Question 1

Illustrate with a graph the effects of fiscal policy when exchange rates are fixed.

Accepted Answer

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Question 2

Which of the following statements about the financial crisis that began in 2008 is true?

Accepted Answer

The financial crisis of 2008 was a global crisis that affected multiple countries and industries. It highlighted how interconnected the national economies of the world are, as the crisis originated from issues in the United States' housing market but quickly spread to other countries and sectors. Option B, C, and D are incorrect statements.

Question 3

With perfect asset substitutability and capital mobility the domestic interest rate is equal to the foreign rate.

Accepted Answer

Perfect asset substitutability and capital mobility imply that investors have the option to move their funds between domestic and foreign assets without incurring any costs. In this scenario, any difference in interest rates between the two countries would be quickly eliminated as investors would move their funds to where they can earn the highest return. Therefore, with perfect asset substitutability and capital mobility, the domestic interest rate would be equal to the foreign interest rate.

Question 4

At higher income levels the interest rate must be lower to achieve money market equilibrium.

Accepted Answer

At higher income levels, there is typically greater demand for money (due to increased spending and investment), which would lead to an increase in the interest rate to reach equilibrium in the money market.

Question 5

The global financial crisis that began in 2008 was a great illustration of how interdependent national economies are.

Accepted Answer

The global financial crisis of 2008 was a clear illustration of how interconnected national economies are. The financial crisis that started in the United States quickly spread to other countries and triggered a worldwide recession. The crisis exposed how interconnected national economies are and highlighted the need for cooperation and coordination among countries to prevent or mitigate future financial crises.

Question 6

The LM curve will shift to the right when government expenditures increase.

Accepted Answer

The LM curve represents the relationship between liquidity preference (money demand) and money supply in the economy, and it is not directly affected by government expenditures. Government expenditures primarily influence the IS curve, which represents the relationship between investment and savings in the goods market.

Question 7

Fiscal policy is most effective when exchange rates are fixed.

Accepted Answer

When exchange rates are fixed, changes in fiscal policy have a greater impact on the economy because the exchange rate cannot adjust to offset the effects of the policy. In a floating exchange rate system, the exchange rate can fluctuate in response to changes in fiscal policy, which can limit the effectiveness of the policy.

Question 8

During the global financial crisis of 2008-2009, it appeared that overt global policy coordination was not practiced, but countries were all following similar policies, such as decreasing interest rates.

Accepted Answer

While there may not have been explicit coordination of policies, many countries did adopt similar measures such as lowering interest rates, increasing government spending, and implementing quantitative easing programs in response to the crisis.

Question 9

The BP curve presents combinations of y and i that yield balance of trade equilibrium.

Accepted Answer

The BP curve represents combinations of output (Y) and the interest rate (i) that maintain balance of payments equilibrium, not just balance of trade equilibrium. It includes both the current account (which involves trade balance) and the capital account transactions.

Question 10

Points to the left of the IS curve represent excess demand for goods.

Accepted Answer

Points to the left of the IS curve represent a situation where the actual output is below the level of output that equals planned expenditure, indicating excess demand for goods.

Question 11

The stimulation of a large economy aimed at increasing growth in the rest of the world is commonly known as

Accepted Answer

The stimulation of a large economy that leads to growth in other economies is commonly known as the locomotive effect. This term is used because the large economy serves as a locomotive that pulls other economies along with it.

Question 12

What policies would you recommend to the U.S. government to lower the balance of trade deficit and decrease net capital inflows?

Accepted Answer

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Question 13

Illustrate the effectiveness of monetary policy with fixed exchange rates.

Accepted Answer

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Question 14

The goal of international economic policy cooperation is to allow for greater flexibility in exchange rates.

Accepted Answer

The goal of international economic policy cooperation is actually to promote international trade and economic growth, as well as to address issues such as currency manipulation, unfair trade practices, and economic imbalances. While flexible exchange rates may be a tool used in achieving these goals, they are not the sole objective of international economic policy cooperation.

Question 15

The BP curve is upward sloping if assets are perfectly substitutable.

Accepted Answer

The BP curve is upward sloping when assets are not perfectly substitutable, as it reflects the balance of payments equilibrium with different interest rates affecting capital flows and the trade balance.

Question 16

The open-economy multiplier is equal to the reciprocal of the marginal propensity to save.

Accepted Answer

The open-economy multiplier is actually equal to the reciprocal of the marginal propensity to import.

Question 17

Monetary policy is most effective at home when exchange rates are flexible.

Accepted Answer

When exchange rates are flexible, the central bank can adjust the interest rates to influence the domestic economy without worrying about affecting the exchange rates. This allows for more effective implementation of monetary policy. However, if exchange rates are fixed, the central bank's interest rate decisions can have unintended consequences on the exchange rate and ultimately limit the effectiveness of its monetary policy.

Question 18

Internal balance can be graphically represented as the intersection of the IS curve with the LM curve.

Accepted Answer

Internal balance occurs when the output is at potential output, which is represented by the intersection of the IS curve (representing goods market equilibrium) with the LM curve (representing money market equilibrium). Therefore, internal balance can indeed be graphically represented as the intersection of these two curves.

Question 19

Analyze the following statement "the global financial crisis of 2008-2009 was a great illustration of how interdependent national economies are."

Accepted Answer

The global financial crisis of 2008-2009 was caused by the collapse of the housing market in the United States, but it quickly spread to other countries due to the interconnectedness of global finance. Banks, investment firms, and other institutions in multiple countries held financial instruments tied to the subprime mortgage sector in the US, and when those instruments turned out to be worthless, it had ripple effects throughout the global economy. The crisis illustrated how national economies are interdependent, with actions in one country having repercussions across the globe.

Quiz 21: Open-Economy Macroeconomic Policy and Adjustment