Question 1

Starting from an equilibrium in both markets,an increase in absorption will cause:&#10;A) the supply curve to shift to the left for both tradables (T) and nontradables (N).&#10;B) the demand curve to shift to the right for both T and N.&#10;C) the demand curve to shift to the right for N and to the left for T.&#10;D) no shift in the curves, but the economy moves to a position of inflation and external surplus.

Accepted Answer

D

Question 2

For an economy that is experiencing internal balance with a large deficit,which package of stabilization measures is warranted?&#10;A) a real devaluation, with no changes in absorption&#10;B) a real appreciation, with no change in absorption&#10;C) a real devaluation, with fiscal austerity&#10;D) a real appreciation, with fiscal austerity

Accepted Answer

A large deficit indicates that the economy is consuming more than it is producing, which can lead to inflation and a loss of external competitiveness. A real devaluation can help improve external competitiveness, but without accompanying fiscal austerity, it may also worsen inflation and the deficit. Therefore, a combination of a real devaluation and fiscal austerity is needed to address the internal balance and external competitiveness issues while also reducing the deficit. A real appreciation without changes in absorption, on the other hand, would likely worsen the deficit and external competitiveness.

Question 3

A depreciation of the real exchange rate (as defined in the Australian model)means that the:&#10;A) price of tradables rises relative to the price of nontradables.&#10;B) price of tradables fall relative to the price of nontradables.&#10;C) official exchange rate (defined as local currency per unit of foreign currency) falls.&#10;D) official exchange rate rises more slowly than the average price of nontradables.

Accepted Answer

A depreciation of the real exchange rate means that tradables become more expensive relative to nontradables, as the domestic currency loses value compared to foreign currencies.

Question 4

If the world price of tradables remains unchanged while the official exchange rate rises by 20 percent and domestic prices for nontradables rise by 50 percent,then the real exchange rate (as defined in the Australian model):

A) rises by 30 percent.
B) falls by 30 percent.
C) falls by 20 percent.
D) rises by 70 percent.

Accepted Answer

In the Australian model, the real exchange rate is calculated as the ratio of the price of nontradables to the price of tradables, multiplied by the nominal exchange rate.

Given that the world price of tradables remains unchanged, the ratio of the price of nontradables to the price of tradables increases as domestic prices for nontradables rise by 50 percent. This means that the real exchange rate falls.

Furthermore, since the official exchange rate rises by 20 percent, the nominal exchange rate increases. However, this increase is offset by the fall in the real exchange rate, resulting in a net decrease in the real exchange rate.

Therefore, the real exchange rate falls by 20 percent.

Question 5

Using the exchange rate as an anchor for an adjustment program means:&#10;A) letting the market set the nominal exchange rate.&#10;B) maintaining a crawling peg such that the real exchange rate remains fixed.&#10;C) fixing the official, nominal exchange rate.&#10;D) imposing strict controls over foreign exchange transactions.

Accepted Answer

Using the exchange rate as an anchor for an adjustment program means fixing the official, nominal exchange rate. This is a common strategy used by countries to manage their exchange rate in order to stabilize their economy.

Question 6

Which of the following is a self-correcting tendency in the market when an economy is in the inflation-and-deficit zone?&#10;A) The loss of foreign exchange reserves compels the government to impose price controls and trade controls.&#10;B) The macroeconomic imbalances cause international lenders to increase the interest rate on the country's external debt.&#10;C) Domestic inflation reduces the real exchange rate.&#10;D) All of the above.

Accepted Answer

Domestic inflation reduces the real exchange rate, which means that foreign goods become relatively cheaper and domestic goods become relatively more expensive. This leads to a decrease in imports and an increase in exports, which helps to correct the trade deficit and the inflation in the economy. Option A is incorrect because price controls and trade controls are not effective long-term solutions to inflation and deficits, and may even exacerbate them. Option B may apply in some cases, but it is more of an external factor beyond the control of the country.

Question 7

Which of the following should be classified as a nontradable?&#10;A) rural road construction services&#10;B) wheat production wholly consumed within the country&#10;C) computer equipment that cannot be produced locally&#10;D) all of the above

Accepted Answer

Rural road construction services are nontradable because they are consumed where they are produced and cannot be exported or imported.

Question 8

The onset of the Dutch disease in represented in the Australian model as a shift of the external-balance (EB)line to the:&#10;A) left.&#10;B) right.&#10;C) left combined with a shift of the internal-balance (IB) line to the left.&#10;D) right combined with a shift of the IB line to the left.

Accepted Answer

The answer of The onset of the Dutch disease in...

Question 9

During the 1970s,1980s,and 1990s,many economies became unbalanced because of:&#10;A) the expansion of the WTO.&#10;B) the emergence of NAFTA and the EU as powerful reenergized economic forces.&#10;C) world market conditions and macroeconomic mismanagement.&#10;D) China's emergence as a new global economic power.

