We can also describe the influence of the interest rate on money

demand in terms of the economic concept of opportunity cost—the

amount you sacrifice by taking one course of action rather than
another.

The interest rate measures the opportunity cost of holding money

rather than interest-bearing bonds. A rise in the interest rate
therefore raises the cost of holding money and causes money
demand to fall.

Chapter 5 (Multiple-Choice Questions)

Revealed correct answer

[Link] does a rise in real income affect aggregate demand? (c)

(a) Y increases, Yd increases, Im increases, CA decreases, D

decreases. But Y increases, Yd increases, C increases, D increases
by more

(b) Y increases, Yd increases, Im decreases, CA decreases, D decreases. But

Y increases, Yd increases, C increases, D increases by more

Y increases, Yd increases, Im increases, CA decreases, D decreases. But Y

increases, Yd increases, C increases, D increases by less.

(e) Y increases, Yd increases, Im decreases, CA decreases, D decreases. But

Y increases, Yd increases, C increases, D increases by less

Correct

[Link] J-curve illustrates which of the following?

(a) The effects of depreciation on the foreign country’s economy

(b) The immediate increase in current account caused by a currency
depreciation

(c) The gradual adjustment of home prices to a currency depreciation

(d) The gradual adjustment of the current account to a currency

depreciation

Correct

[Link] the short run, with prices fixed, how would a temporary increase in
government spending affect the exchange rate and output?

(a) It will increase output and appreciate the currency.

(b) It will increase output and depreciate the currency.

(c) It will decrease output and appreciate the currency.

(d) It will decrease output and depreciate the currency.

Revealed correct answer

[Link] is the AA schedule derived?

(a) The AA schedule has a positive slope because an increase in output leads
to a depreciation of the currency.

(b) The AA schedule has a negative slope because an increase in output

leads to a decrease in the domestic interest rate and appreciation of
domestic currency.

(c) The AA schedule has a negative slope because an increase in

output leads to an increase in the domestic interest rate and
appreciation of domestic currency.

Tang snr lượng => tang cầu tiền=> appre

Cung tiền tăng => qđịnh vị trí AA, k qđịnh hình dạng => dịch phải
=> lãi giảm=> tiền tr nc mất giá

(d) The AA schedule has a positive slope because an increase in the money
supply leads to an increase in the domestic interest rate.

Correct

[Link] one of the following statements is most accurate?

(a) Factors of production can only be over-employed in the short run.

(b) Factors of production can only be under-employed in the short run.

(c) Factors of production can be over- or under-employed in the long run.

(d) Factors of production can be over- or under-employed in the

short run.

Correct

[Link] one of the following statements is most accurate?

(a) In general, consumption demand rises by less than income.

(b) In general, consumption demand rises by less than disposable

income.

(c) In general, consumption demand rises by more than disposable income.

(d) In general, consumption demand rises by more than income.

(e) In general, consumption demand rises by the same amount as disposable

income rises.

Correct

[Link] domestic currency price of a representative foreign expenditure basket

is

(a) P, the domestic price level

(b) E, the nominal exchange rate

(c) P times E, the domestic price level times exchange rate

(d) P*, the foreign price level

(e) P* times E, the foreign price level times the nominal exchange
rate

Correct

[Link] real exchange rate, q, is defined as

(a) The price of the foreign basket divided by the price of the
domestic one

(b) The price of the domestic basket divided by the price of the foreign one

(c) The price of the foreign basket

The price of the domestic basket

Correct

[Link] one of the following statements is the most accurate?

(a) An increase in disposable income improves the current account.

(b) An increase in disposable income does not affect the current account.

(c) An increase in disposable income worsens the current account.

(d) An increase in income worsens the current account.

(e) An increase in income improves the current account.

Revealed correct answer

[Link] q= EP*/P rises, mức giá thực tăng=> giá hh nc ngoài tăng so với
trong nc => hangf trong nc rẻ hơn

Value effect => IM TĂNG

Volume effect => M giảm

(a) IM will rise.

(b). IM will fall.

(c) IM may rise or fall.

(d) IM is not affected.

[Link] else equal, which one of the following statements is the most
accurate?

(a) A rise in domestic real income raises aggregate demand for home output.

(b) A rise in domestic real income decreases aggregate demand for

home output because of the increased demand for import.

