Question 1

The economic goals about which there is a substantial agreement include all of the following except:

Accepted Answer

A large trade surplus is not universally agreed upon as an economic goal. While high employment, low inflation, and high economic growth are widely accepted objectives, opinions on the desirability of a large trade surplus can vary. Some economists argue that focusing too much on trade surpluses can lead to protectionist policies, which might harm international trade relations and economic efficiency.

Question 2

When the euro rose relative to the dollar in the early 2000s, it:

Accepted Answer

When the euro strengthens against the dollar, it makes European goods more expensive for foreign buyers, thus discouraging exports. Conversely, a stronger euro makes it cheaper for Europeans to buy foreign goods, encouraging imports.

Question 3

Contractionary fiscal policy in the United States reduces domestic income, prices, and interest rates, so the exchange rate will decrease.

Accepted Answer

Contractionary fiscal policy typically involves reducing government spending or increasing taxes, which can lead to lower domestic income and prices. However, it often leads to higher interest rates as the government borrows less, making domestic assets more attractive and potentially increasing the value of the domestic currency, thus the exchange rate may actually increase.

Question 4

A country that runs a trade surplus increases current consumption at the expense of future consumption.

Accepted Answer

A trade surplus indicates that a country exports more than it imports, which can lead to an accumulation of foreign currency reserves. This can be used to invest in future production or to pay off debt, potentially enhancing future consumption rather than reducing it.

Question 5

Monetary and fiscal policies have little effect on the trade deficit.

Accepted Answer

Monetary and fiscal policies can significantly affect a country's trade deficit by influencing factors such as exchange rates, domestic consumption, and investment flows, which in turn affect imports and exports.

Question 6

The United States can reduce its trade deficit by:

Accepted Answer

Reducing the value of the dollar makes U.S. goods cheaper for foreigners, potentially increasing exports and reducing imports, which can help reduce the trade deficit.

Question 7

In the 1980s, Japan had a significant trade surplus. The G-7 nations wanted Japan to reduce its trade surplus, and therefore they pressured the Japanese government to:

Accepted Answer

The G-7 nations pressured Japan to strengthen the yen to reduce its trade surplus. A stronger yen would make Japanese exports more expensive and imports cheaper, thus reducing the trade surplus.

Question 8

In the early 2000s, the dollar depreciated relative to other currencies. Foreign policy makers claimed that the U.S. government must curtail its spending and encourage its citizens to save more. What does the U.S. saving rate have to do with the value of the dollar?

Accepted Answer

Increased U.S. savings would reduce the need to borrow from abroad, leading to a smaller trade deficit, which can strengthen the dollar.

Question 9

A higher exchange rate value of the dollar reduces inflation but has a contractionary effect on the economy.

Accepted Answer

A higher exchange rate value of the dollar makes imports cheaper, which can help reduce inflation. However, it also makes exports more expensive, potentially reducing demand for domestically produced goods and services abroad, which can have a contractionary effect on the economy.

Question 10

What is the primary benefit to the United States of a low price for the dollar in the foreign exchange market?

Accepted Answer

A low price for the dollar makes U.S. goods cheaper for foreign buyers, thus encouraging exports and benefiting U.S. producers.

Question 11

When the value of the U.S. dollar fell in the mid-1990s, it:

Accepted Answer

When the value of the U.S. dollar falls, it makes U.S. goods cheaper for foreign buyers, thus encouraging exports. Conversely, foreign goods become more expensive for U.S. consumers, discouraging imports.

Question 12

What is the primary benefit to the United States of a high price for the dollar in the foreign exchange market?

Accepted Answer

A high price for the dollar makes it more valuable compared to other currencies, which means that Americans can buy foreign goods at a lower cost. This is beneficial for consumers in the United States because they can purchase more with their money when buying internationally.

Question 13

Contractionary fiscal policy in the United States will increase the Japanese trade surplus.

Accepted Answer

The answer of Contractionary fiscal policy in the United States...

Question 14

In the short run, the net effect of an expansionary monetary policy is a lower trade deficit.

Accepted Answer

Expansionary monetary policy typically leads to lower interest rates, which can increase domestic consumption and investment but also lead to a depreciation of the currency. This can increase the cost of imports and potentially increase exports, but the immediate effect often includes increased imports due to higher domestic demand, potentially widening the trade deficit in the short run.

Question 15

An increase in a balance of trade surplus tends to:

Accepted Answer

An increase in a balance of trade surplus means that a country is exporting more than it is importing, which injects more money into the economy through increased sales abroad. This leads to an expansionary effect as it can stimulate production, increase income, and potentially lead to job creation.

Question 16

Expansionary fiscal policy increases income, which increases imports, and this in turn increases the size of the trade deficit.

Accepted Answer

Expansionary fiscal policy boosts domestic income by increasing government spending or cutting taxes, which leads to higher consumer spending, including on imports. As imports increase without a corresponding rise in exports, the trade deficit (the difference between exports and imports) widens.

Question 17

Crowding out can be avoided temporarily if the government's debt is internationalized.

Accepted Answer

Internationalizing government debt can attract foreign investment, which can help fund government spending without necessarily crowding out domestic private investment, at least in the short term.

Question 18

A U.S. trade deficit will cause all of the following phenomena except:

Accepted Answer

A trade deficit does not necessarily require an increase in production; it involves more imports than exports, which can be financed by selling assets or borrowing.

Question 19

If Japan adopts an expansionary monetary policy, U.S. exports are likely to increase.

Accepted Answer

An expansionary monetary policy in Japan typically leads to a depreciation of the yen relative to other currencies, such as the U.S. dollar. This makes Japanese goods cheaper for foreign buyers and foreign goods more expensive in Japan, potentially increasing demand for U.S. exports as they become relatively cheaper for Japanese consumers and businesses.

Question 20

A low exchange rate for the dollar makes foreign currencies:

Accepted Answer

A low exchange rate for the dollar means that you need more dollars to buy the same amount of foreign currency, making foreign currencies more expensive. This, in turn, raises the price of imports since you're paying more in dollar terms for goods priced in foreign currencies.

Quiz 36: Macro Policy in a Global Setting