Deck 16: Macroeconomic Policy in an Open Economy

Question 1

An $\underline { \text { expenditure-increasing } }$ policy would consist of an increase in:

A) Import tariffs
B) Import quotas
C) Governmental taxes
D) The money supply

Answer 1

The money supply

Question 2

Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil $\underline { \text { devalue } }$ its currency, one would expect the:

A) Inflation to become more severe--deficit to become less severe
B) Inflation to become more severe--deficit to become more severe
C) Inflation to become less severe--deficit to become less severe
D) Inflation to become less severe--deficit to become more severe

Answer 2

Inflation to become more severe--deficit to become less severe

Question 3

A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:

A) Trade flows only
B) Capital flows only
C) both trade flows and capital flows
D) Neither trade flows nor capital flows

Answer 3

C

Question 4

Most industrial countries generally considered ____ as the most important economic goal.

A) External balance
B) Internal balance
C) Maximum efficiency for business
D) Maximum efficiency for labor

Question 5

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy

A) cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output
B) cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output
C) have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output
D) have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output

Question 6

Which policy is an $\underline { \text { expenditure-switching } }$ policy?

A) Increase in the money supply
B) Decrease in government expenditures
C) Increase in business and household taxes
D) Decrease in import tariffs

Question 7

A nation experiences $\underline { \text { internal } }$ balance if it achieves:

A) Full employment
B) Price stability
C) Full employment and price stability
D) Unemployment and price instability

Question 8

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy

A) cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output
B) cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output
C) have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output
D) have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output

Question 9

Given fixed exchange rates, assume Mexico initiates $\underline { \text { expansionary } }$ monetary and fiscal policies to combat recession. These policies will also:

A) Increase both imports and exports
B) Increase exports and reduce imports
C) Reduce a balance-of-payments surplus
D) Reduce a balance-of-payments deficit

Question 10

In a closed economy, which of the following will cause the economy's aggregate demand curve to shift to the right?

A) decreases and wages and salaries paid to employees
B) increases in the prices of oil and natural gas
C) decreases in income taxes for households
D) decreases in the productivity of labor

Question 11

Given fixed exchange rates, assume Mexico initiates $\underline { \text { contractionary } }$ monetary and fiscal policies to combat inflation. These policies will also:

A) Reduce a balance-of-payments surplus
B) Reduce a balance-of-payments deficit
C) Increases both imports and exports
D) Decrease both imports and exports

Question 12

A nation experiences $\underline { \text { external } }$ balance if it achieves:

A) No net changes in its international gold stocks
B) Productivity levels equal to those of its trading partners
C) An increase in its money supply equal to increases overseas
D) Equilibrium in its balance of payments

Question 13

Which policies are $\underline { \text { expenditure-changing } }$ policies?

A) Currency devaluation and revaluation
B) Import quotas and tariffs
C) Monetary and fiscal policy
D) Wage and price controls

Question 14

The appropriate expenditure- $\underline { \text { switching } }$ policy to correct a current account $\underline { \text { deficit } }$ is:

A) Contractionary monetary policy
B) Expansionary fiscal policy
C) Currency devaluation
D) Currency revaluation

Question 15

An $\underline { \text { expenditure-reducing } }$ policy would consist of a decrease in:

A) The par value of a currency
B) Government expenditures
C) Import duties
D) Business or household taxes

Question 16

A nation experiences $\underline { \text { overall } }$ balance if it achieves:

A) Balance-of-payments equilibrium, full employment, and price stability
B) Balance-of-payments equilibrium, maximum productivity, and price stability
C) Full employment, price stability and no change in its money supply
D) Full employment, price stability, and maximum productivity

Question 17

Suppose the United States faces domestic inflation and a current account surplus. Should the United States $\underline { \text { revalue } }$ the dollar, one would expect the:

A) Inflation to become more severe--surplus to become less severe
B) Inflation to become less severe--surplus to become less severe
C) Inflation to become less severe--surplus to become more severe
D) Inflation to become more severe--surplus to become more severe

Question 18

The appropriate expenditure- $\underline { \text { switching } }$ policy to correct a current account surplus is:

A) Currency revaluation
B) Currency devaluation
C) Expansionary monetary policy
D) Contractionary fiscal policy

Question 19

Suppose Brazil faces domestic recession and a current account surplus. Should Brazil $\underline { \text { revalue } }$ its currency, one would expect the:

A) Recession to become less severe--surplus to become less severe
B) Recession to become more severe--surplus to become more severe
C) Recession to become more severe--surplus to become less severe
D) Recession to become less severe--surplus to become more severe

Question 20

Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:

A) Recession to become less severe--deficit to become less severe
B) Recession to become more severe--deficit to become less severe
C) Recession to become less severe--deficit to become more severe
D) Recession to become more severe--deficit to become more severe

Question 21

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the

A) domestic money supply to decrease and a decline in aggregate demand
B) domestic money supply to increase and a decline in aggregate demand
C) domestic money supply to decrease and a rise in aggregate demand
D) domestic money supply to increase and a rise in aggregate demand

Question 22

The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:

A) Tariff trade barrier formation
B) Nontariff trade barrier formation
C) International economic policy coordination
D) Beggar-thy-neighbor policies

Question 23

A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:

A) Expansionary fiscal policy
B) Expansionary monetary policy
C) Contractionary fiscal policy
D) Contractionary monetary policy

Question 24

Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be

A) a depreciation of the domestic currency and a rise in net exports
B) a depreciation of the domestic currency and a fall in net exports
C) an appreciation of the domestic currency and a rise in net exports
D) an appreciation of the domestic currency and a fall in net exports

Question 25

At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar's exchange value.

