Question 1

A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:

A) Trade flows only
B) Capital flows only
C) both trade flows and capital flows
D) Neither trade flows nor capital flows

C

Accepted Answer

Monetary or fiscal policies that target the domestic sector also affect both trade flows and capital flows. For instance, an expansionary monetary policy that reduces interest rates may lead to a weaker currency, making exports cheaper and imports more expensive. However, it may also encourage capital outflows as investors seek higher returns elsewhere due to lower interest rates. Similarly, tighter fiscal policy aimed at reducing government spending and increasing taxes may help to reduce current account deficits, but it may also dampen economic growth and discourage foreign investors, reducing capital inflows. These interlinkages make it challenging for policymakers to promote both internal and external balance simultaneously.

Question 2

Given fixed exchange rates,assume Mexico initiates expansionary monetary and fiscal policies to combat recession.These policies will also:&#10;A) Increase both imports and exports&#10;B) Increase exports and reduce imports&#10;C) Reduce a balance-of-payments surplus&#10;D) Reduce a balance-of-payments deficit

Accepted Answer

C

Question 3

Suppose the United States faces domestic inflation and a current account surplus.Should the United States revalue the dollar,one would expect the:&#10;A) Inflation to become more severe--surplus to become less severe&#10;B) Inflation to become less severe--surplus to become less severe&#10;C) Inflation to become less severe--surplus to become more severe&#10;D) Inflation to become more severe--surplus to become more severe

Accepted Answer

Revaluing the dollar would make U.S. exports more expensive and imports cheaper, thus potentially reducing the current account surplus. At the same time, it would make imported goods more expensive, which would reduce domestic demand and potentially ease inflationary pressures. Therefore, one would expect inflation to become less severe and the surplus to become less severe as well.

Question 4

A nation experiences internal balance if it achieves:&#10;A) Full employment&#10;B) Price stability&#10;C) Full employment and price stability&#10;D) Unemployment and price instability

Accepted Answer

Internal balance refers to the ideal state of an economy where both full employment and price stability are achieved. Full employment means that all able and willing workers are employed, which leads to higher income and spending levels. Price stability means that there is no significant inflation or deflation, ensuring a stable purchasing power of money. Together, full employment and price stability contribute to a productive and sustainable economy. Options A and B do not encompass the full scope of internal balance, while option D has negative implications for the economy.

Question 5

Which policies are expenditure-changing policies?&#10;A) Currency devaluation and revaluation&#10;B) Import quotas and tariffs&#10;C) Monetary and fiscal policy&#10;D) Wage and price controls

Accepted Answer

Monetary and fiscal policy are both expenditure-changing policies. Monetary policy aims to control the money supply and interest rates in order to affect spending and inflation, while fiscal policy involves government spending and taxation to influence aggregate demand and the economy as a whole.

Currency devaluation and revaluation (A) are exchange rate policies and do not directly affect government expenditure. Import quotas and tariffs (B) are trade policies that can affect the prices of goods and the competitiveness of domestic producers, but they do not necessarily change government expenditure. Wage and price controls (D) are potentially expenditure-changing policies, but they are not widely used in contemporary economies and are not considered effective or appropriate by many economists.

Question 6

Which policy is an expenditure-switching policy?&#10;A) Increase in the money supply&#10;B) Decrease in government expenditures&#10;C) Increase in business and household taxes&#10;D) Decrease in import tariffs

Accepted Answer

Decreasing import tariffs is an expenditure-switching policy because it makes imported goods relatively more expensive compared to domestic goods. This encourages consumers to switch their expenditure from imports to domestic goods, which can help to reduce a trade deficit or improve a country's balance of payments. The other policy options (increase in money supply, decrease in government expenditures, increase in taxes) do not directly involve shifting consumption or production towards domestic goods.

