Question 1

The currency created by the European Monetary Union,for which notes and coins became available in 2002,is the

Accepted Answer

The currency created by the European Monetary Union is the euro.

Question 2

Currency unions are rare because

Accepted Answer

Countries are typically very reluctant to give up having their own currencies because it is a symbol of their sovereignty and they believe it gives them more control over their own economy. Additionally, joining a currency union requires a significant amount of economic coordination and cooperation with other countries, which can be difficult to achieve. However, while currency unions are rare, they do exist - for example, the eurozone.

Question 3

Under a system of fixed exchange rates,what happens if a country's currency is overvalued?

Accepted Answer

If a country's currency is overvalued under a fixed exchange rate system, its central bank will have to sell its own currency and buy foreign currency to maintain the fixed value. This results in a decrease in the central bank's official reserve assets.

Question 4

Describe the effects of contractionary monetary policy by the domestic central bank on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model in the short run.What happens in the long run? Show a diagram to illustrate the short-run and long-run effects in both countries.

Accepted Answer

The answer of Describe the effects of contractionary monetary policy...

Question 5

Compared with a system of fixed exchange rates,currency unions are beneficial because they

Accepted Answer

Currency unions eliminate the possibility of speculative attacks because countries within the union share the same currency and have a central bank that can intervene to defend the currency if necessary. This reduces the risk of currency fluctuations and makes investments in the union more stable. However, currency unions do restrict countries' ability to use fiscal policy and monetary policy independently, so choices A, B, and C are incorrect.

Question 6

For this question,use the Keynesian IS-LM model with flexible exchange rates.
Eastland's main trading partner is Westland.Suppose Westland undertakes an expansionary monetary policy.
(a)What is the effect of Westland's expansionary monetary policy on Eastland's real exchange rate in the short run,assuming no change in Eastland's policies?
(b)What is the effect of Westland's expansionary monetary policy on Eastland's real exchange rate in the long run,assuming no change in Eastland's policies?
(c)What is the effect of Westland's expansionary monetary policy on Eastland's nominal exchange rate in the short run and in the long run?

Accepted Answer

The answer of For this question,use the Keynesian IS-LM model...

Question 7

International businesses like a fixed-exchange-rate system because

Accepted Answer

International businesses prefer a fixed-exchange-rate system because it allows them to plan better and make long-term decisions with more certainty. With a fixed rate, they have a clear idea of the exchange rate they'll receive, reducing uncertainty and the risk of unexpected losses. This can be particularly important for firms that must commit to investments and contracts in different countries where the currency may fluctuate.

Question 8

An increase in the U.S.money supply would cause the value of the dollar to ________ and U.S.net exports to ________ in the short run using a Keynesian model.

Accepted Answer

The answer of An increase in the U.S.money supply would...

Question 9

The Federal Reserve has just purchased bonds in the market,carrying out open market operations.In the short run in the Keynesian model,this would cause the foreign real interest rate to ________ and foreign output to ________.

Accepted Answer

The answer of The Federal Reserve has just purchased bonds...

Question 10

Describe the effects of contractionary fiscal policy by the domestic government on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model.

Accepted Answer

The answer of Describe the effects of contractionary fiscal policy...

Question 11

Under a system of fixed exchange rates,what happens if a country's currency is undervalued?

Accepted Answer

If a country's currency is undervalued under a fixed exchange rate system, it means that it is being traded at a lower rate than its real worth. This leads to an increase in demand for the country's exports and a decrease in imports, as foreign consumers find the goods of the country relatively cheap. This results in an increase in the country's current account surplus, which leads to an increase in the country's official reserve assets. Therefore, the correct answer is B.

Question 12

If a country has an overvaluation problem,the best solution is to

Accepted Answer

The answer of If a country has an overvaluation problem,the...

Question 13

In the short run in the Keynesian model,an increase in the domestic money supply would cause domestic output to ________ and the domestic real interest rate to ________.

Accepted Answer

In the short run in the Keynesian model, an increase in the domestic money supply would cause domestic output to rise as there would be an increase in aggregate demand due to increased money supply. This would cause an increase in prices, which would lower the real interest rate as the nominal interest rate would remain the same in the short run. Therefore, the domestic output would rise and the domestic real interest rate would fall.

Question 14

Suppose Japan is currently running a current account surplus.The most effective way of eliminating this current account surplus would be to temporarily ________ government purchases and ________ the domestic money supply.

Accepted Answer

Increasing government purchases injects more money into the economy, boosting domestic consumption and potentially increasing imports. Increasing the domestic money supply lowers interest rates, encouraging more spending and investment, further increasing imports relative to exports, which can help eliminate a current account surplus.

