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

Question 1

When considering the impact of foreign repercussions relative to a scenario without such repercussions,for a large nation the foreign trade multiplier will be a larger
B) smaller
C) exactly the same
D) any of the above

Answer 1

B

Question 2

The S-I function is upward sloping 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

Answer 2

B

Question 3

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

Answer 3

B

Question 4

One disadvantage facing a freely flexible exchange rate system is that is can cause

A) overshooting
B) competitive devaluations
C) hedging
D) loss of monetary policy control

Question 5

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 6

When considering the impact of foreign repercussions relative to a scenario without such repercussions,for a small nation the foreign trade multiplier will be a larger
B) smaller
C) exactly the same
D) any of the above

Question 7

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 8

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.

Question 9

Of the G-7 industrialized economies,the following nation has the lowest income elasticity of imports

A) The U.S.
B) German
C) Canada
D) Japan

Question 10

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

Question 11

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 12

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 13

The United States current account deficit as a percentage of GDP has generally

A) worsened in the 2000s
B) improved in the 2000s
C) remained relatively unchanged in the 2000s
D) the U.S. has been running a current account surplus in the 2000s

Question 14

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

Question 15

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 16

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

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

Question 17

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 18

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

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

Question 19

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 20

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

Question 21

In an open economy,the marginal propensity to consumer is 0.75,and the marginal propensity to import is 0.15.Calculate the change in equilibrium GDP if exports fall by $50 billion.

Question 22

In what way does the automatic income adjustment mechanism differ from the traditional or classical adjustment mechanism?

Question 23

In the Keynesian model,in short-run equilibrium,the trade balance must be

A) positive.
B) equal to zero.
C) negative.
D) could be positive, negative, or equal to zero.

Question 24

What are some of the disadvantages of a freely flexible exchange rate system with respect to the adjustment process?

Question 25

.If the MPC=0.8 and the MPM=0.05,a $100 million increase in exports will lead to:

A) a $400 million increase in equilibrium GDP.
B) a $400 million decrease in equilibrium GDP.
C) a $500 million increase in equilibrium GDP.
D) a $500 million increase in equilibrium GDP.

Question 26

An open economy can be described by the following functions (all figures in millions of dollars):
C = 500 + 0.8Y
I = 600
X = 400
M = 200 + 0.05Y
Calculate equilibrium income and the trade balance.

Question 27

According to the absorption approach,under what conditions will a competitive devaluation fail to reduce a balance of payments deficit?

Question 28

Why is the foreign trade multiplier smaller in a large nation relative to small nation?

Question 29

Why is the foreign trade multiplier smaller than the corresponding multiplier in a closed economy?

Question 30

If MPC=0.8 and MPM=0.05,the foreign trade multiplier is:

A) 5
B) 4
C) 3
D) 2