Deck 22: How Does the Open Macroeconomy Work

Question 1

An increase in government spending will:

A)shift the IS curve to the left.
B)shift the IS curve to the right.
C)increase the slope of the IS curve.
D)shift the LM curve to the right.

Answer 1

B

Question 2

For small open economy, assume that the marginal propensity to import is 0.3, and that interest rates, exchange rates, and the price level are all constant. If an increase of $10 billion in government spending results in an increase of $6 billion in imports, then:

A)real GDP increases by $4 billion.
B)the spending multiplier is 2.
C)taxes increase by $10 billion.
D)real domestic investment decreases by $4 billion.

Answer 2

A

Question 3

The IS curve has a:

A)positive slope because a higher interest rate leads to an increase in foreign investment and thus raises the level of aggregate income.
B)negative slope because a higher interest rate leads to a decrease in government spending which reduces domestic output level.
C)negative slope because a higher interest rate leads to a decrease in aggregate demand that results in lowering of domestic production level.
D)positive slope because a higher interest rate leads to an increase in aggregate savings and thus an increase in domestic real investment.

Answer 3

C

Question 4

The IS curve illustrates all combinations of domestic output levels and interest rates for which:

A)the domestic product market is in equilibrium.
B)the domestic money market is in equilibrium.
C)there is a zero balance in the country's official settlements balance.
D)there is full employment.

Question 5

The LM curve illustrates all combinations of domestic output levels and interest rates for which:

A)the domestic product market is in equilibrium.
B)the domestic money market is in equilibrium.
C)there is a zero balance for the country's official settlements balance.
D)there is full employment.

Question 6

Which of the following will NOT cause the IS curve to shift to the left?

A)A contractionary fiscal policy
B)An exogenous decrease in exports
C)An exogenous decrease in imports
D)An exogenous decrease in household consumption

Question 7

When taking into account foreign-income repercussions, the spending multiplier is:

A)smaller because an increase in domestic imports causes current account deficit.
B)larger because an increase in domestic imports causes foreign income to rise and thus boosts domestic exports.
C)smaller because an increase in domestic imports lowers the growth in the domestic exports.
D)larger because an increase in domestic imports causes a surplus in the official settlements balance.

Question 8

The locomotive theory posits that growth in one or more large countries:

A)will retard the growth of smaller countries dependent on exports.
B)will lead smaller countries to open their economies.
C)can put pressure on their domestic import-competing firms.
D)can raise growth in other smaller countries that trade with these larger countries.

Question 9

The greater the marginal propensity to import:

A)the smaller the spending multiplier.
B)the greater the level of investment.
C)the greater is the net export.
D)the smaller is the level of consumption.

Question 10

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.2, then value of the simple spending multiplier is:

A)2.0.
B)0.5.
C)1.5.
D)0.1.

Question 11

If C represents aggregate consumption, I_d represents domestic investments, G represents government expenditures, E represents national expenditures on goods and services, X represents foreign demands for exports, and M represents domestic demand for imports, then aggregate demand in an economy equals:

A)C + I_d + G.
B)E + C + I_d + (X - M).
C)C + I_d + G + (X - M).
D)C + I_d + G + (M - X).

Question 12

The amount by which imports increase when income goes up by one dollar is called:

A)the marginal propensity to consume.
B)the spending multiplier.
C)the money multiplier.
D)the marginal propensity to import.

Question 13

At points above the IS curve, there is an _____ and at points below the IS curve there is an _____.

A)excess demand for goods; excess supply of goods
B)excess demand for money; excess supply of money
C)excess supply of money; excess demand for money
D)excess supply of goods; excess demand for goods

Question 14

Fiscal policy consists of:

A)changes in money supply and interest rates.
B)changes in government expenditures and taxes.
C)changes in exchange rate par values.
D)changes in the official settlements balance.

Question 15

Equilibrium GDP in the short-run is determined at the point where:

A)gross domestic production equals aggregate demand.
B)domestic production equals domestic consumption.
C)imports equal exports.
D)the rate of unemployment equals zero.

