Using the UIP equation, equilibrium in the short run occurs when
a) arbitrage is possible
b) the spot rate is such that foreign and domestic investment returns are equalized
c) the spot rate and forward rate are equalized
d) foreign interest rates and domestic interest rates are equalized
Ans: b) the spot rate is such that foreign and domestic investment returns are equalized
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Three individuals have $1000 and identical preferences for gum, g, and cigarettes, s, as measured by the utility function U(g,s) = 10g0.9s0.1. The price of gum is $9 and the price of cigarettes is $12. What is the market surplus/shortage at a price of $12 when the supply of cigarettes is 5?
A) There will be a shortage of 3 cigarettes. B) There will be a surplus of 3 cigarettes. C) There will be a shortage of 2/3 cigarettes. D) There will be a surplus of 2/3 cigarettes.
If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are:
A. not going to let inflation deviate from its target at all. B. not concerned at all about inflation. C. less concerned about keeping inflation close to its short-run target. D. very concerned about keeping inflation close to the target rate.