Question 1

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3. As U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA₀, thus moving towards capital and financial account surplus.

Accepted Answer

As U.S. interest rates rise relative to foreign interest rates, there is an increase in capital inflows leading to a surplus in the capital and financial account, which is represented by the shift of the schedule CA₀ upward.

Question 2

Regarding the equation of exchange, the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

Accepted Answer

The answer of Regarding the equation of exchange, the classical...

Question 3

Under the classical gold standard, a trade surplus nation would realize gold inflows, an increase in its money supply, rising interest rates, and net investment inflows.

Accepted Answer

The answer of Under the classical gold standard, a trade...

Question 4

According to the price-adjustment mechanism, trade deficits can occur only in the long run rather than in the short run.

Accepted Answer

The price-adjustment mechanism can take time to occur, but trade deficits can still occur in the short run due to factors such as changes in consumer preferences or sudden changes in exchange rates.

Question 5

Under the price-adjustment mechanism, a government's efforts to maintain a current-account surplus is self defeating over the long run because a nation's current account automatically moves toward equilibrium.

Accepted Answer

The price-adjustment mechanism refers to the process by which exchange rates adjust to restore equilibrium in the current account. If a government tries to maintain a surplus by manipulating exchange rates or implementing trade barriers, it disrupts this mechanism and can lead to imbalances in the long run. Eventually, the current account will adjust to equilibrium regardless of government interventions.

Question 6

According to the equation of exchange, the total expenditures on final goods equals the monetary value of the final goods sold.

Accepted Answer

The equation of exchange is MV = PQ where M is the total money supply, V is the velocity of money (how many times it changes hands), P is the price level, and Q is the quantity of final goods and services produced. This equation states that the total expenditures on final goods (PQ) equals the monetary value of the final goods sold (MV). Therefore, the answer is true.

Question 7

The price-adjustment mechanism's relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

Accepted Answer

The statement is true, as the price-adjustment mechanism assumes full employment and constant velocity of money, which may not always hold true in the real world.

Question 8

The gold standard's "rules of the game" required central bankers in a trade deficit nation to expand the money supply, leading to falling interest rates and net investment outflows.

Accepted Answer

The "rules of the game" under the gold standard required central bankers in a trade deficit nation to contract the money supply, leading to higher interest rates and net investment inflows.

Question 9

Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

Accepted Answer

Under the classical gold standard, prices were fixed and adjustments were made through gold flows, which in turn influenced the short-term interest rates. These adjustments automatically promoted balance-of-payments equilibrium over the long run.

Question 10

Under the gold standard of the 1800s, exchange rates were allowed to float freely in the currency markets.

Accepted Answer

Under the gold standard of the 1800s, exchange rates were fixed to the value of gold and were not allowed to fluctuate freely in the currency markets.

Question 11

Under the price-adjustment mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a loss of international competitiveness.

Accepted Answer

When a trade-surplus nation realizes an inflow of gold, its money supply increases. This leads to a decrease in the value of its currency, making its exports more expensive and less competitive in international markets.

Question 12

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3. Decreases in U.S. interest rates relative to foreign interest rates would shift U.S. capital and financial account schedule CA₀ downward toward CA₁, resulting in net financial outflows from the United States.

Accepted Answer

The answer of Figure 13.3. U.S. Capital and Financial Account...

Question 13

The gold standard's "rules of the game" required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

Accepted Answer

The answer of The gold standard's "rules of the game"...

Question 14

The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

Accepted Answer

The quantity theory of money explains how changes in the money supply affect the general price level in an economy, and is closely tied to the classical theory of price adjustment. According to this theory, an increase in the money supply will lead to higher prices, as there is more money chasing the same amount of goods and services. In the long run, prices will adjust to ensure that the economy remains in equilibrium.

Question 15

The "rules of the game" served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

Accepted Answer

The rules of the game were agreed upon by countries under the fixed exchange rate system to help stabilize their exchange rates. These rules included adjusting interest rates to maintain the exchange rate within a certain range. By reinforcing and speeding up the interest-rate-adjustment mechanism, the rules of the game helped to maintain the stability of exchange rates.

Question 16

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3. Falling investment profitability in the United States, relative to investment profitability abroad, would shift the U.S. capital and financial account schedule downward from CA₀ to CA₁, resulting in net financial outflows from the United States.

Accepted Answer

This is because a decrease in investment profitability in the United States would make foreign investments more attractive, resulting in U.S. investors sending more funds abroad, leading to net financial outflows from the United States.

Question 17

Under the gold standard, each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

Accepted Answer

This is the basic principle of the gold standard. Each country would set the value of its currency in terms of a fixed weight of gold and be willing to exchange their currency for gold or gold for their currency at that pre-determined price.

Question 18

According to the quantity theory of money, a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

Accepted Answer

The answer of According to the quantity theory of money,...

Question 19

Under the price-adjustment mechanism, trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

Accepted Answer

The answer of Under the price-adjustment mechanism, trade-deficit nations realize...

Question 20

Under the gold standard, a nation with a current-account surplus would realize gold outflows, a decrease in its money supply, and a fall in its domestic price level.

Accepted Answer

Under the gold standard, a nation with a current-account surplus would experience inflows of gold, an increase in its money supply, and a rise in its domestic price level.

Quiz 13: Mechanisms of International Adjustment

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3. As U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA0, thus moving towards capital and financial account surplus.