Accepted Answer

Many economies became unbalanced during this time due to world market conditions and macroeconomic mismanagement, which led to debt crises, inflation, and devaluations of currencies. This was particularly evident in Latin American economies, known as the "lost decade" of economic growth. The expansion of the WTO, the emergence of NAFTA and the EU as powerful economic forces, and China's emergence as a new global economic power all had significant impacts on the world economy during this time, but were not the primary causes of economic imbalance.

Question 10

The defining characteristic of equilibrium in the Australian model is that:&#10;A) the economy is operating on its production frontier.&#10;B) the market for nontradables is in equilibrium.&#10;C) the market for tradables is in equilibrium.&#10;D) both the market for nontradables and the market for tradables are in equilibrium.

Accepted Answer

In the Australian model, the equilibrium is achieved when both the markets for nontradables and tradables are in equilibrium. This means that the demand and supply of both goods and services are balanced, leading to a state of economic stability. Therefore, option D is the correct answer. Options A, B, and C are incorrect because they do not capture the essence of the equilibrium in the Australian model.

Question 11

Which of the following events will cause the external-balance line in the phase diagram to shift to the left?&#10;A) an appreciation of the exchange rate&#10;B) a decline in the interest rate on foreign debt&#10;C) a decline in the absorption&#10;D) a decline in export earnings

Accepted Answer

The answer of Which of the following events will cause...

Question 12

Starting from disequilibrium in both markets,an increase in absorption will cause:&#10;A) the supply curve to shift to the left for both tradables (T) and nontradables (N).&#10;B) the demand curve to shift to the right for both T and N.&#10;C) the demand curve to shift to the right for N and to the left for T.&#10;D) no shifts in the curves, but the economy moves to a position of inflation and external deficit.

Accepted Answer

The answer of Starting from disequilibrium in both markets,an increase...

Question 13

An unexpected feature of Chile's stabilization program in the 1970s was that:&#10;A) export growth was weak after the real exchange rate appreciated.&#10;B) the economy stabilized without requiring fiscal austerity.&#10;C) the market's self-correcting mechanisms worked smoothly and quickly to eliminate the imbalances.&#10;D) inflation stayed high despite tight monetary policy and a big drop in the fiscal deficit.

Accepted Answer

The answer of An unexpected feature of Chile's stabilization program...

Question 14

The two main policy approaches for correcting macroeconomic imbalances are:&#10;A) changes in aggregate expenditure and adjustments to the exchange rate.&#10;B) changes in expenditure and price controls.&#10;C) adjustments to the exchange rate and price controls.&#10;D) price controls and trade restrictions.

Accepted Answer

The answer of The two main policy approaches for correcting...

Question 15

For an economy suffering from high inflation and a large external deficit,the standard prescription for stabilization entails fiscal:&#10;A) austerity to reduce demand and an appreciation of the exchange rate.&#10;B) austerity to reduce demand and a real appreciation.&#10;C) stimulus to expand supply and a real devaluation.&#10;D) stimulus to expand supply and a real appreciation.

Accepted Answer

The answer of For an economy suffering from high inflation...

Question 16

For purposes of macroeconomic analysis,a country is small when:&#10;A) its population is less than 20 million.&#10;B) it is a price taker in world markets for its exports and imports.&#10;C) its macroeconomic imbalances have no significant effect on other countries.&#10;D) its domestic economy is not significantly influenced by international trade and financial flows.

Accepted Answer

The answer of For purposes of macroeconomic analysis,a country is...

Question 17

At any point to the left of the EB line in the phase diagram:&#10;A) there is inflationary pressure.&#10;B) there is an external surplus.&#10;C) fiscal and monetary policies are too loose.&#10;D) all of the above.

Accepted Answer

The answer of At any point to the left of...

Question 18

The domestic price of a tradable good is determined by which equation?&#10;A) Pt = e/P*t&#10;B) Pt = P*t/e&#10;C) Pt = eP*t&#10;D) Pt = e -P*t

Accepted Answer

The answer of The domestic price of a tradable good...

Question 19

In terms of national income accounting concepts,absorption is defined as GNP:&#10;A) plus imports minus exports.&#10;B) plus exports minus imports.&#10;C) plus imports plus exports.&#10;D) minus investment expenditures minus exports.

Accepted Answer

The answer of In terms of national income accounting concepts,absorption...

Question 20

If the world price of cotton is $.75 per pound and Mexico's exchange rate is 14 pesos per dollar,then the peso price of cotton in Mexico (in the absence of distortionary policies)is:&#10;A) P.08 per pound.&#10;B) P.125 per pound.&#10;C) P10.5 per pound.&#10;D) P8 per pound.

Accepted Answer

The answer of If the world price of cotton is...

Question 21

IDs and Paired-Concept Questions&#10;These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.&#10;Exchange-rate anchor,monetary policy

Accepted Answer