Question 1

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 a specific amount of gold. Currencies were therefore not allowed to float freely in the currency markets.

Question 2

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

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Question 3

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,a...

Question 4

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

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Question 5

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

This is because as a trade-surplus nation receives more gold inflows, its money supply increases, causing its currency to appreciate, making its exports more expensive and reducing its competitiveness in the international market.

Question 6

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 an inflow of gold, an increase in its money supply, and a rise in its domestic price level. This is because an increase in the supply of gold would lead to an increase in the money supply, which would in turn lead to an increase in prices. Conversely, a current-account deficit would result in an outflow of gold, a decrease in the money supply, and a decrease in the domestic price level.

Question 7

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

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Question 8

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 CA?,thus moving towards capital and financial account surplus.

Accepted Answer

According to Figure 13.3, as U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA, indicating an increase in capital and financial account surplus.

Question 9

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's currency was convertible into gold at a fixed price, allowing for stability in exchange rates and trade.

Question 10

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 gold standard's "rules of the game" required central bankers in a trade deficit nation to contract the money supply, leading to rising interest rates and net investment inflows. This was done to maintain the convertibility of the currency into gold and prevent a drain on the nation's gold reserves.

Question 11

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

Accepted Answer

According to the equation of exchange, MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the volume of goods and services produced. This equation suggests that the total expenditures on final goods and services (PQ) equals the monetary value of the final goods sold (MV). Therefore, the statement is true.

Question 12

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 CA? to CA?,resulting in net financial outflows from the United States.

Accepted Answer

This is because falling investment profitability in the United States would decrease the demand for U.S. financial assets and increase the demand for foreign financial assets, leading to a net outflow of financial resources from the United States. This would be reflected in a downward shift of the capital and financial account schedule from CA? to CA?.

Question 13

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

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Question 14

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 price-adjustment mechanism assumes that the economy is at full-employment level and that the velocity of money is constant. However, in reality, these assumptions may not hold true, which questions the relevance of the mechanism in the real world.

Question 15

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 CA? downward toward CA?,resulting in net financial outflows from the United States.

Accepted Answer

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

Question 16

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 involves changes in exchange rates and prices to eventually correct trade imbalances. However, in the short run, these adjustments may not happen quickly enough to prevent a trade deficit from occurring. Therefore, trade deficits can occur in the short run as well as the long run.

Question 17

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 a country's exchange rate and prices adjust to maintain a balance of payments equilibrium over the long run. If a government intervenes to maintain a current-account surplus, it will typically do so by imposing restrictions on imports or manipulating its currency, which will ultimately lead to a loss of competitiveness and a decline in exports. This, in turn, will cause the current account to move toward equilibrium as the trade surplus narrows or turns into a deficit. Therefore, the government's efforts to maintain a surplus are self-defeating over the long run.

Question 18

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 gold standard, a country's currency was pegged to a fixed amount of gold, and any balance-of-payments deficits or surpluses were automatically corrected through changes in domestic prices and short-term interest rates. This promoted balance-of-payments equilibrium over the long run.

Question 19

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, also known as the central bank agreement, were designed to promote exchange rate stability and prevent competitive devaluations. One of the key mechanisms of this system was the interest rate adjustment mechanism, which involved central banks adjusting interest rates in response to changes in capital flows and exchange rates. The rules of the game helped to reinforce and speed up this mechanism, ensuring that exchange rate adjustments occurred in a coordinated and predictable manner.

Question 20

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

Accepted Answer

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Quiz 13: Balance-of-payments Adjustments