True/False PB 1-3

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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