Deck 17: The Income Adjustment Mechanism and Synthesis of Automatic Adjustments

Question 1

A depreciation of a deficit nation's currency from a condition of full employment:

A)may improve the nation's trade balance
B)will improve the nation's trade balance
C)will leave the nation's trade balance unchanged
D)will cause a deterioration in the nation's trade balance

Answer 1

A

Question 2

The improvement in a nation's balance of trade and payments resulting from a depreciation of its currency is:

A)reinforced by the induced fall in imports
B)partly neutralized by the induced rise in imports
C)partly neutralized by the induced fall in imports
D)any of the above.

Answer 2

B

Question 3

An autonomous fall in M from a condition of equilibrium in national income and in the trade balance results in the nation's income:

A)rising and its trade balance turning to deficit
B)falling and its trade balance turning into surplus
C)rising and its trade balance turning into surplus
D)rising and the trade balance remaining in equilibrium

Answer 3

C

Question 4

In the real world,the automatic income,price,and interest adjustment mechanisms,if allowed to operate,are likely to:

A)reinforce each other but still result in incomplete adjustment
B)reinforce each other and result in complete adjustment
C)work at cross purposes from each other and result in incomplete adjustment
D)work at cross purposes from each other and result in perverse adjustment

Question 5

If MPS=0.2 and MPM=0.3,the foreign trade multiplier is:

A)5
B)3.3
C)3
D)2

Question 6

In order to isolate the income adjustment mechanism,we assume that:

A)the nation operates under a fixed exchange rate system
B)all prices,wages,and interest rates are constant
C)the nation operates at less than full employment
D)all of the above

Question 7

A benefit of automatic adjustment mechanisms is that they:

A)avoid the possibility of policy mistakes
B)avoid the time lags associated with adjustment policies
C)begin to operate as soon as balance of payments disequilibria develop
D)all of the above

Question 8

By itself,the automatic income adjustment mechanism is likely to bring about:

A)incomplete adjustment
B)complete adjustment
C)perverse adjustment
D)any of the above

Question 9

When S exceeds I,an open economy has a trade balance:

A)surplus
B)deficit
C)equilibrium
D)any of the above

Question 10

The income elasticity of imports is given by:

A)the percentage change in income over the percentage change in imports
B)the change in imports over the change in income
C)the marginal propensity to import over the average propensity to import
D)the average propensity to import over the marginal propensity to import

Question 11

The marginal propensity to consume measures:

A)the ratio of imports to income
B)the ratio of income to imports
C)the change in imports over the change in income
D)the change in income over the change in imports

Question 12

The S-I function rises because:

A)rising I are subtracted from constant S
B)constant I are subtracted from rising S
C)rising I are subtracted from rising S
D)constant I are added to falling S

Question 13

An autonomous increase in S from a condition of equilibrium in national income and in the trade balance results in the nation's income:

A)rising and its trade balance turning into surplus
B)falling and its trade balance turning into surplus
C)falling and its trade balance turning into deficit
D)rising and its trade balance turning into deficit

Question 14

The foreign trade multiplier of nation 1 is largest:

A)when there are no foreign repercussions
B)with foreign repercussions for an autonomous increase in nation 1's X that replace domestic production in nation 2
C)with foreign repercussions for an autonomous increase in I in nation 1
D)with foreign repercussions for an autonomous increase in I in nation 2

Question 15

The equilibrium level of national income in an open economy is given by:

A)I + X = S + M
B)X - M = S - I
C)I + (X-M)= S
D)all of the above