Problem Set Review 1




1. Below is a series of statements. You must decide which of the statements would make you look smart at a Washington D.C cocktail party. Answer T (for true) if the statement would make you look smart, answer F (for false) if it would make you look, ... well ... , not so smart. Provide a brief explanation for each response. Of course, let's assume that each comment is relevant to the conversation and does NOT follow the question, "So, I hear your mother is in town?"

A. "A trade deficit can only occur if the government budget is in deficit."

B. "I heard the FED is intervening to lower the value of the dollar, but, if the FED sterilizes the intervention, it probably won't have much effect."

C. "The most effective way the FED can raise the dollar value is to lower the money supply which will raise US interest rates."

D. "Did you know that about $10 billion dollars is traded on foreign exchange markets around the world each day."

E. "The persistent US trade deficits implies that the US will have to suffer a lower average standard of living in the future. It's inevitable!"

F. "Everyone knows that trade deficits are a sign of economic weakness and trade surpluses are a sign of economic strength."

G. "One of the main reasons the Bretton-Woods system of fixed exchange rates broke apart was because the US failed to follow the rules."

H. "If investors think that Latin American currencies will suffer the same fate as some of the Asian NICs currencies in the late 1990s, it may lead to significant capital flight."

I. "One of the biggest obstacles to a single European currency was that each nation involved had to give up some of their monetary autonomy."

J. "A rapid currency depreciation can only have good effects, since it will stimulate exports and reduce imports."

©1999-2004 Steven M. Suranovic, ALL RIGHTS RESERVED
Last Updated on 4/3/04