Final Exam

Topics: Inflation, Central bank, Purchasing power parity Pages: 7 (1206 words) Published: May 12, 2013

Second Examination
Spring 2012

Please check to make sure you have 10 pages in your copy of the exam and answer each question in the space provided. You may consult one page of notes and a calculator. I understand that the honor code applies: I will not lie, cheat, or steal to gain an academic advantage, or tolerate those who do.


(Printed Name)


Each of the 11 questions on the exam is worth 10 points. You get 2 points for following these instructions.

For the numerical and multiple choice questions (questions 1 to 9), please enter your final answer on the answer summary sheet (p.2). There will be partial credit awarded for every question, if some work is correct. To receive partial credit, you must show your work in the space provided after each question – not on the answer summary sheet.

Write legibly and only in the space provided. You can use the backs of pages for scratch paper, but that work may not be graded.

For questions 10 and 11, there is a length limit, expressed in sentences. I will read the first 2 sentences. Run-on sentences will be counted as 2 or more sentences. You may use graphs to support your argument. The point is, be brief. I am looking for one answer or one reason. Mentioning extra things that are wrong can hurt your score. Part of the challenge here is to provide a short, precise answer.

Good luck!

Answer Summary Sheet

1. Circle one:a bc de

2. Circle one: a bc de

3. Circle one:a bc de

4. Yen/ Rinngit should (circle one): Rise Fall

by ___________ % per year

5. Circle one: a bc de f

6. Circle one: a bc de f

7. The real exchange rate is _____________________

in ________________ baskets per ________________ basket

8. GDP per capita will be __________________ dollars

9. The INR/USD exchange rate should (circle one): Rise Fall

by ___________ %

--------------------------- For grading only. Do not write below this line ----------------------------------



Raw Total: ________ Your score: _________


If prices are perfectly flexible, which of the following can affect GDP? a. Changes in technology
b. Changes in demand
c. Changes in expectations
d. Changes in technology or in expectations
e. None of the above


The Phillips curve tells us that inflation will decrease if

a. Unemployment falls
b. Unemployment rises
c. Expected inflation falls
d. Unemployment is above the natural rate or expected inflation falls e. Unemployment rises or expected inflation falls


Banks create money because
a. They print it.
b. They take loans from the central bank.
c. They take deposits and use the money to make loans to others. d. They make interbank loans to other banks.
e. They pay interest on deposits.


According to the PPP (purchasing power parity) theory of exchange rates, if Japan (Yen) has 3% inflation and 1% interest rate and Malaysia (Ringgit) has 5% inflation and 2% interest rate (all annual), what should be happening to the Yen/Ringgit exchange rate?


What are conditions under which central banks might opt to use an unconventional monetary policy, such as quantitative easing?

a. Inflation is at or below zero percent.
b. There is a hyperinflation.
c. The nominal interest rate is near zero percent.
d. Banks refuse to/ are unable to lend.
e. a or c
f. c or d


Which of the following make a fixed exchange rate very costly? a. Sticky...
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