Question 1

If a country cannot internationalize its debt, then it will have to:

Accepted Answer

When a country cannot internationalize its debt and has to sell more bonds domestically, it increases the supply of bonds in the domestic market. To attract buyers, the country has to offer higher interest rates, causing its interest rates to rise.

Question 2

If Japan adopts an expansionary monetary policy, the value of the dollar would:

Accepted Answer

An expansionary monetary policy in Japan would decrease the value of the yen relative to the dollar, making the dollar stronger (increase in value). This would make Japanese goods cheaper for Americans and American goods more expensive for Japanese, potentially reducing the U.S. trade deficit as U.S. imports from Japan increase and exports decrease.

Question 3

If Japan is experiencing inflation and the United States is experiencing a recession, international policy coordination would be most likely to occur if it required:

Accepted Answer

A weakening of the dollar would make U.S. goods cheaper abroad, potentially helping the U.S. recover from recession, while making Japanese goods more expensive, which could help curb inflation in Japan.

Question 4

If Japan is in a recession and the United States is growing too rapidly, international policy coordination most likely requires:

Accepted Answer

To address a recession, Japan would need expansionary policies to stimulate growth, while the United States would require contractionary policies to slow down its overly rapid growth. This coordinated approach helps balance economic activity in both countries.

Question 5

Suppose the United States is entering a recession at the same time that it has agreed to work toward eliminating its trade deficit. Considering the effect of monetary policy on trade through its impact on income only:

Accepted Answer

An expansionary monetary policy can help combat a recession by increasing income and spending, but it may worsen a trade deficit by increasing imports. Conversely, a contractionary policy can help reduce a trade deficit by decreasing income and imports, but it may exacerbate a recession.

Question 6

If the United States is experiencing inflation, then it will be most willing to engage in international policy coordination that requires:

Accepted Answer

Strengthening the dollar can help combat inflation by making imports cheaper, which can reduce the prices of goods and services in the United States, thereby helping to control inflation.

Question 7

In 2018, China held over $3 trillion in foreign reserves. Over 40 percent of China's reserves were in the form of U.S. Treasuries. This is an example of:

Accepted Answer

Internationalizing the U.S. debt refers to the process where foreign countries hold significant amounts of a country's debt, in this case, U.S. Treasuries. China's substantial holding of U.S. debt is a prime example of this phenomenon.

Question 8

In order to pay foreigners interest on the debt, the United States must:

Accepted Answer

To pay foreigners interest on the debt, the United States must generate a surplus in its current account, which means it needs to export more than it imports. This surplus provides the currency needed to pay the interest without depleting reserves.

Question 9

If Canada is growing too rapidly, and at the same time is agreeing to work toward reducing its trade surplus, Canada could forsake:

Accepted Answer

Rapid growth can lead to inflation, which might require measures that could reduce a country's trade surplus, such as allowing the currency to appreciate. This means Canada could still work towards reducing its trade surplus (meeting its international commitment) but might have to forsake domestic goals related to managing growth and inflation.

Question 10

If Japan adopts a contractionary monetary policy, then the dollar will:

Accepted Answer

The answer of If Japan adopts a contractionary monetary policy,...

Question 11

Suppose the U.S. economy is going into a recession. Considering the effect of monetary policy on trade through its impact on income only, the domestic problem calls for:

Accepted Answer

Expansionary monetary policy is typically used to combat a recession by lowering interest rates, which stimulates domestic investment and consumption. This increase in domestic income leads to higher imports, which can widen the trade deficit.

Question 12

The basic idea of crowding out is that a budget:

Accepted Answer

The basic idea of crowding out is that when the government runs a budget deficit, it needs to borrow money, which can lead to higher interest rates as the government competes with the private sector for loanable funds.

Question 13

A large trade deficit that the United States has with China would be narrowed by a:

Accepted Answer

A decline in the value of the U.S. dollar makes U.S. goods cheaper for foreigners, including the Chinese, potentially increasing U.S. exports to China. Chinese inflation would make Chinese goods more expensive, potentially reducing U.S. imports from China, both of which would help narrow the trade deficit.

Question 14

In the late 1990s, Brazil decided to reduce the value of its currency, the real, in order to boost exports and help the economy to move out of a recession. Argentina, the main trade competitor of Brazil in various products, was immediately affected by Brazil's decision, since it would:

Accepted Answer

When Brazil devalued its currency, Brazilian goods became cheaper on the international market, making them more competitive compared to Argentine products. This would likely decrease Argentina's exports because Argentine goods would be more expensive relative to Brazilian goods. Additionally, it would increase Argentina's trade deficit because the country would be exporting less while the value of imports would remain relatively constant or even increase due to the increased attractiveness of cheaper Brazilian goods.

Question 15

Which of the following combinations would be most likely to increase U.S. imports from Japan and reduce U.S. exports to Japan?

Accepted Answer

Expansionary monetary policy in the U.S. would likely weaken the U.S. dollar, making imports from Japan cheaper. Contractionary monetary policy in Japan would strengthen the yen, making U.S. exports to Japan more expensive.

Question 16

In the short run, crowding out could be avoided if foreigners:

Accepted Answer

Crowding out can be avoided if foreigners buy U.S. debt at the existing interest rate, as it prevents the need for higher interest rates to attract buyers, which would otherwise reduce private investment.

Question 17

A key reason that the value of the dollar did not change relative to the Chinese yuan in the early 2000s was:

Accepted Answer

The Chinese central bank bought dollars to keep the value of the dollar from falling. This action helped maintain a favorable exchange rate for China, making its exports cheaper and more competitive in the global market.

Question 18

When a country internationalizes its debt, it:

Accepted Answer

When a country internationalizes its debt, it borrows money from foreign lenders, which allows it to increase its current consumption. However, this comes at the cost of future consumption because the country will have to repay the debt with interest, reducing the resources available for future consumption.

Question 19

Internationalization of the debt refers to a situation in which the deficit is financed by foreigners:

Accepted Answer

Internationalization of the debt occurs when foreigners buy a country's debt, which can help avoid crowding out. Crowding out is a situation where increased government spending leads to a reduction in private sector investment. By financing the deficit through foreign investment, the domestic supply of funds is not reduced, which helps in avoiding the crowding out effect.

Question 20

Internationalization of U.S. debt is:

Accepted Answer

Internationalization of U.S. debt can provide short-term benefits by attracting foreign investment and keeping interest rates low. However, in the long run, it can lead to increased vulnerability to foreign influence and economic instability if foreign investors lose confidence.

Quiz 36: Macro Policy in a Global Setting