Question 1

The current account is the same as the balance of trade.

Accepted Answer

The current account is a broader measure of international trade that includes not only goods and services, but also income payments and transfers. The balance of trade only reflects the difference between exports and imports of goods.

Question 2

Under flexible exchange rates, an open economy _____ monetary policy and _____ fiscal policy.

Accepted Answer

Under flexible exchange rates, the exchange rate is determined by the market forces of supply and demand. As a result, a country's monetary policy can be used to influence domestic interest rates and inflation rates but has limited impact on the exchange rate. In contrast, fiscal policy, which involves changes in government spending and taxation, can have a more direct impact on the exchange rate through its effect on the economy. Therefore, under flexible exchange rates, monetary policy is reinforced (i.e. effective in achieving its goals) while fiscal policy is hampers (i.e. less effective in achieving its goals because of the impact on the exchange rate).

Question 3

Assume we have an economy currently in a recession with a flexible exchange rate system. In order to expand the economy, the government should:

Accepted Answer

The answer of Assume we have an economy currently in...

Question 4

The sum of all of the balance of payments accounts must equal zero.

Accepted Answer

According to the balance of payments accounting system, every transaction that involves a change of ownership between residents of one country and residents of another country is recorded in two separate accounts. These are the current account and the capital account. The sum of these two accounts must be equal to zero, meaning that every credit must have an offsetting debit. Therefore, the given statement is true.

Question 5

The nominal exchange rate is the price of one country's currency for another country's currency without taking into consideration the price levels of each country.

Accepted Answer

The definition of nominal exchange rate is correct. It only considers the exchange rate between two currencies, without adjustments for the different price levels in each country.

Question 6

The importation of capital is included in the current account.

Accepted Answer

The importation of capital is included in the capital account, not the current account. The current account deals with trade in goods and services, income, and current transfers.

Question 7

The current account summarizes the flow of money into and out of domestic and foreign assets.

Accepted Answer

The current account summarizes the flow of goods, services, income, and transfer payments into and out of a country. It is part of the balance of payments, which also includes the capital account and the financial account, the latter of which deals with the flow of money into and out of domestic and foreign assets.

Question 8

Under a fixed exchange rate system, expansionary monetary policy is _____due to changes brought about through the _____ account.

Accepted Answer

The answer of Under a fixed exchange rate system, expansionary...

Question 9

The capital account summarizes the flow of money into and out of domestic and foreign assets.

Accepted Answer

This statement is true. The capital account of a country's balance of payments reflects the flow of funds between a country and its trading partners. It includes capital transfers, such as foreign aid and debt forgiveness, and purchases and sales of fixed assets like real estate and stocks.

Question 10

Exports of goods and services are included in the capital account.

Accepted Answer

Exports of goods and services are included in the current account, not the capital account. The capital account deals with financial transactions that don't affect a country's income, savings, or investments.

Question 11

The capital account includes payments for imports and exports of goods and services, incomes flowing into and out of the country, and net transfers of money.

Accepted Answer

The capital account mainly records transactions involving the purchase and sale of foreign assets and liabilities, such as real estate or stocks and bonds, rather than trade in goods and services or income flows, which are recorded in the current account.

Question 12

The balance of trade is the difference between exports of goods and services and imports of goods and services.

Accepted Answer

The balance of trade is indeed the difference between exports of goods and services and imports of goods and services.

Question 13

Wages earned by a Haitian nanny working in the United States that are sent home to support her own children in Haiti are still added to the U.S. current account because the services were rendered in the United States.

Accepted Answer

Wages earned by a Haitian nanny working in the United States and sent home to Haiti are considered remittances and are recorded in the current account as a debit (outflow) for the United States, reflecting a transfer of funds abroad, not as an addition to the U.S. current account income.

Question 14

The gold account is a component of the balance of payments account.

Accepted Answer

The answer of The gold account is a component of...

Question 15

Assume we have an economy currently in a recession with a fixed exchange rate system. In order to expand the economy, the government should:

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes in order to stimulate economic growth. This can help to increase demand for goods and services, leading to increased production and employment. In a fixed exchange rate system, monetary policy may not be effective as the central bank may be limited in its ability to adjust interest rates. Dollarization involves adopting a foreign currency as the official currency, which can provide more stability but also limits the government's ability to control monetary policy. Trade restrictions can also have negative effects on the economy, as they can decrease international trade and investment. Therefore, the best choice in this scenario would be to use expansionary fiscal policy.

Question 16

The effects of expansionary fiscal and monetary policies differ under a flexible exchange rate system because they have different effects on:

Accepted Answer

Expansionary fiscal policy (increasing government spending or decreasing taxes) and expansionary monetary policy (increasing the money supply) both aim to increase aggregate demand but have different effects on interest rates. Expansionary fiscal policy tends to increase interest rates by increasing demand for loanable funds, while expansionary monetary policy tends to decrease interest rates by increasing the supply of money.

Question 17

The balance of payments comprises all payments received from foreign countries and all payments made to them.

Accepted Answer

The balance of payments is a record of all economic transactions between a country and the rest of the world, including both payments received from foreign countries and payments made to them.

Question 18

In the balance of payments accounts, the current account includes the purchase and sale of foreign currency.

Accepted Answer

The current account includes transactions related to goods, services, income, and current transfers. The purchase and sale of foreign currency is recorded in the capital account.

Question 19

The capital account includes payments for imports and exports of goods and services.

Accepted Answer

The capital account records transfers of capital, such as foreign investments and loans, while the current account includes payments for imports and exports of goods and services.

Question 20

Under a flexible exchange system, an expansionary monetary policy would:

Accepted Answer

An expansionary monetary policy typically lowers interest rates, making domestic assets less attractive to foreign investors, leading to a depreciation of the currency.

Quiz 16: Open Economy Macroeconomics