Fall 2008                                                        Professor: Alan G. Isaac 
ECON­372                                                         MIDTERM EXAMINATION 

Instructions: ALL QUESTIONS ARE EQUALLY WEIGHTED. Choose the one best
answer. The exam is closed books, closed notes. All variables are as
defined in class. GOOD LUCK!! 

MULTIPLE CHOICE Answer all 58 questions. 

1. Which of the following are endogenous in our first model of exchange
rate determination? 
(a) the domestic interest rate 
(b) the foreign interest rate 
(c) the expected future sport rate 
(d)  the current spot rate 
(e) all of the above 

2. A U.S. dollar costs 7.5 Norwegian kroner or 1.25 Swiss francs. The cost
of francs in kroner is 
(a) 8.75 
(b) 6.25 
(c)  6 
(d) 0.66 
(e) 9 3/8 

3. Suppose a euro currently costs $1.50 but sells for $1.65 one­year
forward. We can conclude that 
(a) the forward discount on dollars is 15% 
(b) the forward premium on dollars is 15% 
(c) the dollar­euro interest di#erential is 15% 
(d)  a. and c. 
(e) b. and c. 

4. According to the course blog, the US current account deficit in 2007 was
about $730 billion. This means that the US 
(a)  borrowed nearly 3/4 of a trillion dollars from foreign countries in 2007 alone. 
(b) lent nearly 3/4 of a trillion dollars from foreign countries in 2007 alone. 
(c) borrowed nearly 3/4 of a trillion dollars from foreign countries over its entire history, up to 2007 
(d) lent nearly 3/4 of a trillion dollars from foreign countries over its entire history, up to 2007 
(e) none of the above 

5. When the BEA computes the net international investment position of the
US, it adjusts for the e#ect of exchange rate changes. In 2007 this added
to the NIIP almost 
(a)  half a trillion dollars 
(b) a trillion dollars 
(c) a trillion and a half dollars 
(d) two trillion dollars 
(e) none of the above (the e#ect was nil) 

6. US foreign assets are very roughly equal to 
(a) 10% of current GDP 
(b) 25% of current GDP 
(c) 50% of current GDP 
(d)  100% of current GDP 
(e) 125% of current GDP 

7. US foreign liabilities are very roughly equal to 
(a) 10% of current GDP 
(b) 25% of current GDP 
(c) 50% of current GDP 
(d) 100% of current GDP 
(e)  125% of current GDP 

8. The national income accounts avoid double counting by 
(a)  including only the value of final goods and services. 
(b) subtracting imports from GDP. 
(c) subtracting exports from GDP. 
(d) subtracting unilateral transfers from GDP. 
(e) all of the above 

9. Ceteris paribus, a nation might reduce its current account deficit by 
(a) increasing private saving 
(b) reducing domestic investment 
(c) cutting the government budget defict 
(d) a. and b. 
(e) all of the above 

10. Suppose a country's net foreign debt is 25% of its GDP and that foreign
assets and liabilities both yield 5% per year. We expect its income account
to show 
(a) a deficit of about 2.5% of GDP 
(b)  a deficit of about 1.25% of GDP 
(c) a surplus of about 1.25% of GDP 
(d) a surplus of about 2.5% of GDP 
(e) none of the above 

11. Among the nations of the world, the U.S. is commonly estimated to be
the largest debtor. Income receipts on U.S.­owned assets abroad 
(a) are therefore very negative. 
(b) are therefore far below income payments on foreign­owned assets in the U.S. 
(c) are nevertheless far above income payments on foreign­owned assets in the U.S. 
(d)  are nevertheless slightly above income payments on foreign­owned assets in the U.S. 
(e) none of the above 

12. In Munich a bratwurst costs 5 euros. In Boston's Fenwick park a hotdog
costs 4 dollars. The current exchange rate is $1.40 per euro. What is the
price of bratwurst in hotdog terms? 
(a) 0.89 hotdogs per bratwurst 
(b) 1.12 hotdogs per bratwurst 
(c) 1.40 hotdogs per bratwurst 
(d)  1.75 hotdogs per bratwurst 
(e) 14.28 hotdogs per bratwurst 

13. Reconsider the previous bratwurst problem. The exchange rate changes to
$1.25 per euro. This means that 
(a) the dollar has appreciated 
(b) it takes fewer dollars to buy a bratwurst 
(c) it takes fewer hotdogs to buy a bratwurst 
(d) a. and b. 
(e)  all of the above 

14. Arriving in Paris for a junior year abroad, you buy 10,000 EUR and
invest these in a bond that pays 10 percent per year. During the year the
exchange rate changes from 1.50 USD per EUR to 1.35 USD per EUR. Your
dollar return on your investment is 
(a) about 10% per year 
(b) about 5% per year 
(c)  about 0% per year 
(d) about ­5% per year 
(e) about ­10% per year 

15. Which of the following is an example of a ``flow'' variable? 
(a) nominal GDP 
(b) real GDP 
(c) investment 
(d) the rate of money growth 
(e) all of the above