Question 7

Suppose the United States faces domestic recession and a current account deficit.Should the United States devalue the dollar,one would expect the:&#10;A) Recession to become less severe--deficit to become less severe&#10;B) Recession to become more severe--deficit to become less severe&#10;C) Recession to become less severe--deficit to become more severe&#10;D) Recession to become more severe--deficit to become more severe

Accepted Answer

Devaluing the dollar makes U.S. goods cheaper abroad, potentially boosting exports and reducing the current account deficit, while also stimulating domestic economic activity, thus alleviating the recession.

Question 8

A nation experiences overall balance if it achieves:&#10;A) Balance-of-payments equilibrium,full employment,and price stability&#10;B) Balance-of-payments equilibrium,maximum productivity,and price stability&#10;C) Full employment,price stability and no change in its money supply&#10;D) Full employment,price stability,and maximum productivity

Accepted Answer

Balance-of-payments equilibrium ensures that a nation is not borrowing excessively from other countries, which can lead to debts and financial instability. Full employment ensures that all available resources are being utilized and that the economy is producing at its maximum potential. Price stability ensures that inflation is low, which helps in maintaining the purchasing power of the currency. Therefore, achieving these three goals ensures overall balance in a nation's economy. Option B is incorrect because while maximum productivity is desirable, it is not necessary for overall balance. Option C is incorrect because changes in the money supply may be required to achieve price stability, and there can still be an overall balance without any change in money supply. Option D is incorrect because while maximum productivity is desirable, it is not necessary for overall balance.

Question 9

An expenditure-increasing policy would consist of an increase in:&#10;A) Import tariffs&#10;B) Import quotas&#10;C) Governmental taxes&#10;D) The money supply

Accepted Answer

An increase in the money supply would lead to lower interest rates, which would encourage increased spending and investment in the economy, leading to an increase in overall expenditure. Import tariffs and quotas would restrict imports and decrease expenditure, while governmental taxes would take money out of the economy and also decrease expenditure.

Question 10

Given an open economy with high capital mobility and floating exchange rates,suppose an expansionary fiscal policy is implemented to combat recession.The initial and secondary effects of the policy&#10;A) cause aggregate demand to increase,thus strengthening the policy's expansionary effect on real output&#10;B) cause aggregate demand to decrease,thus eliminating the policy's expansionary effect on real output&#10;C) have conflicting effects on aggregate demand,thus weakening the policy's expansionary effect on real output&#10;D) have conflicting effects on aggregate demand,thus strengthening the policy's expansionary effect on real output

Accepted Answer

In an open economy with high capital mobility and floating exchange rates, an expansionary fiscal policy typically leads to an increase in interest rates, attracting foreign capital inflow and leading to an appreciation of the currency. This appreciation makes exports more expensive and imports cheaper, leading to a decrease in net exports and a decrease in aggregate demand. This is the primary effect of the policy. The secondary effect is that the increase in government spending or tax cuts might stimulate consumption and investment, leading to an increase in aggregate demand. These two effects tend to have conflicting impacts on aggregate demand and can weaken the expansionary effect of the policy on real output. Therefore, option C is the correct answer.

Question 11

The appropriate expenditure-switching policy to correct a current account surplus is:&#10;A) Currency revaluation&#10;B) Currency devaluation&#10;C) Expansionary monetary policy&#10;D) Contractionary fiscal policy

Accepted Answer

The answer of The appropriate expenditure-switching policy to correct a...

Question 12

Given fixed exchange rates,assume Mexico initiates contractionary monetary and fiscal policies to combat inflation.These policies will also:&#10;A) Reduce a balance-of-payments surplus&#10;B) Reduce a balance-of-payments deficit&#10;C) Increases both imports and exports&#10;D) Decrease both imports and exports

Accepted Answer

The answer of Given fixed exchange rates,assume Mexico initiates contractionary...

Question 13

An expenditure-reducing policy would consist of a decrease in:&#10;A) The par value of a currency&#10;B) Government expenditures&#10;C) Import duties&#10;D) Business or household taxes

Accepted Answer

The answer of An expenditure-reducing policy would consist of a...

