1. An investor who owns foreign currency will buy a put option on the

foreign currency (the right to sell the foreign currency for a certain number

of units of domestic currency) if

a. he expects the domestic currency to appreciate.

b. he expects the domestic currency to depreciate.

c. currency markets are volatile.

2. Suppose the domestic money supply rises and the exchange rate is

initially at its PPP value then if the exchange rate is a random walk

a. short term deviations from PPP will result.

b. long term deviations from PPP may result.

c. both (a) and (b).

3. If supply side economics is incorrect tax cuts in the U.S. may

a. raise the U.S. trade deficit.

b. raise U.S. inflation.

c. both (a) and (b).

4. Suppose capital is perfectly mobile and the foreign stock market ex-

periences sustained rises while the domestic stock market remain nearly flat.

If the exchange rate is floating then the supply-demand model of exchange

rates predicts

a. a rise in E and a fall in XM.

b. a rise in XM and rise in E.

c. jumps in the domestic interest rate and a fall in XM.

5. Suppose everyone has rational expectations and the domestic government announces a rise in its money growth rate then

a. the rate at which the domestic currency depreciates rises in the short run and more in the long run.

b. domestic inflation rises immediately to the new money growth rate.

c. domestic GDP rises in the short run.