Question 1

When exchange rates are fixed but fiscal and monetary policies are not coordinated, equilibrium exchange rates can move away from their fixed levels.

Accepted Answer

When fiscal and monetary policies are not coordinated, the actions taken by one country can cause imbalances with other countries, leading to changes in the demand and supply of currencies, which can cause equilibrium exchange rates to move away from their fixed levels.

Question 2

A nation engages in a managed float exchange rate system to ensure that its currency will fluctuate freely with market forces.

Accepted Answer

A managed float exchange rate system involves government intervention to stabilize or manage the fluctuations of a currency's value, rather than allowing it to fluctuate freely with market forces.

Question 3

While members of the European Union that are part of the eurozone continue to have their own central bank, these national central banks agree to cede the conduct of monetary policy to the European Central Bank.

Accepted Answer

This is true. The national central banks of the eurozone countries have agreed to cede the conduct of monetary policy to the European Central Bank.

Question 4

A free-floating exchange rate is only flexible if there is a deficit in the foreign exchange market.

Accepted Answer

A free-floating exchange rate is always flexible, regardless of whether there is a deficit or surplus in the foreign exchange market. It means that the exchange rate is determined by market forces of supply and demand without government intervention.

Question 5

It is impossible to have a current account deficit and a current account surplus at the same time.

Accepted Answer

A country cannot have both a current account deficit and surplus simultaneously because the current account balance is a net measure of a country's international trade, investment income, and transfer payments. It can only be in deficit, surplus, or balanced at any given time.

Question 6

The newspapers often use the terms "a strong dollar" and "a weak dollar." a. What do these terms mean? b. Who might benefit from a strong currency and who might be hurt by a strong currency? c. Who might benefit from a weak currency and who might be hurt by a weak currency?

Accepted Answer

The answer of The newspapers often use the terms "a...

Question 7

One reason to demand a nation's currency is to facilitate foreigners' purchases of that nation's goods.

Accepted Answer

If foreigners have to exchange their own currency for the nation's currency in order to purchase goods, it makes the process easier and more efficient.

Question 8

Explain how exchange rates are determined in a fixed exchange rate system. Discuss the advantages and disadvantages of a fixed exchange rate system.

Accepted Answer

The answer of Explain how exchange rates are determined in...

Question 9

What were the primary characteristics of the Bretton Woods Agreement? Why was it successful from 1945 to 1971? What factors caused it to be abandoned in the early 1970s? What system replaced it and how successful has it been?

Accepted Answer

The answer of What were the primary characteristics of the...

Question 10

A managed float exchange rate system is often used to reduce the uncertainty of businesses engaged in importing and exporting.

Accepted Answer

A managed float exchange rate system allows the exchange rate to fluctuate based on market forces but with some government intervention to prevent extreme volatility. This can provide a more predictable environment for businesses engaged in international trade as they can better plan and budget for future transactions.

Question 11

A current account surplus exists when the balance on current account is positive.

Accepted Answer

A current account surplus means that a country is exporting more goods and services than it is importing, resulting in a positive balance on the current account.

Question 12

Suppose there is an increased demand from foreign countries for Iowa pork. 
a. What happens to the U.S. dollar exchange rate in a flexible foreign currency market? Illustrate your answer with a graph of the U.S. dollar market. 
b. Explain how a free-floating exchange rate acts as a buffer to insulate an economy, say, Canada's economy, from the impact of this event.

Accepted Answer

The answer of Suppose there is an increased demand from...

Question 13

The Bretton Woods system is an example of a fixed exchange rate system.

Accepted Answer

The Bretton Woods system was a fixed exchange rate system created in 1944. Under this system, countries agreed to tie the value of their currency to the value of the US dollar, which was in turn tied to the value of gold. This created a stable exchange rate system, but it ultimately proved unsustainable and was abandoned in 1971.

Question 14

An increase in exports would shift the U.S. aggregate demand curve to the left.

Accepted Answer

An increase in exports would shift the U.S. aggregate demand curve to the right, as it increases the demand for U.S. goods and services.

Question 15

A current account deficit is generally a result of imports exceeding exports.

Accepted Answer

A current account deficit occurs when a country imports more goods and services than it exports, resulting in a negative balance of trade.

Question 16

As a result of the financial crisis of 2008, the EU countries that were most at risk for not being able to pay their government debts included Portugal, Ireland, Italy, Greece, and Spain.

Accepted Answer

These countries, often referred to as the "PIIGS," were particularly affected by the financial crisis and struggled to manage their government debts, leading to economic instability and austerity measures.

Question 17

Under a gold standard exchange rate system, a country could not issue more money than it could back up with the gold it owned.

Accepted Answer

This is the fundamental principle of the gold standard exchange rate system. A country's currency is backed by a certain amount of gold reserves, and it cannot issue or print more money than the amount of gold it has. This ensures that the value of the currency remains stable and reliable.

Question 18

Employment in the long run does not depend on the trade deficit.

Accepted Answer

While the trade deficit can have short-term effects on employment, such as job losses in industries that compete with cheaper imports, employment in the long run is primarily determined by factors such as productivity, technology, and labor force participation.

Question 19

Explain how exchange rates are determined in a managed float exchange rate system. Discuss the advantages and disadvantages of a managed float system.

Accepted Answer