Econ 2123 Problem Set 5
Instructor: Wenwen Zhang
TA: Peter Tsui, Lawrence Ko
Lecture: L3, L4
Due date & Homework Submission Location: Thu, Nov 26, at 5:30p.m. Homework Collection Box on the LSK 6th floor (Next to Econ Department, near lifts 3-4)

Multiple Choices

1. Which of the following, all else fixed, will cause the real exchange rate to increase?
A) a nominal depreciation
B) a reduction in the foreign price level
C) a reduction in the domestic price level
D) all of the above
E) none of the above

2. When the dollar appreciates relative to the pound, the pound price of the dollar
A) increases.
B) decreases.
C) does not change.
D) increases or decreases, depending on the amount of the depreciation.
E) changes in the next period.

3. When the U.S. has a current account surplus, we know that it is also
A) running a balanced trade account.
B) lending to the rest of the world.
C) borrowing from the rest of the world.
D) suffering from negative investment income.
E) none of the above

4. Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is less than the U.K. interest rate. Given this information, we know that investors expect
A) the pound to depreciate.
B) the pound to appreciate.
C) the dollar-pound exchange rate to remain fixed.
D) the U.S. interest rate to fall.
E) none of the above

5. The quantity of imports will increase when there is
A) a reduction in the real exchange rate.
B) an increase in domestic output.
C) an increase in foreign output.
D) all of the above
E) none of the above

6. Assume the Marshall-Lerner condition holds. Which of the following will cause a reduction in net exports?
A) a reduction in government spending
B) a reduction in investment
C) an increase in foreign output
D) an increase in the real exchange rate
E) all of the above

7. For