the trend in accounting profits. C. decrease, even if accounting profits remain positive. ANSWER: C Which of the following is most likely a characteristic of monopolistic competition? A. Producer decisions are interdependent. B. Each producer offers a differentiated product. C. Producers face horizontal demand curves. ANSWER: B Which of the following is least likely a condition of a perfectly competitive market? A. Firms face elastic demand curves. B. Indistinguishable products. C. Sellers make economic profits. ANSWER: C Which one of the following structures is characterized by free entry and exit, a differentiated product, and price searcher behavior? C. Pure competition. A. Monopolistic competition. B. Oligopoly. ANSWER: A In which of the following industry structures is a firm least likely able to increase its total revenue by decreasing the price of its output? C. Oligopoly. A. Perfect competition. B. Monopolistic competition. ANSWER: A The type of economic market that features a large number of competitors offering differentiated products is best characterized as: A. monopolistic competition. C. perfect competition. B. oligopoly. ANSWER: A A key difference in oligopoly price setting between the Cournot model and the Stackelberg model is that the latter assumes: A. a strategic game model versus the former, which is a rule-based model. B. sequential rather than simultaneous pricing by market participants. C. competitors' prices will not change. ANSWER: B The sale price per unit that would maximize profits for all oligopoly participants is equal to \\$25 per unit. The sale price that would exist in a perfectly competitive market structure is equal to \\$18 per unit. The most likely price for a firm in an oligopoly to charge will be closet to: A. $25 B. $30 C. $20 ANSWER: C Which of the following is least likely to be considered a feature that is common to both monopolistic competition and perfect competition? B. Low or no barriers to entry. A. Extensive advertising to differentiate products. C. Zero economic profits in the long run. ANSWER: A Monopolistic competition differs from pure monopoly in that: C. monopolists maximize profit; monopolistic competitors do not. A. monopolistic competitors are price takers, monopolists are not. B. barriers to entry are high under monopoly, but low under monopolistic competition. ANSWER: B The demand curves faced by monopolistic competitors is: B. inelastic due to the availability of many complementary goods. A. elastic due to the availability of many close substitutes. C. not sensitive to price due to absence of close substitutes. ANSWER: A Which one of the following is least likely a characteristic of monopolistic competition? B. Differentiated products. A. A single seller. C. Low barriers to entry and exit. ANSWER: A Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually: A. fall at a decreasing rate. B. rise at a decreasing rate. C. rise at an increasing rate. ANSWER: C The upward sloping segment of a long-run average total cost curve represents the existence of: A. diseconomies of scale. B. economies of scale. C. efficiencies of scale. ANSWER: A At a fixed level of capital, output increases as the quantity of labor increases, but at a decreasing rate. This phenomenon is an example of: A. diminishing costs to labor. B. diminishing returns to capital. C. diminishing returns to labor. ANSWER: C A firm that is experiencing diseconomies of scale should: A. decrease its plant size. B. decrease output in the short run. C. shut down in the long run. ANSWER: A The law of diminishing returns states that for a given production process, as more and more of a resource (such as labor) are added, holding the quantities of other resources fixed: A. cost declines at a decreasing rate. B. cost declines at an increasing rate. C. output increases at a decreasing rate. ANSWER: C According to the law of diminishing returns, doubling the number of salespeople for a firm will most likely result in: A. increasing the total sales of the firm and reducing the average sales per salesperson. B. doubling the total sales of the firm. C. decreasing the total sales of the firm as a result of competition amongst salespeople. ANSWER: A Which of the following most accurately describes economies of scale? Economies of scale: A. are dependent on short-run average costs. B. increase at a decreasing rate. C. occur when long-run unit costs fall as output increases. ANSWER: C A firm is operating in a perfectly competitive market. Market price is greater than average variable cost (AVC) but lower than average total cost (ATC). Which of the following statements is most accurate? A. The firm should continue to produce and sell its product in the short run but not in the long run, unless the price increases. B. The firm should decrease its production in the short run in order to increase price and either reduce losses or produce profits. C. If the owner thinks the price eventually will exceed ATC, the firm should shut down its operations temporarily and resume when price exceeds ATC. ANSWER: A The law of diminishing returns states that at some point as: A. less of a resource are devoted to production, holding the quantity of other inputs constant, the output will decrease, but at an increasing rate. C. more of a resource is devoted to production, holding the quantity of other inputs constant, at some point output will begin to decrease. B. more of a resource is devoted to production, holding the quantity of other inputs constant, the output will increase, but at a decreasing rate. ANSWER: B Which of the following statements regarding diminishing marginal returns is most accurate? A. As the quantity produced rises, costs begin to rise at a decreasing rate. C. As the quantity produced rises, costs begin to rise at an increasing rate. B. The total cost curve arches downward. ANSWER: C