Question 14

In a closed economy,which of the following will cause the economy's aggregate demand curve to shift to the right?&#10;A) decreases and wages and salaries paid to employees&#10;B) increases in the prices of oil and natural gas&#10;C) decreases in income taxes for households&#10;D) decreases in the productivity of labor

Accepted Answer

The answer of In a closed economy,which of the following...

Question 15

The appropriate expenditure-switching policy to correct a current account deficit is:&#10;A) Contractionary monetary policy&#10;B) Expansionary fiscal policy&#10;C) Currency devaluation&#10;D) Currency revaluation

Accepted Answer

The answer of The appropriate expenditure-switching policy to correct a...

Question 16

A nation experiences external balance if it achieves:&#10;A) No net changes in its international gold stocks&#10;B) Productivity levels equal to those of its trading partners&#10;C) An increase in its money supply equal to increases overseas&#10;D) Equilibrium in its balance of payments

Accepted Answer

The answer of A nation experiences external balance if it...

Question 17

Given an open economy with high capital mobility and floating exchange rates,suppose an expansionary monetary policy is implemented to combat recession.The initial and secondary effects of the policy&#10;A) cause aggregate demand to increase,thus strengthening the policy's expansionary effect on real output&#10;B) cause aggregate demand to decrease,thus eliminating the policy's expansionary effect on real output&#10;C) have conflicting effects on aggregate demand,thus weakening the policy's expansionary effect on real output&#10;D) have conflicting effects on aggregate demand,thus strengthening the policy's expansionary effect on real output

Accepted Answer

The answer of Given an open economy with high capital...

Question 18

Most industrial countries generally considered ____ as the most important economic goal.&#10;A) External balance&#10;B) Internal balance&#10;C) Maximum efficiency for business&#10;D) Maximum efficiency for labor

Accepted Answer

The answer of Most industrial countries generally considered ____ as...

Question 19

Suppose that Brazil faces domestic inflation and a current account deficit.Should Brazil devalue its currency,one would expect the:&#10;A) Inflation to become more severe--deficit to become less severe&#10;B) Inflation to become more severe--deficit to become more severe&#10;C) Inflation to become less severe--deficit to become less severe&#10;D) Inflation to become less severe--deficit to become more severe

Accepted Answer

The answer of Suppose that Brazil faces domestic inflation and...

Question 20

Suppose Brazil faces domestic recession and a current account surplus.Should Brazil revalue its currency,one would expect the:&#10;A) Recession to become less severe--surplus to become less severe&#10;B) Recession to become more severe--surplus to become more severe&#10;C) Recession to become more severe--surplus to become less severe&#10;D) Recession to become less severe--surplus to become more severe

Accepted Answer

The answer of Suppose Brazil faces domestic recession and a...

Question 21

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency.This causes the&#10;A) domestic money supply to decrease and a decline in aggregate demand&#10;B) domestic money supply to increase and a decline in aggregate demand&#10;C) domestic money supply to decrease and a rise in aggregate demand&#10;D) domestic money supply to increase and a fall in aggregate demand

Accepted Answer

The answer of Suppose a central bank prevents a depreciation...

Question 22

A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:&#10;A) Expansionary fiscal policy&#10;B) Expansionary monetary policy&#10;C) Contractionary fiscal policy&#10;D) Contractionary monetary policy

Accepted Answer

The answer of A system of floating exchange rates and...

Question 23

At the ____,the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S.dollar's exchange value.&#10;A) Plaza Agreement of 1985&#10;B) Louvre Accord of 1987&#10;C) Bonn Summit of 1978&#10;D) Tokyo Summit of 1962

Accepted Answer

The answer of At the ____,the Group-of-Five nations agreed to...