Question 15

In a Keynesian model,a temporary increase in government purchases would cause output to ________ and the domestic real interest rate to ________,in the short run.

Accepted Answer

In a Keynesian model, a temporary increase in government purchases would increase aggregate demand, leading to an increase in output. This increase in demand for funds for government spending would also lead to an increase in the domestic real interest rate in the short run.

Question 16

When a group of countries agree to share a common currency,they are said to have formed a

Accepted Answer

When a group of countries agree to share a common currency, they form a currency union. This arrangement entails each member country adopting the same currency as legal tender and pursuing common monetary and exchange rate policies. Examples of currency unions include the Eurozone (19 European Union member states that have adopted the euro) and the Eastern Caribbean Currency Union (ECCU).

Question 17

Compared to a system of fixed exchange rates,currency unions are beneficial because they

Accepted Answer

Currency unions eliminate exchange rate risk and reduce transaction costs of trading goods and assets. This leads to increased economic integration and efficiency within the union. However, countries in a currency union must give up their independent monetary policy, which can limit their ability to respond to economic shocks.

Question 18

According to the classical model,an increase in the American nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.

Accepted Answer

An increase in the nominal money supply would lead to a depreciation of the nominal exchange rate due to the increased supply of money, making the currency less valuable relative to others. However, the real exchange rate, which adjusts the nominal rate by price levels, would remain unchanged in the classical model, assuming prices adjust proportionately to changes in the money supply.

Question 19

You have just noticed that the dollar appreciated and you suspect that the American government was behind this change.Which would you choose as the most likely cause of this appreciation in the real exchange rate?

Accepted Answer

When the money supply is decreased, it becomes more expensive for consumers to spend money and therefore consumption decreases. This will result in a decrease in the supply of dollars as consumers are less willing to spend them. As a result, the value of the dollar will appreciate relative to other currencies. Additionally, government intervention in currency markets can lead to the appreciation of the dollar through adjusting interest rates, buying and selling foreign currencies, and other market activities. However, in this scenario, the question specifically mentions the suspicion that the American government was behind the change, making the possibility of government intervention more likely to be true.

Question 20

To encourage more investment,Mexico has lowered its tax rates to reduce the user cost of capital.Argentina is unable to pay back its foreign debts,causing its expected future marginal product of capital to fall.Mexico's real exchange rate will ________ and its net exports will ________.

Accepted Answer

Lowering tax rates in Mexico makes investing in Mexico more attractive, likely appreciating its currency due to increased demand for Mexican assets. Argentina's inability to pay back debts decreases its investment appeal, reducing demand for its currency and likely causing a depreciation relative to Mexico's. An appreciated currency makes a country's exports more expensive and imports cheaper, potentially leading to a fall in net exports.

Quiz 13: Exchange Rates,business Cycles,and Macroeconomic Policy in the Open Economy

The currency created by the European Monetary Union,for which notes and coins became available in 2002,is the

Currency unions are rare because

Under a system of fixed exchange rates,what happens if a country's currency is overvalued?

Compared with a system of fixed exchange rates,currency unions are beneficial because they

International businesses like a fixed-exchange-rate system because

An increase in the U.S.money supply would cause the value of the dollar to and U.S.net exports to in the short run using a Keynesian model.

The Federal Reserve has just purchased bonds in the market,carrying out open market operations.In the short run in the Keynesian model,this would cause the foreign real interest rate to and foreign output to .

Describe the effects of contractionary fiscal policy by the domestic government on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model.

Under a system of fixed exchange rates,what happens if a country's currency is undervalued?

If a country has an overvaluation problem,the best solution is to

In the short run in the Keynesian model,an increase in the domestic money supply would cause domestic output to and the domestic real interest rate to .

Suppose Japan is currently running a current account surplus.The most effective way of eliminating this current account surplus would be to temporarily government purchases and the domestic money supply.

In a Keynesian model,a temporary increase in government purchases would cause output to and the domestic real interest rate to ,in the short run.

When a group of countries agree to share a common currency,they are said to have formed a

Compared to a system of fixed exchange rates,currency unions are beneficial because they

According to the classical model,an increase in the American nominal money supply would cause the nominal exchange rate to and the real exchange rate to .

You have just noticed that the dollar appreciated and you suspect that the American government was behind this change.Which would you choose as the most likely cause of this appreciation in the real exchange rate?

To encourage more investment,Mexico has lowered its tax rates to reduce the user cost of capital.Argentina is unable to pay back its foreign debts,causing its expected future marginal product of capital to fall.Mexico's real exchange rate will and its net exports will .