Question 16

An increase in the spending multiplier causes the IS curve to:

A)become steeper.
B)become flatter.
C)shift temporarily to having a positive slope.
D)shift to the left.

Question 17

Real domestic investment spending is:

A)positively related to the marginal propensity to consume.
B)negatively related to the level of interest rates in the economy.
C)positively related to government spending.
D)negatively related to the exchange rate.

Question 18

The goal of internal balance includes:

A)growth stability.
B)full employment of resources.
C)a reasonable and sustainable balance of payments with the rest of the world.
D)exchange rate stability.

Question 19

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.1, and the government increases expenditures by $10 billion, ignoring foreign-income repercussions, how much will GDP rise?

A)$20 billion.
B)$10 billion.
C)$25 billion.
D)$15 billion.

Question 20

Which of the following is NOT a fundamental objective for the performance of a country's macroeconomy?

A)Price stability
B)Interest rates
C)Full employment of resources
D)A reasonable and sustainable balance of payments with the rest of the world

Question 21

Perfect capital mobility implies:

A)a vertical FE curve.
B)high domestic interest rates relative to foreign interest rates.
C)an FE curve that is horizontal.
D)an FE curve that is steeper than the LM curve.

Question 22

An increase in the domestic price level will:

A)shift the IS curve to the right.
B)shift the LM curve to the right.
C)shift the FE curve to the left.
D)lead to a surplus in the balance of payments.

Question 23

The intersection of the IS and LM curves shows:

A)the balance of payments deficit or surplus.
B)the short-run equilibrium interest rate and the output level in the economy.
C)the short-run trade balance.
D)the long-run equilibrium inflation rate and the natural rate of unemployment in the economy.

Question 24

The LM curve will shift to the right if:

A)the average price level decreases.
B)the money supply decreases.
C)the money demand increases.
D)the interest rate decreases.

Question 25

The greater the degree of international capital mobility:

A)the further to the right is the FE curve.
B)the further to the left is the FE curve.
C)the steeper is the FE curve.
D)the flatter is the FE curve.

Question 26

The FE curve has a:

A)negative slope because an increase in domestic interest rates leads to capital inflows causing a surplus in the official settlements balance.A decrease in output levels is thus needed to reduce that surplus.
B)positive slope because a decrease in domestic interest rates leads to capital outflows causing a surplus in the official settlements balance.An increase in output levels is thus needed to reduce that surplus.
C)positive slope because an increase in domestic interest rates leads to capital inflows causing a surplus in the financial account balance.An increase in output levels is thus needed to reduce that surplus.
D)negative slope because an increase in domestic interest rates leads to capital outflows causing a deficit in the financial account balance.An increase in output levels is thus needed to reduce that deficit.

Question 27

The demand for money is:

A)positively related to nominal GDP and to the level of interest rates available on other financial assets.
B)negatively related to nominal GDP and to the level of interest rates available on other financial assets.
C)positively related to nominal GDP and negatively related to the level of interest rates available on other financial assets.
D)negatively related to nominal GDP and positively related to the level of interest rates available on other financial assets.

Question 28

Which of the following will cause the LM curve to shift to the left?

A)A reduction in the interest rates
B)A decrease in the average price level
C)An exogenous decrease in money demand
D)A contractionary monetary policy

Question 29

The LM curve has a:

A)positive slope because a higher interest rate leads to a decrease in the demand for money and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money.
B)negative slope because a lower interest rate leads to an increase in the demand for bonds and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money.
C)negative slope because a lower interest rate leads to a decrease in foreign investments and thus a higher level of domestic production is needed for equilibrium.
D)positive slope because a higher interest rate leads to a higher incentive to hold money and thus a higher money supply is needed for equilibrium.

Question 30

The official settlements balance is in _____ if the IS-LM intersection is _____ the FE curve.

A)surplus; on
B)surplus; to the right of
C)surplus; to the left of
D)deficit; on

Question 31

Which of the following is true for an expansionary fiscal policy?

A)It leads to a fall in the interest rate.
B)It has no impact on the aggregate output.
C)It causes an increase in the aggregate demand.
D)It increases the level of imports.