Question 24

Exhibit 16.1 &#10;At the Plaza Accord of 1985,the Group-of-Five nations agreed to drive the value of the dollar downward (i.e.,depreciation) so as to help reduce the U.S.trade deficit.Answer the following question(s) on the basis of this information.&#10;Refer to Exhibit 16.1.The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward,it promotes an increase in the U.S.:&#10;A) Rate of inflation&#10;B) Budget deficit&#10;C) Unemployment level&#10;D) Economic growth rate

Accepted Answer

The answer of Exhibit 16.1 &#10;At the Plaza Accord of...

Question 25

Assume a system of floating exchange rates.In response to relatively high interest rates abroad,suppose domestic investors place their funds in foreign capital markets.The result would be&#10;A) a depreciation of the domestic currency and a rise in net exports&#10;B) a depreciation of the domestic currency and a fall in net exports&#10;C) an appreciation of the domestic currency and a rise in net exports&#10;D) an appreciation of the domestic currency and a fall in net exports

Accepted Answer

The answer of Assume a system of floating exchange rates.In...

Question 26

Under a fixed exchange-rate system and high capital mobility,an expansionary fiscal policy leads to a:&#10;A) Trade-account deficit and a capital-account surplus&#10;B) Trade-account deficit and a capital-account deficit&#10;C) Trade-account surplus and a capital-account surplus&#10;D) Trade-account surplus and a capital-account deficit

Accepted Answer

The answer of Under a fixed exchange-rate system and high...

Question 27

Given an open economy with high capital mobility,all of the following statements are true except:&#10;A) fiscal policy is strengthened under fixed exchange rates&#10;B) monetary policy is weakened under fixed exchange rates&#10;C) monetary policy is strengthened under floating exchange rates&#10;D) fiscal policy is strengthened under floating exchange rates

Accepted Answer

The answer of Given an open economy with high capital...

Question 28

Under a system of managed-floating exchange rates with heavy exchange rate intervention:&#10;A) Fiscal policy is successful in promoting internal balance,while monetary policy is unsuccessful&#10;B) Monetary policy is successful in promoting internal balance,while fiscal policy is unsuccessful&#10;C) Both fiscal policy and monetary policy are successful in promoting internal balance&#10;D) Neither fiscal policy nor monetary policy are successful in promoting internal balance

Accepted Answer

The answer of Under a system of managed-floating exchange rates...

Question 29

Under a fixed exchange-rate system and high capital mobility,an expansion in the domestic money supply leads to:&#10;A) Trade-account deficit and a capital-account surplus&#10;B) Trade-account deficit and a capital-account deficit&#10;C) Trade-account surplus and a capital-account surplus&#10;D) Trade-account surplus and a capital-account deficit

Accepted Answer

The answer of Under a fixed exchange-rate system and high...

Question 30

All of the following are obstacles to international economic policy coordination except:&#10;A) Different national objectives and institutions&#10;B) Different national political climates&#10;C) Different phases in the business cycle&#10;D) Different national currencies

Accepted Answer

The answer of All of the following are obstacles to...

Question 31

Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency.This causes the&#10;A) domestic money supply to decrease and a decline in aggregate demand&#10;B) domestic money supply to increase and a decline in aggregate demand&#10;C) domestic money supply to decrease and a rise in aggregate demand&#10;D) domestic money supply to increase and a fall in aggregate demand

Accepted Answer

The answer of Suppose a central bank prevents an appreciation...

Question 32

A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:&#10;A) Expansionary fiscal policy&#10;B) Expansionary monetary policy&#10;C) Contractionary fiscal policy&#10;D) Contractionary monetary policy

Accepted Answer

The answer of A system of fixed exchange rates and...

Question 33

Given a system of floating exchange rates,a contractionary monetary policy by the Federal Reserve will cause&#10;A) the dollar to appreciate and will decrease U.S.net exports&#10;B) the dollar to appreciate and will increase U.S.net exports&#10;C) the dollar to depreciate and will increase U.S.net exports&#10;D) the dollar to depreciate and will decrease U.S.net exports

Accepted Answer

The answer of Given a system of floating exchange rates,a...

