THE UNIVERSITY OF SYDNEY

Macroeconomic Theory: ECON5002

Week Seven

PRACTICE QUESTIONS

1) For this question, assume the interest parity conditions holds. Also assume that
the domestic interest rate is 10% and that the foreign interest rate is 7%. Given this
information, we would expect that:
A) the domestic currency is expected to appreciate by 3%.
B) individuals will only hold domestic bonds.
C) individuals will only hold foreign bonds.
D) the domestic currency is expected to depreciate by 3%.

2) Suppose the domestic interest rate is 3% and that the foreign interest rate is 6%.
And finally, assume that the domestic currency is expected to appreciate by 4%
during the coming year. Given this information, we know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold foreign bonds.
C) the interest parity condition holds.
D) individuals will only hold domestic bonds.

3) Which of the following expressions represents the real exchange rate (ε)?
A) E
B) EP*
C) EP*/P
D) E/P
E) none of the above

4) Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-
year) bonds in period t. Which of the following expressions represents the amount
of U.K. pounds you will receive in one year (i.e., period t+1) from purchasing U.K.
bonds in period t?
A) i
B) (1 + i*)Eet+1/Et
C) 1 + i*
D) (1 + i*)Et/Eet+1
E) none of the above

5) Which of the following expressions represents the dollar price of foreign

currency?
A) 1/E
B) EP/P*
C) E
D) EP*/P
E) none of the above

6) For this question, assume that the domestic interest rate is 8% and that the
foreign interest rate is 6%. And finally, assume that the domestic currency is
expected to depreciate by 3% during the coming year. Given this information, we
know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold domestic bonds.
C) individuals will only hold foreign bonds.
D) the interest parity condition holds.