Tutorial 9

The answers to the multiple-choice questions will be published the day before the tutorial.
The answers to the open questions are only discussed during the tutorial and will not be
published.
Multiple choice questions:
Question 1
A reduction in a country's money supply causes…
A. …its currency to appreciate in the foreign exchange market.
B. …its currency to depreciate in the foreign exchange market.
C. …affects other countries' currencies in the foreign exchange market.
D. …does affect its currency in the foreign exchange market in an ambiguous manner.
E. …does not affect its currency in the foreign exchange market.
Question 2
The aggregate real money demand schedule L(R,Y)…
A. …slopes upward because a fall in the interest rate raises the desired real money
holdings of each household and firm in the economy.
B. …slopes downward because a fall in the interest rate raises the desired real money
holdings of each household and firm in the economy.
C. …slopes downward because a fall in the interest rate reduces the desired real money
holdings of each household and firm in the economy.
D. …has a zero slope because a fall in the interest rate keeps constant the desired real
money holdings of each household and firm in the economy.
E. …slopes downward because a rise in the interest rate makes consumers less focused
on the liquidity of their assets.
Question 3
If there is initially an…
A. …excess supply of money, the interest rate will rise, and if there is also an excess
demand, it will rise rapidly.
B. …excess supply of money, the interest rate will rise, and if there is initially an excess
demand, it will fall.
C. …excess supply of money, the interest rate will fall, and if there is also an excess
demand, it will fall rapidly.
D. …excess demand for money, the interest rate will fall, and the supply of money it will
rise.
E. …excess supply of money, the interest rate will fall, and if there is initially an excess
demand, it will rise.
Question 4
Which one of the following statements is the most accurate?
A. An increase in the money supply lowers the interest rate while a fall in the money
supply raises the interest rate, given the price level and output.
B. A decrease in the money supply lowers the interest rate while an increase in the
money supply raises the interest rate, given the price level and output.
C. An increase in the money supply does not usually affect the interest rate.
D. An increase in the money supply lowers the interest rate while a fall in the money
supply raises the interest rate, given the output level.
E. An increase in the money supply lowers the interest rate while a fall in the money
supply raises the interest rate, given the price level.
Question 5
Which one of the following statements is the most accurate?
A. Given PUS and YUS, when the US money supply decreases, the dollar interest rate
declines and the dollar depreciates against the euro.
B. Given PUS and YUS, when the US money supply rises, the dollar interest rate declines
and the dollar appreciates against the euro.
C. Given YUS, when the US money supply rises, the dollar interest rate declines and the
dollar depreciates against the euro.
D. Given PUS, when the US money supply rises, the dollar interest rate declines and the
dollar depreciates against the euro.
E. Given PUS and YUS, when the US money supply rises, the dollar interest rate declines
and the dollar depreciates against the euro.
Question 6
Given PUS and YUS:
A. An increase in the European money supply causes the euro to depreciate against the
dollar, but it does not disturb the U.S. money market equilibrium.
B. An increase in the European money supply causes the euro to appreciate against the
dollar, but it does not disturb the U.S. money market equilibrium.
C. An increase in the European money supply causes the euro to appreciate against the
dollar, but it does not disturb the U.S. money market equilibrium.
D. An increase in the European money supply causes the euro to depreciate against the
dollar, and it creates excess demand for dollars in the U.S. money market.
E. An increase in the European money supply causes the euro to appreciate against the
dollar, and it creates excess demand for dollars in the U.S. money market.
Question 7
We have the following data for a hypothetical open economy:
GNP = $10,000
Consumption (C) = $7,500
Investment (I) = $1,400
Government Purchases (G) = $1,600
What is the value of the current account?
A. $500
B. $-500
C. $1100
D. $900
E. $4500
Question 8
For a given level of:
A. real GNP, changes in interest rates cause a decrease of the L(R,Y) schedule.
B. nominal GNP, changes in interest rates cause movements along the L(R,Y) schedule.
C. nominal GNP, changes in interest rates cause an increase in the L(R,Y) schedule.
D. real GNP, changes in interest rates cause movements along the L(R,Y) schedule.
E. real GNP, changes in interest rates cause an increase of the L(R,Y) schedule.

Question 9
A country's gross national product (GNP) is

A. the value of all final goods and services produced by its factors of production and
sold on the market in a given time period.
B. the value of all intermediate goods and services produced by its factors of
production and sold on the market in a given time period.
C. the value of all final goods produced by its factors of production and sold on the
market in a given time period.
D. the value of all final goods and services produced by its factors of production and
sold on the market.
E. the value of all final goods and services produced by its factors of production,
excluding land, and sold on the market in a given time period.
Question 10
The aggregate money demand depends on…

A. …the interest rate.

B. …the price level.
C. …real national income.
D. …the interest rate, price level, and real national income.
E. …the price level and the liquidity of the asset.

Question 11
In open economies…

A. …saving and investment are necessarily equal.

B. …as in a closed economy, saving and investment are not necessarily equal.
C. …saving and investment are not necessarily equal as they are in a closed
economy.
D. …saving and investment are necessarily equal contrary to the case of a closed
economy.
E. …investment always refers to the domestic stock market.

Question 12

In an open economy, the CA is equal to:

A. Y - (C + I + G).
B. Y + (C + I + G).
C. Y - (C - I + G).
D. Y - (C + I - G).
E. Y + (C - I - G).
Open questions
Question 1: Fantasia – a stylized model economy
Suppose that the country Fantasia is a closed economy. Its GNP is equal to 1000. Moreover,
the following equations characterize Fantasia:
T = 0.2Y
G = 300 − 0.1Y
I = 100 + 0.1Y
C = 200 + c(Y − T)
a) Derive the parameter c for which national income (GNP) equals expenditures by domestic
households.
b) What is the amount of private and government savings?
c) What is the amount of national savings? Does it equal investment?
d) Assume that GNP stays constant, and that consumption by domestic households + net
foreign consumption is equal to the previous calculated domestic consumption in a).
Provide the relationship between the current account and the proportion of disposable
income spend on consumption, so parameter c. Is this a realistic assumption based on what
you learned in the previous part of the course?
e) Assume that GNP increases to 1200 and that the marginal propensity to consume
(parameter c) is equal to 0.4. Calculate the value of the current account.
f) Under the assumptions of d, calculate private savings and government savings. Does
national savings equal investment? Compare your answer to 2b.

Question 3: The money market and exchange rate in the short run
Suppose that Fantasia, after its trade reforms also imposes no capital restrictions prices are
fixed.
a) What are the determinants of aggregate money demand and explain their respective
effects on aggregate money demand?
b) Derive the equation for the aggregate real money demand curve and portray it in a graph.
What is the effect of the interest rate r and Y?
c) What is the effect on an increase in domestic real income on the interest rate, ceteris
paribus. How does the exchange rate respond: does the currency of Fantasia appreciate,
depreciate or does it not change? Provide a sketch to support your analysis.
d) Why would exporting firms demand a policy intervention? Provide one argument.
e) What is the effect on the domestic interest rate of the central bank intervention? What
happens to the currency of Fantasia? Provide a sketch to support your analysis.

Question 4: The money market and population size

How would you expect a fall in a country’s population to alter its aggregate money demand
function? Would it matter if the fall in population were due to a fall in the number of
households or due to a fall in the size of the average household?