Question 1

The United States accounts for more than 50% of world production.

Accepted Answer

This statement is false. The United States accounts for approximately 16% of world production.

Question 2

What is the mechanism at work that causes the increase in a country's government spending to have an impact on foreign countries' production and income?

Accepted Answer

The answer of What is the mechanism at work that...

Question 3

Exports depend on income in the exporting country and on the relative prices between the exporting and importing countries.

Accepted Answer

Exports primarily depend on the income levels and demand in the importing country, as well as the relative prices and exchange rates between the exporting and importing countries.

Question 4

Fiscal policy is the set of central-bank policies, institutions, and bank behavioral patterns governing the availability of bank checking deposits and currency in circulation.

Accepted Answer

Fiscal policy is actually the government's policies related to taxing and spending, while the central bank is responsible for monetary policy, which deals with the money supply, interest rates, and borrowing costs.

Question 5

Contractionary monetary policy will shift the LM curve to the right.

Accepted Answer

A contractionary monetary policy involves reducing the money supply through actions such as raising interest rates. This makes borrowing more expensive and reduces demand for loans, leading to a decrease in investment and consumer spending. As a result, the LM curve shifts to the left, not the right.

Question 6

The smaller the country, the more its spending tends to affect other countries.

Accepted Answer

The size of a country does not necessarily determine the impact of its spending on other countries. Factors such as the type of spending, the country's economic power and influence, and the interconnectedness of global markets all play a role in determining the degree of impact.

Question 7

The amount of price inflation that the economy experiences eventually depends on the size of the spending multiplier.

Accepted Answer

The amount of price inflation that the economy experiences depends on multiple factors, including the size of the spending multiplier, but it is not solely determined by it. Other factors, such as the availability of resources and the level of competition in the market, also play a significant role.

Question 8

Suppose the United States' imports substantially affect foreign incomes, and the foreign countries import from the United States. The United States' spending multiplier will exceed the spending multiplier for a comparable small open economy.

Accepted Answer

Since the United States is a large economy and its imports have a significant impact on foreign incomes, its spending multiplier is likely to be higher compared to a small open economy. In addition, foreign countries' imports from the United States will further augment the overall impact of US imports on the global economy.

Question 9

For a small country with closed economy, if the marginal propensity to save is equal to 0.2, then the spending multiplier indicates that a $10 exogenous increase in government spending will lead to a $20 increase in GDP.

Accepted Answer

The spending multiplier is determined by the formula 1/(1-MPC) where MPC refers to the marginal propensity to consume. However, since the question specifies the MPC, we can calculate the spending multiplier as 1/(1-0.2) = 1.25.

Therefore, a $10 increase in government spending will lead to a $10 x 1.25 = $12.50 increase in GDP. Since the question specifies that this is an exogenous increase in government spending, it is not offset by any decrease in private spending. As a result, the total increase in GDP will be $12.50 + $10 = $22.50, which is close to the stated answer of $20. So, the answer is true.

Question 10

The volume of imports is positively related to real national production and income. What are two reasons for this relationship?

Accepted Answer

The answer of The volume of imports is positively related...

Question 11

Expansionary fiscal policy will cause the IS curve to shift to the right.

Accepted Answer

Expansionary fiscal policy, such as increased government spending or tax cuts, will increase aggregate demand in the economy, causing an upward shift of the IS curve. This is because the policy will increase consumption and investment spending, leading to higher levels of output and income in the short run.

Question 12

With its rapid growth of production and imports, China can be considered as another locomotive economy.

Accepted Answer

China's economy has been growing rapidly in recent years, with high levels of production and imports, making it a major player in the global economy.

Question 13

In your opinion do government policies to stabilize real domestic production have a larger role to play in the IS-LM-FE model or in the monetary approach to the balance of payments? Why? (Note: This question is an extension of the analysis. It is not covered explicitly in the book.)

Accepted Answer

The answer of In your opinion do government policies to...

Question 14

A vertical FE curve indicates perfect capital mobility.

Accepted Answer

A vertical FE curve indicates perfect capital immobility, as it suggests that the domestic interest rate is fixed regardless of changes in the foreign interest rate or domestic income.

Question 15

Use the standard IS-LM-FE framework and assume the country begins at a triple intersection. What effect will an increase in the country's money supply have on domestic interest rates, output levels, and the official settlements balance, assuming low capital mobility?

Accepted Answer

The answer of Use the standard IS-LM-FE framework and assume...

Question 16

The European Union has relatively large production and income effects on Africa.

Accepted Answer

The European Union is one of Africa's biggest trading partners and aid donors, and EU policies can have significant impacts on African economies. EU agricultural subsidies, for example, can make it difficult for African farmers to compete in their own markets, while EU trade agreements can open up new export opportunities for African countries. The EU also provides significant development aid to Africa, which can have positive impacts on income, health, and education.

Question 17

Expansionary monetary policy will cause the FE curve to shift to the right.

Accepted Answer

Expansionary monetary policy primarily affects the LM curve by shifting it to the right, not the FE (Foreign Exchange Market Equilibrium) curve, which is more directly influenced by factors affecting the balance of payments and exchange rates.

Question 18

Describe weaknesses of the IS-LM-FE model.

Accepted Answer

The answer of Describe weaknesses of the IS-LM-FE model....

Question 19

A rise in the domestic product of an economy deteriorates its current account balance.

Accepted Answer

A rise in domestic product leads to an increase in imports, which deteriorates the current account balance.

Quiz 22: How Does the Open Macroeconomy Work