1. True or False (could you explain your decision?):
  2. According to the Keynesians, unemployment persists because wages are sticky in the downward direction.
  3. A weak dollar in international currency markets may increase inflation.
  4. If the Fed accommodates an increase in inflation, then the rate of growth in the money supply is negative.
  5. Comparative advantage of a country in terms of producing a good implies that the country is able to produce this good with fewer resources than the other country.
  6. If the United States is a relatively capital abundant country, the Heckscher-Ohlin theory predicts that the United States will import capital intensive good from overseas.
  7. If the Fed wants the dollar to depreciate against the Japanese yen, a policy that is consistent with this goal would be for the Fed to jack up the discount rate.
  1. Explain how the following situations affect the United States' Balance of Payments. That is describe what components of the current and or capital account are changed and in what way.
  2. A U.S. marketing firm designs an ad campaign for a company in France.
  3. The Cornell Investment Club decides to buy 100 shares of a promising Korean automobile manufacturer.
  4. A consortium of European investors decides to build a large manufacturing facility in Montana.
  5. You are from India and you and your parents decide to send you to Cornell.
  6. Identify whether each of the following would lead to an appreciation or depreciation of the dollar. In each case, explain why the currency either appreciates or depreciates.
  7. U.S. citizens switch from buying stock in British companies to buying stock in U.S. companies.
  8. The inflation rate in the United States increases relative to the inflation rate in England.
  9. The money supply is increased in the United States.
  10. Income in the United States increases.
  11. Suppose an economy is represented by the equations below:
  12. Find Y* for this economy.
  13. Find the value of the government multiplier.
  14. What is the value of this economy’s current account in its balance of payments?
  15. Without using any explicit numbers, how would a sudden depreciation of the dollar alter Y*?

C = 300 + 0.6Yd

I = 400

G = 1,000

EX = 400

IM = 0.1Yd

Yd = Y-T

T = 1,000

  1. During 1981 and 1982, the president and the Congress were pursuing a very expansionary fiscal policy. In 1980 and 1981, the Federal Reserve was pursuing a very restrictive monetary policy in an attempt to rid the economy of inflation. Ultimately, the economy went into a deep recession, but before it did, interest rates went to record levels.
  2. Explain how this policy mix led to very high interest rates.
  3. Show graphically the effect of the high interest rates on the foreign exchange market. What do you think would happen to the value of the dollar under these circumstances?
  4. What impact was such a series of events likely to have on the trade balances in countries like Japan?
  1. The statement, “Inflation as a pure monetary phenomenon,” implies that
  2. the Fed can never lower inflation by decreasing the rate of growth in the money supply.
  3. inflation results because of cheaperimports.
  4. inflation increases the value of the nation’s money supply.
  5. the Fed has always liked inflation.
  6. none of the above.
  1. Suppose the dollar has been falling in value for more than 18 months against major currencies in the world. If the Fed increases the money supply to accommodate a growth in output
  2. it is following a contractionary monetary policy.
  3. it is not accommodation inflation
  4. the dollar will fall even further.
  5. the dollar will increase in value in the currency markets.
  1. If Japan is a capital abundant country and exports AND imports a large number of automobiles every year, her trade flow in automobiles is most likely based on
  2. product differentiation
  3. the Heckscher-Ohlin theorem.
  4. the theory of comparative advantage.
  5. the theory of absolute advantage.
  6. all of the above.
  1. The supply of foreign exchange will decrease if which of the following occurs?
  2. Demand for U.S. goods decreases overseas.
  3. The U.S. demand for imported goods decreases.
  4. The U.S. demand for imported goods increases.
  5. Demand for U.S. goods increases overseas.
  1. Suppose there is a decline in the U.S. demand for British goods. You would predict that
  2. the demand curve for dollar will shift to the right and the pound will appreciate.
  3. the supply curve for the pound will shift to the left and the dollar will appreciate.
  4. the demand curve for the pound will shift to the right and the pound will appreciate.
  5. the demand curve fo4r the pound will shift to the left and the pound will depreciate.
  6. Imports
  7. supply us with foreign exchange, and thus they are registered as a credit item in the balance of payments current account.
  8. supply us with foreign exchange, and thus they are registered as a debit item in the balance of payments current account.
  9. cause foreign exchange to leave the country, and thus they are registered as a debit item in the balance of payments current account.
  10. cause foreign exchange to leave the country, and thus they are registered as a credit item in the balance of payments current account.