Fall 2009                                              Professor: Alan G. Isaac

                    Econ 372 Midterm Examination

Answer all 59 questions. 

1. Which of the following cause a depreciation of the domestic currency in our
first model of exchange rate determination? 
(a) an increase the expected future spot rate 
(b) an increase in the domestic interest rate 
(c) an increase the foreign interest rate 
(d) a. and b. 
(e) a. and c. 

2. 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 spot rate 
(d) the current spot rate 
(e) all of the above 

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

4. Suppose a euro currently costs $1.50 but sells for $1.65 one-year forward.
We can conclude that 
(a) the forward premium on dollars is 15% 
(b) the forward discount on dollars is 15% 
(c) the dollar-euro interest dierential is 15% 
(d) a. and c. 
(e) b. and c. 

5. The US current account deficit in 2008 was about $706 billion. This means
that the US 
(a) borrowed more than 2/3 of a trillion dollars from foreign countries in 2008
alone. 
(b) lent more than 2/3 of a trillion dollars from foreign countries in 2008
alone. 
(c) borrowed more than 2/3 of a trillion dollars from foreign countries over
its entire history, up to 2008 
(d) lent more than 2/3 of a trillion dollars from foreign countries over its
entire history, up to 2008 
(e) none of the above 

6. 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 

7. 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 

8. 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 

9. 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 

10. Arriving in Paris for a junior year abroad, you buy EUR 10,000 and invest
these in a bond that pays 10 percent per year. During the year the exchange
rate changes from 1.50 dollars per euro to 1.35 dollars per euro. 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