ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 99
EXERCISE SET 6: 5 POINTS TOTAL DUE: Thursday, March 25, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
Please FILL IN YOUR NAME on Side 1 of the accompanying General Purpose
NCS Answer Sheet and use a #2 pencil to MARK YOUR ANSWERS on Side 1 of this
Answer Sheet to the following five multiple choice questions.
NOTE: If you missed the answer sheet hand-out in class, you can obtain
an answer sheet from Sue Streeter (4-6600) in Heady Hall 382.
1-1.When the price of a bond is above the equilibrium price, there is an
excess _______ for (of) bonds and the price will tend to _________.
A. demand; rise
B. demand; fall
C C. suppy; fall
D. supply; rise
2-1 When the interest rate on a bond is _____ the equilibrium interest
rate, there is an excess _______ for (of) loanable funds, hence an excess
_______ for (of) bonds, and the interest rate will tend to ________.
A. above; supply; demand; rise
B B. above; supply; demand; fall
C. below; demand; supply; fall
D. above; supply; supply; rise
3-1 If the 1998 inflation rate in Sweden is 4 percent, and the 1998 inflation
rate in South Korea is 3 percent, then the theory of purchasing power parity
predicts that, during 1998, the value of the Swedish currency (kronas)
measured in terms of the South Korean currency (wons) -- i.e., the number of
wons per krona -- will
A. rise by 1 percent
B. rise by 7 percent
C. fall by 7 percent
D D. fall by 1 percent
4-1 The theory of purchasing power parity cannot fully explain exchange rate
movements because
A. currencies can be subject to speculative attacks.
B. price levels differ across countries.
C. not all countries produce similar bundles of goods.
D. all of the above.
E E. only A and C of the above.
5-1 If the average nominal interest rate on bank deposit accounts across
foreign countries who are major trading partners of the U.S. is 5 percent,
and the U.S. effective exchange rate index for these countries (i.e., a
weighted average of their exchange rates measured in foreign currency units
per U.S. dollar) is expected to depreciate by 2 percent, then interest parity
predicts that, on average, nominal interest rates on U.S. bank deposit
accounts should be about
A. 3 percent.
B B. 7 percent.
C. -3 percent
D. 3.5 percent
