True/False PB 1-3

The exercise was created 2025-03-19 by julnie0811. Question count: 22.

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  • EUR appreciates against USD and SEK appreciates against USD then EUR must appreciate against SEK False, True
  • Relative to other time periods bid-ask spread tends to be lower during financial crisis False, True
  • Denote R and R∗ as domestic and foreign interest rate E and Ee as the exchange rate and exchange rate expectation both denominated as the unit of foreign currency per unit of home currency Then the interest parity is written as R∗ = R + (Ee - E)/Ee True, False
  • If domestic currency is more risky than foreign currency then domestic interest rate is higher than foreign interest rate False, True
  • Denote P and P ∗ as the price level in home and foreign country E the exchange rate denominated as the unit of foreign currency per unit of home currency Then absolute PPP is given by E = P/P ∗ False, True
  • Higher money supply lowers the real exchange rate False, True
  • Higher European demand for the Swedish products will make SEK appreciate in real terms against the EUR True, False
  • If the relative PPP holds the absolute PPP may not hold True, False
  • The AA schedule plots the relation between interest rate and exchange rate False, True
  • Every point on the DD schedule represents the relation between exchange rate and output when the money market is in equilibrium False, True
  • Other things equal DD schedule moves to the left when there is a temporary increase in the government spending False, True
  • Other things equal AA schedule moves to the right when there is an expected real appreciation of domestic currency against the foreign currency False, True
  • Denote st as the natural logarithm of the spot exchange rate denominated as the unit of home currency per unit of foreign currency it and i∗t as the interest rate in the home and foreign country Assuming continuous compounding the Uncovered Interest Parity can be written as Et(st+1 − st) = it − i∗t True, False
  • CIP must hold in any conditions False, True
  • If UIP holds but CIP does not hold then the forward rate is still an unbiased predictor for future exchange rate False, True
  • Capital account must be equal to the difference between current account and financial account False, True
  • Suppose the balance of capital account is zero and there is no net errors/omissions if a country runs current account deficit then this country is borrowing from other countries True, False
  • Home currency depreciation relative to foreign currency will increase the external wealth for home country False, True
  • A country has to abandon floating exchange rate regime when it wants to have effective monetary policy and capital controls False, True
  • Floating exchange rate regime is always better than the gold standard False, True
  • A country’s policy that tries to stabilize the domestic economy may also trigger favorable outcome for its current account balance True, False
  • Both fiscal and monetary policy are effective under fixed exchange rate regime False, True

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