ANSWER OUTLINE
ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 99
EXERCISE SET 5: 5 POINTS TOTAL DUE: Thursday, March 25, 2:10 P.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 382 Heady Hall.
1-2.When the price of a bond is below the equilibrium price, there is an
excess _______ for (of) bonds and the price will tend to _________.
A A. demand; rise
B. demand; fall
C. suppy; fall
D. supply; rise
2-2 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. below; demand; supply; fall
B. above; demand; supply; rise
C. below; supply; demand; fall
D D. below; demand; supply; rise
3-2 If the 1998 inflation rate in Thailand is 6 percent, and the 1998
inflation rate in Ireland is 8 percent, then the theory of purchasing power
parity predicts that, during 1998, the value of the Thai currency (bahts)
measured in terms of Irish currency (punts) -- i.e., the number of Irish
punts per Thai baht -- will
A A. rise by 2 percent
B. rise by 14 percent
C. fall by 2 percent
D. fall by 14 percent
4-2 The theory of purchasing power parity cannot fully explain exchange rate
movements because
A. inflation rates differ across countries.
B. countries impose different types of trade barriers that change over time.
C. some goods are not traded between countries.
D. all of the above.
E E. only B and C of the above.
5-2 If the average nominal interest rate on bank deposit accounts across
foreign countries who are major trading partners of the U.S. is 4 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 appreciate by 3 percent, then interest parity
predicts that, on average, nominal interest rates on U.S. bank deposit
accounts should be about
A. 3.5 percent.
B. 7 percent.
C C. 1 percent
D. -1 percent