(c) A rise in domestic real income keeps aggregate demand for home output
at the same level.

(d) It is difficult to tell whether a rise in domestic real income affects

positively or negatively aggregate demand for home output.

[Link] the DD-AA model, a rise in the exchange rate, i.e. currency
depreciation,

(a) raises aggregate demand and raises output.

(b) raises aggregate demand and lowers output.

(c) raises aggregate demand and does not affect output.

(d) lowers aggregate demand and raises output.

[Link] the output market equilibrium, any rise in the foreign price level, P*,
will cause

(a) an upward shift in the aggregate demand schedule and an

expansion of output

(b) an upward shift in the aggregate demand schedule and a reduction in

output

(c) a downward shift in the aggregate demand schedule and an expansion of

output

(d) a downward shift in the aggregate demand schedule and a reduction in

output (e) a downward shift in the aggregate demand schedule but leaves
output intact

[Link] the short-run, a temporary increase in the money supply

(a) Shifts the DD curve to the right, increases output and appreciates the
currency

(b) Shifts the AA curve to the left, increases output and depreciates the
currency

(c) Shifts the AA curve to the left, decreases output and depreciates the
currency

(d) Shifts the AA curve to the left, increases output and appreciates the
currency

(e) Shifts the AA curve to the right, increases output and

depreciates the currency

[Link] the short-run, a temporary increase in government spending causes

(a) a shift of the DD curve to the left, output increases and the currency
appreciates

(b) a shift of the DD curve to the right, output decreases and the currency
appreciates
(c) a shift of the DD curve to the right, output increases and the currency
depreciates

(d) a shift of the DD curve to the left, output decreases and the currency
appreciates

(e) a shift of the DD curve to the right, output increases and the
currency appreciates

[Link] the economy starts at the long-run equilibrium, a permanent

fiscal expansion

(a) Shifts the DD and the AA schedules to the right, increasing output

(b) Shifts the DD and the AA schedules to the right, decreasing output

(c) Shifts the DD to the right, increasing output

(d) Shifts the DD to the left decreasing output

(e) Shifts the DD schedules to the right and the AA schedules to the
left, leaving output the same

[Link] aggregate demand for home output can be written as a function of: I.
Real exchange rate. II. Government spending. III. Disposable income.

(a) I only

(b) III only

(c) I and III

(d) II and III

(e) I, II, and III

[Link] of the following do not affect the position of the AA curve?

(a) Temporary changes in government spending.

(b) Permanent changes in government spending.

(c) Temporary changes in domestic money supply.

(d) Temporary changes in foreign money supply.

[Link] of the following do not affect the position of the DD curve?

(a) Temporary monetary changes.

(b) Government spending.

(c) Taxes.

(d) Export demand.

(e) Price levels.

Correct

[Link] one of the following statements is most accurate?

(a) In the long run, domestic output depends on the available

domestic supplies of factors of production and available
technologies.

(b) In the short run, domestic output depends on the available domestic
supplies of factors of production and available technologies.

(c) In the long run, foreign output depends on foreign disposable income.

(d) All of the above.

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Vv

Trade barriers, such as tariffs or quotas, are measures implemented by

governments to restrict imports and protect domestic industries. While trade
barriers can have various effects on the economy, they do not necessarily
improve the current account balance.

The current account balance is a component of the balance of payments,

which measures the flow of goods, services, and capital between countries. It
consists of the trade balance (exports minus imports), net income from
abroad, and net transfers.

Trade barriers can affect the current account balance in several ways:
 1. Impact on imports: By restricting imports, trade barriers can reduce the
volume of imported goods and services. This can lead to a decrease in
the trade deficit (or an increase in the trade surplus), which would
improve the current account balance.

2. Impact on exports: Trade barriers can also provoke retaliation ( trả thù)
from trading partners, leading to reduced exports. This can offset any
positive impact on the trade balance from reduced imports, potentially
worsening the current account balance.

3. Impact on competitiveness: Trade barriers can make domestic

industries less competitive by shielding them from international
competition. This can hinder innovation, productivity, and efficiency,
which may negatively affect exports and the overall current account
balance.

4. Impact on investment: Trade barriers can discourage foreign direct

investment (FDI) by creating an uncertain business environment.
Reduced FDI can limit capital inflows, which are an important
component of the current account balance.