Question 34

The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:&#10;A) Tariff trade barrier formation&#10;B) Nontariff trade barrier formation&#10;C) International economic policy coordination&#10;D) Beggar-thy-neighbor policies

Accepted Answer

The answer of The Plaza Agreement of 1985 and Louvre...

Question 35

Given a system of floating exchange rates,an expansionary monetary policy by the Federal Reserve will cause&#10;A) the dollar to appreciate and will decrease U.S.net exports&#10;B) the dollar to appreciate and will increase U.S.net exports&#10;C) the dollar to depreciate and will increase U.S.net exports&#10;D) the dollar to depreciate and will decrease U.S.net exports

Accepted Answer

The answer of Given a system of floating exchange rates,an...

Question 36

Assume a system of floating exchange rates.In response to relatively high domestic interest rates,suppose that foreign investors place their funds in domestic capital markets.The result would be&#10;A) a depreciation of the domestic currency and a rise in net exports&#10;B) a depreciation of the domestic currency and a fall in net exports&#10;C) an appreciation of the domestic currency and a rise in net exports&#10;D) an appreciation of the domestic currency and a fall in net exports

Accepted Answer

The answer of Assume a system of floating exchange rates.In...

Question 37

Under a fixed exchange-rate system and high capital mobility,a contraction in the domestic money supply leads to a:&#10;A) Trade-account deficit and a capital-account surplus&#10;B) Trade-account deficit and a capital-account deficit&#10;C) Trade-account surplus and a capital-account surplus&#10;D) Trade-account surplus and a capital-account deficit

Accepted Answer

The answer of Under a fixed exchange-rate system and high...

Question 38

Under a fixed exchange-rate system and high capital mobility,a contractionary fiscal policy leads to a:&#10;A) Trade-account deficit and a capital-account surplus&#10;B) Trade-account deficit and a capital-account deficit&#10;C) Trade-account surplus and a capital-account surplus&#10;D) Trade-account surplus and a capital-account deficit

Accepted Answer

The answer of Under a fixed exchange-rate system and high...

Question 39

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency.This causes the&#10;A) domestic money supply to decrease and a decline in aggregate demand&#10;B) domestic money supply to increase and a decline in aggregate demand&#10;C) domestic money supply to decrease and a rise in aggregate demand&#10;D) domestic money supply to increase and a rise in aggregate demand

Accepted Answer

The answer of Suppose a central bank prevents a depreciation...

Question 40

Exhibit 16.1 &#10;At the Plaza Accord of 1985,the Group-of-Five nations agreed to drive the value of the dollar downward (i.e.,depreciation) so as to help reduce the U.S.trade deficit.Answer the following question(s) on the basis of this information.&#10;Refer to Exhibit 16.1.To help drive the dollar's exchange value downward,the Federal Reserve would:&#10;A) Reduce taxes&#10;B) Increase taxes&#10;C) Decrease the money supply&#10;D) Increase the money supply

Accepted Answer

The answer of Exhibit 16.1 &#10;At the Plaza Accord of...

Question 41

Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

Accepted Answer

The answer of Expenditure-switching policies alter the level of total...

Question 42

Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

Accepted Answer

The answer of Economic policymakers have typically adopted expenditure-increasing policies...

Question 43

Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

Accepted Answer

The answer of Nations have typically placed greater importance to...

Question 44

Policy coordination is complicated by&#10;A) Different economic objectives&#10;B) Different national institutions&#10;C) Different phases in the business cycle&#10;D) All of the above

Accepted Answer

The answer of Policy coordination is complicated by&#10;A) Different economic...

Question 45

Expenditure-switching policies include currency revaluation,currency devaluation,and direct controls such as tariffs,quotas,and subsidies.