Question 32

Which of the following is likely to have the most effect on a country's demand for imports?

A)Foreign income
B)Prices of domestic products relative to the prices of foreign products
C)The volume of the country's exports
D)The change in the country's official settlements balance

Question 33

The official settlements balance _____ if the IS-LM intersection is _____ the FE curve.

A)is in surplus; on
B)is in surplus; to the right of
C)is in deficit; to the left of
D)has a zero value; on

Question 34

In IS-LM-FE analysis, expansionary monetary policy:

A)leads to lower interest rates.
B)leads to higher interest rates.
C)lowers levels of GDP.
D)shifts the LM curve to the left.

Question 35

Which of the following will cause the FE curve to shift to the left?

A)An exogenous increase in exports
B)An exogenous increase in imports
C)Exogenous changes that cause an increase in capital inflows
D)A decrease in real domestic product (Y)

Question 36

The FE curve illustrates all combinations of domestic output levels and interest rates for which:

A)the domestic product market is in equilibrium.
B)the domestic money market is in equilibrium.
C)there is a zero balance for the country's official settlements balance.
D)there is full employment.

Question 37

A devaluation of the exchange rate will:

A)shift the IS curve to the right.
B)shift the LM curve to the right.
C)shift the FE curve to the left.
D)lead to a financial account surplus.

Question 38

Start from an initial triple intersection of the IS, LM, and FE curves. Before anything else adjusts, a shift to an expansionary monetary policy results in a(n):

A)overall balance of payments surplus.
B)overall balance of payments deficit.
C)increase in domestic interest rates.
D)decrease in domestic output.

Question 39

An increase in home country money demand will shift the:

A)IS curve to the right.
B)LM curve to the right.
C)FE curve to the right.
D)LM curve to the left.

Question 40

An external shock such as a foreign country's devaluation will shift the:

A)FE curve to the right.
B)LM curve to the right.
C)FE curve to the left.
D)LM curve to the left.

Question 41

The United States accounts for more than 50% of world production.

Question 42

What is the mechanism at work that causes the increase in a country's government spending to have an impact on foreign countries' production and income?

Question 43

Exports depend on income in the exporting country and on the relative prices between the exporting and importing countries.

Question 44

Fiscal policy is the set of central-bank policies, institutions, and bank behavioral patterns governing the availability of bank checking deposits and currency in circulation.

Question 45

Contractionary monetary policy will shift the LM curve to the right.

Question 46

The smaller the country, the more its spending tends to affect other countries.

Question 47

The amount of price inflation that the economy experiences eventually depends on the size of the spending multiplier.

Question 48

Suppose the United States' imports substantially affect foreign incomes, and the foreign countries import from the United States. The United States' spending multiplier will exceed the spending multiplier for a comparable small open economy.

Question 49

For a small country with closed economy, if the marginal propensity to save is equal to 0.2, then the spending multiplier indicates that a $10 exogenous increase in government spending will lead to a $20 increase in GDP.

Question 50

The volume of imports is positively related to real national production and income. What are two reasons for this relationship?

Question 51

Expansionary fiscal policy will cause the IS curve to shift to the right.

Question 52

With its rapid growth of production and imports, China can be considered as another locomotive economy.

Question 53

In your opinion do government policies to stabilize real domestic production have a larger role to play in the IS-LM-FE model or in the monetary approach to the balance of payments? Why? (Note: This question is an extension of the analysis. It is not covered explicitly in the book.)

Question 54

A vertical FE curve indicates perfect capital mobility.

Question 55

Use the standard IS-LM-FE framework and assume the country begins at a triple intersection. What effect will an increase in the country's money supply have on domestic interest rates, output levels, and the official settlements balance, assuming low capital mobility?

Question 56

The European Union has relatively large production and income effects on Africa.

Question 57

Expansionary monetary policy will cause the FE curve to shift to the right.

Question 58

Describe weaknesses of the IS-LM-FE model.

Question 59

A rise in the domestic product of an economy deteriorates its current account balance.