Therefore, while trade barriers can have an impact on the current account
balance by affecting imports and exports, the overall effect is not
necessarily positive. The net impact depends on various factors,
including the specific trade barriers implemented, the response of trading
partners, and the broader economic conditions.

Is it possible for a country to have a current account deficit at the

same time it has a surplus in the balance of payments

Yes, it is possible for a country to have a current account deficit while having
a surplus in the balance of payments. The balance of payments is a record of
all economic transactions between a country and the rest of the world over a
specific period. It consists of the current account, capital account, and
financial account.

The current account includes the balance of trade (exports minus imports of
goods and services), net income from abroad (such as interest and
dividends), and net transfers (such as foreign aid). A current account deficit
occurs when a country's imports exceed its exports, or when it has a net
outflow of income and transfers.
On the other hand, the balance of payments also includes the capital
account and financial account. The capital account records capital
transfers, such as debt forgiveness and migrants' transfers, while the
financial account records the inflows and outflows of financial assets, such as
foreign direct investment and portfolio investment.

Therefore, it is possible for a country to have a surplus in the balance of

payments if it receives more capital inflows or financial investments
than it sends out ( nếu có thặng dư trong financial và capital ). This
surplus in the capital and financial accounts can offset the current
account deficit, resulting in an overall surplus in the balance of payments

There are several factors that can affect the demand for foreign
currency. These factors include:
1. Interest rates: Higher interest rates in a country can attract foreign investors, leading to an
increased demand for the country's currency. This is because higher interest rates offer the
potential for greater returns on investments.

2. Inflation: If a country has high inflation rates, the value of its currency may decrease. As a
result, the demand for foreign currency may increase as people seek to protect their purchasing
power by holding foreign currencies.

3. Economic stability: Countries with stable economies and low levels of political and economic
risk are more likely to attract foreign investment. This can lead to an increased demand for
their currency.

4. Trade balance: The balance of trade between countries can also impact the demand for foreign
currency. If a country has a trade deficit (imports exceed exports), it will need to purchase
foreign currency to pay for the excess imports, increasing the demand for foreign currency.

5. Speculation: Speculators in the foreign exchange market can also influence the demand for
foreign currency. If speculators anticipate that a currency will appreciate in value, they may
increase their demand for that currency, hoping to profit from its future appreciation.

6. Government policies: Government policies, such as capital controls or restrictions on foreign

investment, can also affect the demand for foreign currency. These policies can either increase or
decrease the demand for foreign currency, depending on their impact on the flow of capital in and
out of the country.

It is important to note that these factors can interact with each other and have complex effects on the
demand for foreign currency. Additionally, the relative strength of these factors can vary depending on the
specific circumstances of each country.
The interest parity condition(IPC) states that the difference between the interest rates of two
nations should be exactly equal to the difference between the forward exchange rate(FER) and
spot exchange rate(SER) of the two countries. The formula can be written as:
(FER/SER)-1 = i-i*
Where i is the domestic interest rate and i* is the foreign interest rate and (FER/SER)-1 is the
forward premium(difference between forward and spot rate).
People tend to buy more bonds when they expect to get more returns so if the interest rate in a
nation(domestic nation) is higher than the other(foreign nation), more people will buy bonds
from the nation with higher interest rates. Even if the bonds in two nations yield the same return,
the difference in their exchange rates provides a chance for arbitrage.
If a domestic nation earns higher returns on foreign bonds, it will raise the demand for foreign
bonds and thus, the price of the same. As a result, the interest rate in a foreign nation will fall.
Simultaneously, the rise in the demand for foreign bonds will lead to a higher demand for foreign
currency, thus, the value of the foreign currency will rise and the currency will appreciate and the
expected exchange rate or the FER will increase. With this change in the exchange rate, the
returns on bonds from both nations will equalize. Therefore, there will be no chances of
arbitrage. So, the interest parity condition ensures that all the expected returns from both nations
are equal such that there is no excess supply of or excess demand for any type of deposits or
bonds. This condition leads to the equilibrium level in the foreign exchange market. This is
because when the returns will be the same there will be no upward or downward pressure on the
currency demand and thus, the exchange rate will stay at equilibrium.