Deck 17: Open Economy Macroeconomics

Question 1

With fixed exchange rates,perfect asset substitutability,and perfect capital mobility

A)the LM curve is horizontal.
B)the LM curve is vertical.
C)the BP curve is horizontal.
D)the BP curve is vertical.

Answer 1

C

Question 2

Which of the following would not cause the IS curve to shift to the left?

A)a decrease in government expenditures
B)a decrease in the money supply
C)an increase in the domestic price level
D)an increase in taxes

Answer 2

B

Question 3

If foreign countries simultaneously stimulate their economies rather than follow independent policies

A)world interest rates would rise and the pressure for exchange rate change would fall.
B)world interest rates would rise and the pressure for exchange rate change would rise.
C)world interest rates would fall and the pressure for exchange rate change would fall.
D)world interest rates would fall and the pressure for exchange rate change would rise.

Answer 3

A

Question 4

With floating exchange rates

A)monetary policy is effective.
B)fiscal policy is ineffective.
C)monetary and fiscal policy are effective.
D)fiscal and monetary policy are ineffective.

Question 5

As interest rates rise,other things equal,

A)investment decreases.
B)money demand decreases.
C)capital inflows increase.
D)All of the above.

Question 6

With fixed exchange rates,a country

A)cannot conduct independent monetary policy.
B)can conduct independent monetary policy.
C)cannot conduct independent fiscal policy.
D)Both A and C.

Question 7

Complete crowding out occurs when

A)monetary policy has no effect on income.
B)fiscal policy has no effect on income.
C)monetary policy has no effect on interest rates.
D)fiscal policy has no effect on interest rates.

Question 8

The LM curve represents combinations of income and interest rate which

A)clear the goods market.
B)achieve the external equilibrium.
C)clear the money market.
D)achieve internal equilibrium.

Question 9

External balance refers to

A)an economy which is on its LM curve.
B)an economy which is on its IS curve.
C)an economy which is on its BP curve.
D)All of the above.

Question 10

With fixed exchange rates,perfect asset substitutability,and perfect capital mobility

A)fiscal policy is ineffective.
B)monetary policy is ineffective.
C)both fiscal and monetary policy are effective.
D)both fiscal and monetary policy are ineffective.

Question 11

A point to the left of the BP curve would represent

A)a balance of payments deficit.
B)a balance of payments surplus.
C)internal disequilibrium.
D)Both A and C.

Question 12

If the United States follows an expansionary monetary policy relative to Japan and Germany,which of the following is not likely to occur?

A)U.S. interest rates will rise relative to Japan and Germany
B)a larger U.S. capital account deficit
C)a depreciation of the dollar
D)lower level of U.S. income

Question 13

Which of the following is not a true statement?

A)The higher the income level, the lower interest rates must be for goods market equilibrium.
B)The higher the income level, the higher interest rates must be for money market equilibrium.
C)The higher the income level, the lower the interest rate must be for external balance to be achieved.
D)Equilibrium occurs at the intersection of the IS, LM, and BP curves.

Question 14

The world of flexible exchange rates and perfect capital mobility is often called the

A)Keynesian model.
B)Mundell-Fleming model.
C)Monetarist model.
D)Melvin model.

Question 15

Which of the following is not a necessary condition for a flat BP curve?

A)perfect capital mobility
B)perfect asset substitutability
C)fixed exchange rates
D)floating exchanges rates
E)Both C and D

Question 16

With flexible exchange rates,perfect asset substitutability,and perfect capital mobility,expansionary monetary policy will cause

A)income to rise, interest rates to fall, and the domestic currency to depreciate.
B)income to fall, interest rates to rise, and the domestic currency to appreciate.
C)income to rise, interest rates to remain unchanged, and the domestic currency to appreciate.
D)income to rise, interest rates to remain unchanged, and the domestic currency to depreciate.

Question 17

Many economists argue that the sharp reduction in U.S.net exports in the mid 1980s was due to

A)expansionary U.S. monetary policy.
B)contractionary U.S. monetary policy.
C)expansionary U.S. fiscal policy.
D)contractionary U.S. fiscal policy.

Question 18

Internal balance describes

A)equilibrium in the goods market.
B)a desired level of trade or capital flows.
C)where the IS and BP curve intersect.
D)a domestic rate of growth consistent with a low unemployment rate.

Question 19

An increase in the money supply would

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

Question 20

A point to the left of the LM curve would represent a situation in which

A)money demand is greater than money supply.
B)money supply is greater than money demand.
C)money demand is greater than goods demand.
D)money demand is less than goods demand.

Question 21

Fiscal policy is most effective when exchange rates are fixed.

Question 22

Points to the left of the IS curve represent excess demand for goods.

Question 23

Which of the following would cause the IS curve to shift to the left?

A)an increase in government expenditures
B)a decrease in the money supply
C)an increase in domestic investment
D)a decrease in taxes

Question 24

Internal balance can be graphically represented as the intersection of the IS curve with the LM curve.

Question 25

Which of the following would cause the LM curve to shift to the right?

A)increased money supply
B)a larger U.S. capital account deficit
C)a depreciation of the dollar
D)lower level of U.S. income

Question 26

What policies would you recommend to the U.S.government to lower the balance of trade deficit and decrease net capital inflows?

Question 27

Illustrate with a graph the effects of monetary policy on the economy when exchange rates are flexible.

Question 28

This refers to an increase in government spending that produces a reduction in private spending

A)crowding out.
B)investment disappointment.
C)social loss.
D)deadweight loss.

Question 29

During the global financial crisis of 2008-2009,it appeared that overt global policy coordination was not practiced,but countries were all following similar policies,such as decreasing interest rates.

Question 30

With perfect asset substitutability and capital mobility the domestic interest rate is equal to the foreign rate.

Question 31

The stimulation of a large economy aimed at increasing growth in the rest of the world is commonly known as

A)pass-through effect.
B)locomotive effect
C)investment effect.
D)domino effect.

Question 32

The LM curve will shift to the right when government expenditures increase.

Question 33

The open-economy multiplier is equal to the reciprocal of the marginal propensity to save.

Question 34

The BP curve presents combinations of y and i that yield balance of trade equilibrium.

Question 35

The goal of international economic policy cooperation is to allow for greater flexibility in exchange rates.

Question 36

Monetary policy is most effective at home when exchange rates are flexible.

Question 37

The BP curve is upward sloping if assets are perfectly substitutable.

Question 38

The global financial crisis that began in 2008 was a great illustration of how interdependent national economies are.

Question 39

At higher income levels the interest rate must be lower to achieve money market equilibrium.

Question 40

Which of the following statements about the financial crisis that began in 2008 is true?

A)It was a great illustration of how interdependent national economies are.
B)Most economists agree that it originated in China.
C)It only lasted 3 weeks.
D)It only affected housing markets.

Question 41

Illustrate with a graph the effects of fiscal policy when exchange rates are fixed.

Question 42

Analyze the following statement "the global financial crisis of 2008-2009 was a great illustration of how interdependent national economies are."

Question 43

Illustrate the effectiveness of monetary policy with fixed exchange rates.

Question 44

What was the Plaza Agreement about?