Accepted Answer

The answer of Expenditure-switching policies include currency revaluation,currency devaluation,and direct...

Question 46

Given an open economy with high capital mobility and floating exchange rates,suppose an expansionary monetary policy is implemented to combat recession.The initial and secondary effects of the policy have conflicting effects on aggregate demand,thus weakening the policy's expansionary effect.

Accepted Answer

The answer of Given an open economy with high capital...

Question 47

Changes in a country's net exports,investment spending,or government spending will cause its aggregate demand curve to shift.

Accepted Answer

The answer of Changes in a country's net exports,investment spending,or...

Question 48

Given an open economy with high capital mobility,fiscal policy is strengthened under fixed exchange rates.

Accepted Answer

The answer of Given an open economy with high capital...

Question 49

With a fixed exchange rate system,internal balance is most effectively achieved by using&#10;A) Expansionary monetary policy to combat recession&#10;B) Expansionary fiscal policy to combat inflation&#10;C) Contractionary monetary policy to combat recession&#10;D) Contractionary fiscal policy to combat recession

Accepted Answer

The answer of With a fixed exchange rate system,internal balance...

Question 50

A nation realizes external balance when its current account is in equilibrium.

Accepted Answer

The answer of A nation realizes external balance when its...

Question 51

A nation realizes overall balance when it achieves full employment and current account equilibrium.

Accepted Answer

The answer of A nation realizes overall balance when it...

Question 52

When the economy is in deep recession or depression,it is operating on that portion of its aggregate supply curve that is horizontal.

Accepted Answer

The answer of When the economy is in deep recession...

Question 53

Direct controls may take the form of&#10;A) Tariffs&#10;B) Export subsidies&#10;C) Export quotas&#10;D) All of the above

Accepted Answer

The answer of Direct controls may take the form of&#10;A)...

Question 54

Expenditure-changing policies modify the direction of aggregate demand,shifting it between domestic output and imports.

Accepted Answer

The answer of Expenditure-changing policies modify the direction of aggregate...

Question 55

Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's aggregate demand for goods and services.

Accepted Answer

The answer of Currency devaluation and revaluation are considered to...

Question 56

Given an open economy with high capital mobility and fixed exchange rates,suppose an expansionary fiscal policy is implemented to combat recession.The initial and secondary effects of the policy cause aggregate demand to increase,thus strengthening the policy's expansionary effect.

Accepted Answer

The answer of Given an open economy with high capital...

Question 57

Given an open economy with high capital mobility,monetary policy is strengthened under fixed exchange rates.

Accepted Answer

The answer of Given an open economy with high capital...

Question 58

Expenditure-switching policies include fiscal policy and monetary policy.

Accepted Answer

The answer of Expenditure-switching policies include fiscal policy and monetary...

Question 59

When a nation realizes external balance&#10;A) it can have a current account deficit&#10;B) it can have a current account surplus&#10;C) it has neither a current account deficit nor a current account surplus&#10;D) Both a and b

Accepted Answer

The answer of When a nation realizes external balance&#10;A) it...

Question 60

A nation realizes internal balance if economy achieves full employment and price stability.

Accepted Answer

The answer of A nation realizes internal balance if economy...

Question 61

Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on domestic employment and inflation.

Accepted Answer

The answer of Currency devaluation and revaluation primarily affect the...

Question 62

International policy coordination is plagued by differing national economic objectives,institutions,political climates,and phases in the business cycle.

Accepted Answer

The answer of International policy coordination is plagued by differing...

Question 63

Under floating exchange rates and high capital mobility,an expansionary monetary policy would help a country resolve a recession and a current account deficit.

Accepted Answer

The answer of Under floating exchange rates and high capital...

Question 64

Was the Plaza Agreement of 1985 a success?

Accepted Answer

The answer of Was the Plaza Agreement of 1985 a...

Deck 16: Macroeconomic Policy in an Open-economy