Deck 17: Basic Theories of the Balance of Payments

Question 1

Suppose that the United Kingdom devalues the pound. If both exports and imports are written in terms of pounds, then the United Kingdom balance of trade during a currency contract period.

A) improves
B) worsens
C) is unaffected
D) falls for a while before increasing

Answer 1

C

Question 2

The notion that, following a devaluation, the BOT falls for a while before increasing is called a effect.

A) relative price
B) elasticity
C) J-curve
D) pass-through

Answer 2

C

Question 3

With fixed exchange rates, an increase in the foreign inflation rate, with constant income and domestic credit, will lead to

A) a change in the exchange rate.
B) an increase in international reserves.
C) a decrease in international reserves.
D) no change in international reserves.

Answer 3

B

Question 4

The balance of trade can only worsen if income relative to absorption.

A) increases
B) decreases
C) does not change
D) None of the above

Question 5

With a managed float, monetary disequilibrium is eliminated through

A) international reserve flows.
B) exchange rate changes.
C) international reserve flows and exchange rate changes.
D) None of the above.

Question 6

Both the do not put a great deal of emphasis on the capital account.

A) absorption and monetary approaches
B) monetary and elasticities approaches
C) elasticities and absorption approaches
D) None of the above

Question 7

Which of the following is not appropriate, if we live in a world of fixed exchange rates?

A) monetary approach to the exchange rate
B) elasticities approach
C) monetary approach to the BOP
D) absorption approach

Question 8

The is a theory of the balance of trade that emphasizes how domestic spending on domestic goods changes relative to domestic output.

A) absorption approach
B) monetary approach
C) pass-through analysis
D) elasticities approach

Question 9

The shorter the "pass-through" period, the the desirable BOT effects of devaluation on quantities traded will appear.

A) sooner
B) longer
C) bigger
D) smaller

Question 10

If devaluation does not improve the BOT, but only the BOP, this implies that

A) the capital account is in deficit.
B) the current account is in surplus.
C) the improvement comes in the capital account.
D) Both B and C.

Question 11

Which of the following is not correct for a small open economy?

A) She cannot improve her BOT.
B) She cannot affect the international price of goods.
C) She cannot affect the foreign interest rate.
D) All of the above.

Question 12

With fixed exchange rates, the adjustment to changes in international monetary conditions comes through

A) exchange rate changes.
B) exchange rate changes and international money flows.
C) international money flows.
D) None of the above.

Question 13

If U.S. export contracts are written in terms of foreign currency and import contracts are denominated in domestic currency, a devaluation of the dollar during the currency contract period

A) should increase the dollar value of exports.
B) should not have any effect on the dollar value of U.S. imports.
C) must increase the BOT.
D) All of the above

Question 14

In the case of purely flexible exchange rates, a decrease in domestic real income, with constant prices and domestic credit, will lead to

A) an increase in international reserves.
B) the depreciation of the domestic currency.
C) the appreciation of the domestic currency.
D) no change in the value of the domestic currency.

Question 15

Which of the following are theories of the BOT?

A) monetary approach
B) absorption approach
C) elasticities approach
D) Both B and C

Question 16

Under a managed float system, central banks can

A) allow international reserve changes.
B) let exchange rates adjust to market pressure.
C) experience reserve changes and exchange rate changes.
D) All of the above.

Question 17

According to the MABP, BOP disequilibria

A) must be transitory.
B) are essentially real phenomena.
C) must be permanent.
D) are not important.

Question 18

The analysis considers the ability of domestic and foreign prices to adjust to devaluation in the short run.

A) pass-through
B) absorption
C) adjustment mechanism
D) currency contract period

Question 19

The analyzes the BOP and exchange rates in terms of money supply and money demand.

A) elasticities approach
B) "pass-through of devaluation"
C) monetary approach
D) absorption approach

Question 20

Empirical evidence regarding the effects of devaluation on the balance of trade indicates that

A) devaluation generally improves the BOT.
B) devaluation generally hurts the BOT.
C) no strong generalizations are possible.
D) devaluation has no effect on the BOT.

Question 21

There is evidence that the exchange-rate pass-through effect to import prices has been declining in developed economies, especially for the United States.

Question 22

The fact that the balance of trade normally falls before increasing after a devaluation is known as

A) the J-curve.
B) the pass-through effect.
C) the balance of payments paradox.
D) the indifference reflection.

Question 23

Is the "international adjustment mechanism" for fixed and flexible exchange rates the same? Discuss briefly.

Question 24

The reported reduction in the exchange-rate pass through to import prices means that U.S. inflation will be relatively insensitive to exchange rate changes.

Question 25

Which of the following has been offered as a possible explanation to the evidence that the exchange-rate pass-through effect to import prices has been declining in developed economies?

A) That foreign exporters have been increasingly adopting "pricing-to-market" policies.
B) That transaction costs have decreased in recent years.
C) That global leaders have encouraged this phenomenon.
D) That the share of imports with prices more sensitive to exchange rates has been increasing.

Question 26

The absorption approach is a theory of the balance of payments that emphasizes how domestic spending on domestic goods changes relative to domestic output.

Question 27

What is the difference between the monetary approach to the exchange rate and monetary approach to the balance of payments? Briefly summarize the policy implications of the monetary approach.

Question 28

"Pricing-to-market" is a business practice that was common in the twentieth century, but has now all but disappeared.

Question 29

If devaluation improves only the BOP, rather than the BOT, this implies that the capital account must have improved following a devaluation.

Question 30

The international adjustment mechanism for flexible exchange rates is the same as for managed float regimes.

Question 31

The longer the "pass-through" period following a devaluation, the faster the desirable balance of trade effects of a devaluation will appear on quantities traded.

Question 32

Suppose that the Japanese yen appreciates significantly at some point, thus making Japanese imports more expensive. Japanese exporters may lower their profit margins to reduce the effect of the yen appreciation on U.S. importers, producing a phenomenon known as

A) the J-curve.
B) the absorption effect.
C) pricing to market.
D) international reserves compliance.

Question 33

J-curve effects following a devaluation are simply a theoretical issue with no real world importance.

Question 34

Write down a model that will allow you to analyze the BOP and exchange rate in a monetary framework. Then, discuss the consequences of an increase in the foreign inflation rate under fixed, flexible, and managed floating systems.

Question 35

An increase in real income with constant prices and domestic credit leads to the same effects under both fixed and purely flexible exchange rates.

Question 36

The net effect of a devaluation on economic growth depends on the mix of capital and labor utilized in the nation's export industries.

Question 37

The elasticities approach and the absorption approach are theories of the balance of trade that emphasize trade in real goods and have little to say about the capital account.

Question 38

The evidence available suggests that the effects of devaluation appear to differ across countries and time so that no strong generalizations regarding the effects of devaluation on the balance of trade and/or balance of payments are possible.

Question 39

Discuss the short-run and long-run views of PPP. Make sure that you explain the underlying adjustment mechanism and theoretical reasoning for each view when answering the question. Which view, do you think, is more likely to represent the real world?

Question 40

With a flexible exchange rate, a nation can choose an inflation rate independent of the rest of the world.

Question 41

Explain the elasticities and absorption approaches to the BOT. What is the most notable shortcoming of these approaches?

Question 42

What is pricing to market? Where is it most prevalent?

Question 43

Recent evidence regarding the exchange-rate pass-through effect in the U.S. reflects a declining trend. How can this be explained?