Question 1

Starting from a position where the nation's money demand equals the money supply,and its balance of payments is in equilibrium,economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation a:

Accepted Answer

C

Question 2

Under the gold standard,a surplus nation facing a gold inflow and an increase in its money supply would also experience a:

Accepted Answer

Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would lead to a fall in its interest rate as a result of an increase in the supply of loanable funds. This would make it more attractive for borrowers to invest in the economy, leading to a short-term financial outflow as the surplus nation's investors seek higher returns elsewhere.

Question 3

Refer to Exhibit 13.1.The change in the level of U.S.income resulting from the additional investment spending equals

Accepted Answer

D

Question 4

Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

Accepted Answer

Variations in foreign par values refer to changes in exchange rates, which do not automatically adjust balance-of-payments disequilibrium. The other options can all lead to automatic adjustments in the balance of payments. For example, an increase in domestic income may lead to an increase in imports, which would worsen the balance of payments, but this may be automatically adjusted as a result of higher exports due to increased demand for domestic goods. Similarly, increases in foreign prices may lead to a decrease in demand for exports, but this may be automatically adjusted as a result of lower import demand due to higher import prices. Changes in domestic prices can also impact export and import demand, leading to automatic adjustments in the balance of payments.

Question 5

During the gold standard era,the "rules of the game" suggested that:

Accepted Answer

The answer of During the gold standard era,the "rules of...

Question 6

Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?

Accepted Answer

The quantity theory of money states that changes in the money supply will affect prices. Therefore, the balance-of-payments adjustment mechanism most closely related to this theory would be the price-adjustment mechanism, as changes in prices could potentially affect international trade and the balance of payments.

Question 7

The monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:

Accepted Answer

The answer of The monetary approach to balance-of-payments adjustments suggests...

Question 8

Refer to Exhibit 13.1.The value of the multiplier for the United States equals:

Accepted Answer

The answer of Refer to Exhibit 13.1.The value of the...

Question 9

The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:

Accepted Answer

Hume's balance-of-payments adjustment mechanism is the price-adjustment mechanism. According to Hume, if a country has a balance-of-payments deficit, meaning it is importing more than it is exporting, the deficit will cause an outflow of gold or currency reserves from the country. This will then cause a decrease in the country's money supply, leading to a decrease in prices. Lower prices will make the country's exports cheaper and imports more expensive, eventually leading to a balance-of-payments equilibrium. Similarly, if a country has a surplus, it will accumulate more gold or currency reserves, leading to an increase in the money supply, higher prices, and then a decrease in exports and an increase in imports until there is equilibrium.

Question 10

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account.Now suppose that Canadian interest rates fall to levels below those abroad.For Canada,this tends to promote:

Accepted Answer

The answer of Assume that Canada initially faces payments equilibrium...

Question 11

Under the gold standard,a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:

Accepted Answer

The answer of Under the gold standard,a deficit nation facing...

Question 12

Suppose Japan increases its imports from Sweden,leading to a rise in Sweden's exports and income level.With a higher income level,Sweden imports more goods from Japan.Thus a change in imports in Japan results in a feedback effect on its exports.This process is best referred to as the:

Accepted Answer

The process described in the question is the foreign repercussion effect, where a change in imports of one country results in a feedback effect on its exports due to an increase in income levels and subsequent increase in demand for goods from other countries. The other options listed are not relevant to the scenario described.

Question 13

The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:

Accepted Answer

The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of excess money supply over money demand in the home country. This means that too much money is circulating in the domestic economy, leading to an increase in imports and a decrease in exports, resulting in a payments deficit. To correct this, the monetary authorities can reduce the money supply through open market operations or increase interest rates to reduce demand for money.

Question 14

Which chain of events would promote payments equilibrium for a deficit nation,according to the price-adjustment mechanism?

Accepted Answer

According to the price-adjustment mechanism, decreasing the money supply would lead to a decrease in domestic prices, which would make exports relatively cheaper and imports relatively more expensive. This would lead to an increase in exports and a decrease in imports, bringing the deficit nation closer to payments equilibrium.

Question 15

Which chain of events would promote payments equilibrium for a surplus nation,according to the price-adjustment mechanism?

Accepted Answer

The answer of Which chain of events would promote payments...

Question 16

Suppose the United States levies an interest equalization tax,which taxes Americans on dividend and interest income from foreign securities.Such a tax would be intended to:

Accepted Answer

An interest equalization tax is designed to discourage financial movements from the United States to overseas by making foreign securities less attractive for American investors by taxing dividend and interest income.

Question 17

During the gold standard era,central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism.Which of the following best represents the above statement?

Accepted Answer

The statement is referring to the "rules of the game" that central bankers agreed upon during the gold standard era, which involved reacting positively to international gold flows to reinforce the automatic adjustment mechanism. This means that central bankers were committed to following a set of rules for managing their economies under the gold standard, rather than using discretionary fiscal policy or relying solely on either an income-adjustment or price-adjustment mechanism.

Question 18

Assume that interest rates on comparable securities are identical in the United States and foreign countries.Now suppose that investors anticipate that in the future the U.S.dollar will appreciate against foreign currencies.Investment funds would thus be expected to:

Accepted Answer

If investors anticipate that the U.S. dollar will appreciate against foreign currencies in the future, they are likely to invest in the United States to take advantage of the expected currency appreciation. This would lead to a flow of investment funds from foreign countries to the United States.

Question 19

Refer to Exhibit 13.1.The change in the level of U.S.imports resulting from the rise in U.S.income equals:

Accepted Answer

The answer of Refer to Exhibit 13.1.The change in the...

Question 20

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account.Now suppose that Canadian interest rates increase to levels higher than those abroad.For Canada,this tends to promote:

Accepted Answer