A) Plaza Agreement of 1985
B) Louvre Accord of 1987
C) Bonn Summit of 1978
D) Tokyo Summit of 1962

Question 26

Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:

A) Trade-account deficit and a capital-account surplus
B) Trade-account deficit and a capital-account deficit
C) Trade-account surplus and a capital-account surplus
D) Trade-account surplus and a capital-account deficit

Question 27

A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:

A) Expansionary fiscal policy
B) Expansionary monetary policy
C) Contractionary fiscal policy
D) Contractionary monetary policy

Question 28

Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause

A) the dollar to appreciate and will decrease U.S. net exports
B) the dollar to appreciate and will increase U.S. net exports
C) the dollar to depreciate and will increase U.S. net exports
D) the dollar to depreciate and will decrease U.S. net exports

Question 29

Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause

A) the dollar to appreciate and will decrease U.S. net exports
B) the dollar to appreciate and will increase U.S. net exports
C) the dollar to depreciate and will increase U.S. net exports
D) the dollar to depreciate and will decrease U.S. net exports

Question 30

Under a fixed exchange-rate system and high capital mobility, an $\underline { \text { expansionary } }$ fiscal policy leads to a:

A) Trade-account deficit and a capital-account surplus
B) Trade-account deficit and a capital-account deficit
C) Trade-account surplus and a capital-account surplus
D) Trade-account surplus and a capital-account deficit

Question 31

Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:

A) Trade-account deficit and a capital-account surplus
B) Trade-account deficit and a capital-account deficit
C) Trade-account surplus and a capital-account surplus
D) Trade-account surplus and a capital-account deficit

Question 32

Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes the

A) domestic money supply to decrease and a decline in aggregate demand
B) domestic money supply to increase and a decline in aggregate demand
C) domestic money supply to decrease and a rise in aggregate demand
D) domestic money supply to increase and a fall in aggregate demand

Question 33

Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would be

A) a depreciation of the domestic currency and a rise in net exports
B) a depreciation of the domestic currency and a fall in net exports
C) an appreciation of the domestic currency and a rise in net exports
D) an appreciation of the domestic currency and a fall in net exports

Question 34

Under a system of managed-floating exchange rates with $\underline { \text { heavy } }$ exchange rate intervention:

A) Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful
B) Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessful
C) Both fiscal policy and monetary policy are successful in promoting internal balance
D) Neither fiscal policy nor monetary policy are successful in promoting internal balance

Question 35

Under a fixed exchange-rate system and high capital mobility, a $\underline { \text { contraction } }$ in the domestic money supply leads to a:

A) Trade-account deficit and a capital-account surplus
B) Trade-account deficit and a capital-account deficit
C) Trade-account surplus and a capital-account surplus
D) Trade-account surplus and a capital-account deficit

Question 36

All of the following are obstacles to international economic policy coordination $\underline { \text { except } }$

A) Different national objectives and institutions
B) Different national political climates
C) Different phases in the business cycle
D) Different national currencies

Question 37

Exhibit 16.1
At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.
Refer to Exhibit 16.1. To help drive the dollar's exchange value downward, the Federal Reserve would:

A) Reduce taxes
B) Increase taxes
C) Decrease the money supply
D) Increase the money supply

Question 38

Given an open economy with high capital mobility, all of the following statements are true except:

A) fiscal policy is strengthened under fixed exchange rates
B) monetary policy is weakened under fixed exchange rates
C) monetary policy is strengthened under floating exchange rates
D) fiscal policy is strengthened under floating exchange rates

Question 39

Exhibit 16.1
At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.
Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, it promotes an increase in the U.S.:

A) Rate of inflation
B) Budget deficit
C) Unemployment level
D) Economic growth rate

Question 40

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the

A) domestic money supply to decrease and a decline in aggregate demand
B) domestic money supply to increase and a decline in aggregate demand
C) domestic money supply to decrease and a rise in aggregate demand
D) domestic money supply to increase and a fall in aggregate demand

Question 41

Policy coordination is complicated by

A) Different economic objectives
B) Different national institutions
C) Different phases in the business cycle
D) All of the above

Question 42

Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

Question 43

Changes in a country's net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

Question 44

A nation realizes overall balance when it achieves full employment and current account equilibrium.

Question 45

Expenditure-switching policies include fiscal policy and monetary policy.

Question 46

With a fixed exchange rate system, internal balance is most effectively achieved by using

A) Expansionary monetary policy to combat recession
B) Expansionary fiscal policy to combat inflation
C) Contractionary monetary policy to combat recession
D) Contractionary fiscal policy to combat recession

Question 47

When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

Question 48

Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's aggregate demand for goods and services.

Question 49

A nation realizes external balance when its current account is in equilibrium.

Question 50

Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

Question 51

Direct controls may take the form of

A) Tariffs
B) Export subsidies
C) Export quotas
D) All of the above

Question 52

Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

Question 53

Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

Question 54

Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

Question 55

Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

Question 56

A nation realizes internal balance if economy achieves full employment and price stability.

Question 57

When a nation realizes external balance

A) it can have a current account deficit
B) it can have a current account surplus
C) it has neither a current account deficit nor a current account surplus
D) Both a and b

Question 58

Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy's expansionary effect.

Question 59

Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

Question 60

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect.

Question 61

Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on domestic employment and inflation.

Question 62

What policy instrument should be used when demand-pull inflation exists?

Question 63

Exchange rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency.

Question 64

What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

Question 65

International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

Question 66

What is international economic policy coordination?

Question 67

Was the Plaza Agreement of 1985 a success?

Question 68

The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

Question 69

Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

Question 70

Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

Question 71

The Group of five (G-5) nations include Japan, Germany, China, and Australia.

Question 72

The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.