1,

Imagine a world of two countries in which the only causes of fluctuations in stock prices are unexpected shifts in monetary policies. Under which exchange rate regime would the gains from international asset trade be greater, fixed or floating?

A.

Fixed exchange rate regime.

B.

Floating exchange rate regime.

C.

Both are the same.

D.

Uncertain

2,

If the foreign inflation rate rises permanently, what would you expect the effect to be on a domestic economy in a short run under a floating exchange rateregime?

A.

Home currency will depreciate and domestic output will fall.

B.

Home currency will appreciate and domestic output will remain the same.

C.

Home currency will appreciate and domestic output will fall.

D.

Both exchange rate and domestic output will remain the same.

E.

Home currency will depreciate and domestic output will remain the same.

F.

Home currency will appreciate and domestic output will rise.

G.

Home currency will depreciate and domestic output will rise.

What would happen in the long run?

(Hint:

pay attention to the long-run relationship between domestic and foreign nominal interest

rates.)

A.

The effect on the rate of domestic currency appreciation is ambiguous.

B.

The rate of domestic currency appreciation remains the same.

C.

The rate of domestic currency appreciation rises.

D.

The rate of domestic currency appreciation falls.