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Assume that the domestic interest rate is 7% and that the foreign interest rate is 5%

Economics

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Assume that the domestic interest rate is 7% and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to depreciate by 4% during the coming year. Given this information, we know that: Select one:

a. individuals will only hold domestic bonds.

b. individuals will only hold foreign bonds.

c. individuals will be indifferent about holding domestic or foreign bonds.

d. the interest parity condition holds.

e. the purchasing power parity holds.

Suppose government officials report that the expected inflation rate is negative. Given this information, you would be able to conclude that: Select one:

a. the real interest rate can be any of the above, depending on the absolute value of the negative expected inflation rate.

b. the real interest rate is equal to the nominal interest rate.

c. the real interest rate is greater than zero.

d. the real interest rate is less than the nominal interest rate.

e. the real interest rate is negative.

Research for a number of OECD countries suggests that inflation will be lower: Select one:

a. the more independent the central bank.

b. where the terms of the heads of central banks coincide with the terms of elected officials. c. the less independent the central bank.

d. if the heads of central banks are chosen by election.

e. when there are close ties between the central bank and the government.

Suppose the central bank, as expected, increases the money supply as the result of a decision for monetary expansion. Which of the following will occur as a result? Select one:

a. Stock prices increase only if goods prices increase.

b. An ambiguous effect on stock prices.

c. An increase in stock prices.

d. A decrease in stock prices.

e. No change in stock prices.

Suppose there is a real exchange rate appreciation. This real appreciation is more likely to cause a decrease in net exports when: Select one:

a. exports and imports are relatively sensitive to price changes.

b. imports are not at all sensitive to price changes.

c. domestic output is relatively low.

d. foreign output is relatively high.

e. the Marshall-Lerner condition does not hold.

Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the economy is initially operating at the natural level of output. Suppose that government spending decreases. Given this information, we know that this fiscal contraction will cause: Select one:

a. the effects of this fiscal contraction on the real exchange rate will be ambiguous in the medium run.

b. the real exchange rate to be unchanged in the medium run.

c. the real exchange rate only decreases in the medium run if foreign prices rise.

d. the real exchange rate to be permanently lower in the medium run.

e. the real exchange rate to be permanently higher in the medium run.

Assume that the interest parity condition holds. If the domestic interest rate is 4% and the foreign interest rate is 8% then given this information, we would expect that: Select one:

a. the foreign currency is expected to appreciate by 4%.

b. the domestic currency is expected to appreciate by 4%.

c. the domestic currency is expected to depreciate by 4%.

d. individuals will only hold domestic bonds.

e. individuals will only hold foreign bonds.