Deck 13: Automatic Adjustments With Flexible and Fixed Exchange Rates

Question 1

A depreciation of the US dollar makes US products __________________ for European residents,because European residents need _______ euros to purchase each dollar.

A)cheaper; more
B)cheaper; fewer
C)more expensive; more
D)more expensive; fewer

Answer 1

B

Question 2

The foreign exchange market is stable if:

A)η_M + η_X < 1
B)η_M + η_X = 1
C)η_M + η_X > 1
D)η_M + η_X > 2

Answer 2

C

Question 3

When a(n)___________________ condition is present,a disturbance from the equilibrium exchange rate gives rise to automatic forces that push the exchange rate back toward the equilibrium rate.

A)unstable foreign exchange market
B)Marshall-Lerner condition
C)J-curve effect
D)stable foreign exchange market

Answer 3

D

Question 4

The US supply curve of euros can be positively sloped,negatively sloped,or vertical,depending on the elasticity of the ____________________.

A)US demand for European imports in terms of euros
B)US demand for US exports in terms of euros
C)foreign demand for European imports in terms of euros
D)foreign demand for US exports in terms of euros

Question 5

If η_M = -.85 and η_X = -.62 ,then

A)Foreign exchange market is unstable
B)Marshall-Learner condition is not met
C)Foreign exchange market is stable
D)If the exchange rate deviates from the equilibrium value,market forces will not be able to bring it back to the equilibrium on its own

Question 6

When US demand for imports is price elastic,a(n)___________ in price leads to a ___________ proportionate increase in the quantity demanded so that expenditures on the imports increase.

A)increase; smaller
B)increase; larger
C)decrease; smaller
D)decrease; larger

Question 7

When a(n)_____________condition is present,a disturbance from the equilibrium exchange rate pushes the exchange rate farther away from equilibrium.

A)unstable foreign exchange market
B)Marshall-Lerner condition
C)J-curve effect
D)stable foreign exchange market

Question 8

If the US currency pass-through is 60 percent,what will occur as a result of a 15 percent depreciation in the value of the dollar?

A)import prices to fall by 9 percent
B)import prices to rise by 15 percent
C)export prices to fall by 9 percent
D)export prices to rise by 15 percent

Question 9

In the following diagram D_€ is the US demand curve for Euro and S_€ is the US supply curve for Euro.If the exchange rate of Euro is US$1.5/€ then which of the following is true.

A)US has a balance of trade deficit of 6 billion Euro
B)US has a balance of trade surplus of 6 billion Euro
C)US has a balance of trade deficit of 2 billion Euro
D)US has a balance of trade surplus of 4 billion Euro

Question 10

What signs do the price elasticity of the US demand for imports and the price elasticity of the foreign demand for US exports in euros have?

A)positive
B)negative
C)constant
D)these could be either positive or negative

Question 11

The proportion of an exchange rate change that is reflected in export and import price changes is called:

A)J-curve effect
B)Pass-through
C)Marshall-Lerner condition
D)Unstable foreign exchange market

Question 12

The foreign exchange market is stable (able to correct a trade deficit by a depreciation of the nation's currency)if ____________________

A)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is greater than one.
B)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is less than one.
C)the sum of the absolute values of price elasticities of the US supply of exports and the foreign supply of imports is greater than one.
D)the sum of the absolute values of price elasticities of the US supply for imports and the foreign demand for US exports is less than one.

Question 13

When depreciation of the US dollar occurs compared to the euro,US residents will find European imports __________,because US residents need _________ dollars to purchase each euro.

A)more expensive; more
B)more expensive; fewer
C)less expensive; more
D)less expensive; fewer

Question 14

The ________________ explains why it may take up to two years for a currency depreciation to make significant reductions in a nation's trade deficit.

A)J-curve effect
B)pass-through
C)Marshall-Lerner condition
D)multiplier effect

Question 15

The _______________ states that the foreign exchange market is stable when in absolute sense the sum of the price elasticities of demands for imports and exports is greater than one.

A)J-curve effect
B)pass-through condition
C)Marshall-Lerner condition
D)stable market theory

Question 16

The US demand for euros is always___________.

A)negatively sloped
B)positively sloped
C)perfectly elastic
D)perfectly inelastic

Question 17

The price elasticity of the ______________ in euros is given by the percentage change in the quantity demanded of US exports by foreigners divided by the percentage change in the price of US exports in euros.

A)US demand for exports
B)foreign demand for US imports
C)US demand for imports
D)foreign demand for US exports

Question 18

The price elasticity of the US demand for imports in euros is given by:

A)the percentage change in the quantity demanded of imports by US consumers divided by the percentage change in the quantity demanded of US exports by European consumers
B)the percentage change in the quantity demanded of imports by US consumers divided by the percentage change in the price of the US imports in euros
C)the percentage change in the quantity demanded of US exports by European consumers divided by the percentage change in the quantity demanded of imports by US consumers
D)the percentage change in the price of European exports divided by the percentage change in the price of the US imports in euros.

Question 19

When demand is unitary elastic,a change in price will leave expenditures on the commodity___________.

A)unchanged
B)at a greater value
C)at a lower value
D)none of the above

Question 20

The US supply curve may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is __________.

A)sufficiently elastic
B)sufficiently inelastic
C)unit elastic
D)zero

Question 21

The equilibrium level of income in an open economy is where:

A)Savings + Investment = Imports + Exports
B)Consumption + Savings = Imports + Exports
C)Savings + Exports = Investment + Imports
D)Savings + imports = Investment + Exports

Question 22

In a stable foreign exchange market,a nation can correct a deficit in its balance of payments by allowing its currency to __________.

