CBE Macroeconomics 3

Question 1

Under a fixed exchange rate regime, a country experiencing a balance of payments deficit must:

Accepted Answer

Use foreign reserves to defend the peg

Answer

To maintain a fixed rate when demand for the currency falls, the central bank must sell foreign reserves to buy its own currency and support the peg.

Question 2

The Solow growth model predicts that, holding other factors constant, poorer countries will grow faster than richer ones. This is called:

Accepted Answer

Absolute convergence

Answer

Absolute (unconditional) convergence predicts that all economies converge to the same steady state due to diminishing returns to capital, so poorer nations grow faster.

Question 3

Which of the following best describes 'crowding out' in fiscal policy?

Accepted Answer

Government deficits reduce private investment by raising interest rates

Answer

Crowding out occurs when government borrowing raises real interest rates, making private investment more expensive and thus reducing it.

Question 4

The velocity of money in the quantity theory equation (MV = PQ) represents:

Accepted Answer

The average number of times a dollar is spent in a period

Answer

Velocity (V) measures how frequently the average dollar changes hands in transactions within a given time period.

Question 5

If a country's current account is in deficit, which must be true by definition?

Accepted Answer

The capital and financial account is in surplus

Answer

By the balance of payments accounting identity, a current account deficit must be exactly offset by a capital and financial account surplus.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Macroeconomics 3