A)appreciate
B)depreciate
C)remain constant
D)none of the above

Question 23

Business cycles tend to impact nations other than the nation in which they are occurring because of ________________.

A)foreign repercussions
B)absorption
C)the income elasticity of imports
D)the foreign multiplier

Question 24

The increase in imports induced by a dollar increase in income is called the ________________.

A)import elasticity of demand
B)marginal propensity to import
C)income elasticity of imports
D)none of the above

Question 25

According to the J-curve effect,when a nation's currency appreciates,the nation's trade balance:

A)Will first move toward deficit,then toward surplus
B)Will first move toward surplus,then toward deficit
C)Will move toward deficit and remain there
D)Will move toward surplus and remain there

Question 26

In an open economy,if the marginal propensity to save s = .20 and the marginal propensity to import m = .30,then what should be the foreign trade multiplier?

A)2
B)5
C)3)33
D)10

Question 27

The ________________ operated from about 1880 until the outbreak of World War I in 1914.

A)gold standard
B)silver standard
C)stable foreign exchange market
D)Marshall-Lerner condition

Question 28

_____________ represents the fixed exchange rates defined by the gold content of each nation's currency.

A)Purchasing power parity
B)Pass through
C)Mint parity
D)Price-specie-flow

Question 29

Which exchange system operated from the end of World War II to 1971?

A)The gold standard
B)The silver standard
C)The managed float
D)The Bretton Woods system

Question 30

Assume £1 (pounds sterling)gold coin in the United Kingdom contains 113.0016 grains of pure gold,while the $1 gold coin in the US contains 23.22 grains.If the cost of shipping £1 from London to New York was 3 cents,the gold export point of the UK pound is _____,and the gold import point is ________.

A)$113.16; $113.22
B)$4.90; $4.84
C)$19.16; $19.22
D)cannot be determined from information given

Question 31

In a closed economy without a government sector,the equilibrium level of income is found where income is equal to

A)planned consumption expenditures divided by planned business investment
B)the ratio of planned business investment to planned consumption expenditures
C)planned consumption expenditures plus planned business investment plus planned net exports
D)planned consumption expenditures plus planned business investment.

Question 32

Suppose a £1 gold coin in the UK contained 115 grains of pure gold,while a $1 gold coin in the US contained 25 grains.What is the mint parity exchange rate between pounds and dollars?

A)£4.87 per dollar
B)$4.87 per pound
C)$)22 per pound
D)£0.22 per dollar

Question 33

If for every one dollar increase in income,savings increases by 25 cents,the marginal propensity to consume is _________ and the closed economy multiplier is ______.

A))25,4
B))75,4
C))25,.04
D))75,1.333

Question 34

The ________________ served as the automatic adjustment mechanism under the gold standard exchange system.

A)mint parity
B)gold import point
C)price-specie-flow mechanism
D)purchasing power parity model

Question 35

For the US,the currency pass-through is about _______ percent

A)10
B)100
C)30
D)40

Question 36

The mint parity plus the cost of shipping an amount of gold equal to one unit of the foreign currency between the two nations is:

A)gold export point
B)gold import point
C)price-specie-flow mechanism
D)equilibrium level of income

Question 37

The closed economy multiplier is equal to _____________.

A)The reciprocal of the marginal propensity to save
B)The reciprocal of the marginal propensity to consume
C)The slope of the savings function
D)The ratio of savings to investment

Question 38

The equilibrium level of national income in the economy is where _______________.

A)the ratio of leakages to savings = the ratio of injection to consumption
B)leakages = injections
C)leakages + injections = consumption + investment
D)consumption - investment = zero

Question 39

The ratio of the change in income to the change in exports and/or investments is:

A)the multiplier
B)the foreign trade multiplier
C)equilibrium level of income
D)the marginal propensity to save

Question 40

___________ account(s)for the impact a change in a large nation's income and trade has on the rest of the world and which the rest of the world in turn has on a nation.

A)Foreign repercussions
B)Absorption
C)The synthesis of automatic adjustments
D)The foreign multiplier

Question 41

The _____ effect explains that,after a depreciation of a nation's currency,the trade balance will worsen for a period of time and then improve.

A)J-curve
B)absorption
C)pass-through
D)Marshall-Lerner

Question 42

Under flexible exchange rates,a trade deficit is automatically corrected by a deprecation of the deficit nation's currency.

Question 43

The price elasticity of the US demand for imports in euros is represented by the symbol η_M.

Question 44

The marginal propensity to save is the amount of additional savings associated with each one-dollar increase in income multiplied by the increase in income.

Question 45

How does the adjustment mechanism operate under a gold standard?

Question 46

With a fixed exchange rate system,a nation cannot conduct effective monetary policy.

Question 47

A country with budget deficit which is also at full employment can improve its deficit situation by allowing its currency to depreciate,only if,

A)the real domestic absorption is reduced
B)the real domestic absorption is increased
C)level of imports can be increased
D)income can be increased

Question 48

Please explain the J-Curve effect in exchange rate determination.

Question 49

The price-specie-flow adjustment mechanism operates by the deficit nation losing gold and experiencing a reduction in its money supply.

Question 50

For the US,the currency pass-through is about 10 percent.

Question 51

The gold standard was operated in the US until 1971.

Question 52

The US supply curve of euros may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is sufficiently inelastic.

Question 53

When demand is unitary elastic,then a change in price will leave expenditures on the commodity at a greater value.

Question 54

What is the Marshall-Lerner Condition and how is it used?

Question 55

Under a fixed exchange rate system,trade deficits are not corrected by automatic changes in domestic prices.