Question 1

The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:

Accepted Answer

The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of excess money supply over money demand in the home country. This excess leads to higher prices, which makes exports more expensive and reduces demand for them, while imports become cheaper and demand for them increases, leading to a balance-of-payments deficit. Therefore, the correct choice is C.

Question 2

Exhibit 13.1
Assume the marginal propensity to consume for U.S.households equals 0.9,and the marginal propensity to import for the United States equals 0.1.Suppose there occurs an increase in investment of $10 billion at each level of income.
-Refer to Exhibit 13.1.The value of the multiplier for the United States equals:

Accepted Answer

The multiplier is calculated as 1 / (1 - MPC + MPM). Here, MPC = 0.9 and MPM = 0.1, so the multiplier is 1 / (1 - 0.9 + 0.1) = 1 / 0.2 = 5.

Question 3

The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:

Accepted Answer

The balance-of-payments adjustment mechanism developed by David Hume is the price-adjustment mechanism. This mechanism is based on the idea that if a country experiences a net outflow of gold due to a trade deficit, the money supply in that country will decrease, leading to lower prices and making exports cheaper and imports more expensive. This creates an incentive for the country to export more and import less, eventually restoring balance to the balance of payments.

Question 4

Suppose the United States levies an interest equalization tax,which taxes Americans on dividend and interest income from foreign securities.Such a tax would be intended to:

Accepted Answer

An interest equalization tax would discourage financial movements from the United States to overseas by making those investments less attractive due to the added tax burden.

Question 5

Under the gold standard,a surplus nation facing a gold inflow and an increase in its money supply would also experience a:

Accepted Answer

Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would lead to a fall in its interest rate as a result of an increase in the supply of loanable funds. This would make it more attractive for borrowers to invest in the economy, leading to a short-term financial outflow as the surplus nation's investors seek higher returns elsewhere.

Question 6

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account.Now suppose that Canadian interest rates fall to levels below those abroad.For Canada,this tends to promote:

Accepted Answer

When Canadian interest rates fall below those abroad, it becomes less attractive for foreign investors to invest in Canada, leading to net financial outflows as investors seek higher returns elsewhere.

Question 7

Exhibit 13.1
Assume the marginal propensity to consume for U.S.households equals 0.9,and the marginal propensity to import for the United States equals 0.1.Suppose there occurs an increase in investment of $10 billion at each level of income.
-Refer to Exhibit 13.1.The change in the level of U.S.imports resulting from the rise in U.S.income equals:

Accepted Answer

The change in the level of U.S. imports resulting from the rise in U.S. income equals $5 billion. This is because the marginal propensity to import is 0.1, which means that for every $1 increase in income, imports will increase by $0.1. Therefore, a $10 billion increase in investment will lead to a $1 billion increase in imports, and a $10 billion increase in income will lead to a $5 billion increase in imports.

Question 8

The monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:

Accepted Answer

The answer of The monetary approach to balance-of-payments adjustments suggests...

Question 9

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account.Now suppose that Canadian interest rates increase to levels higher than those abroad.For Canada,this tends to promote:

Accepted Answer

Higher interest rates in Canada make it more attractive for foreign investors to invest in Canadian assets, leading to net financial inflows.

Question 10

Assume that interest rates on comparable securities are identical in the United States and foreign countries.Now suppose that investors anticipate that in the future the U.S.dollar will appreciate against foreign currencies.Investment funds would thus be expected to:

Accepted Answer

When investors anticipate that the U.S. dollar will appreciate against foreign currencies, investment funds are expected to flow from foreign countries to the United States. This is because investors want to take advantage of the expected currency appreciation, so they invest in U.S. dollar-denominated assets. This increase in demand for U.S. dollar-denominated assets will lead to an increase in the value of the U.S. dollar, thus fulfilling the investors' expectations. Therefore, the correct answer is B.

Question 11

Exhibit 13.1
Assume the marginal propensity to consume for U.S.households equals 0.9,and the marginal propensity to import for the United States equals 0.1.Suppose there occurs an increase in investment of $10 billion at each level of income.
-Refer to Exhibit 13.1.The change in the level of U.S.income resulting from the additional investment spending equals

Accepted Answer

The multiplier effect is calculated as 1/(1 - MPC + MPM). Here, MPC = 0.9 and MPM = 0.1, so the multiplier is 1/(1 - 0.9 + 0.1) = 1/0.2 = 5. Therefore, the change in income is 5 times the increase in investment, which is 5 * $10 billion = $50 billion.

Question 12

Suppose Japan increases its imports from Sweden,leading to a rise in Sweden's exports and income level.With a higher income level,Sweden imports more goods from Japan.Thus a change in imports in Japan results in a feedback effect on its exports.This process is best referred to as the:

Accepted Answer

This process is best referred to as the foreign repercussion effect, which describes the feedback effect on exports when a country increases its imports from another country. As Sweden's income level rises, it imports more goods from Japan, leading to a further increase in Japan's exports. This creates a loop in which the initial change in imports has a multiplying effect on exports through the foreign repercussion effect. The other options, such as the monetary approach, discretionary income adjustment process, and price-specie flow mechanism, do not fully capture this feedback effect on exports resulting from changes in imports.

Question 13

Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

Accepted Answer

Foreign par values are fixed by governments and do not adjust automatically in response to balance-of-payments disequilibrium. The other options (domestic income, foreign prices, and domestic prices) can all lead to automatic adjustments in the balance of payments.

Question 14

Under the gold standard,a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:

Accepted Answer

Under the gold standard, a decrease in money supply due to gold outflow would lead to higher interest rates, attracting short-term financial inflows to take advantage of the higher returns.

Question 15

During the gold standard era,central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism.Which of the following best represents the above statement?

Accepted Answer

The statement is referring to the "rules of the game" that central bankers agreed upon during the gold standard era, which involved reacting positively to international gold flows to reinforce the automatic adjustment mechanism. This means that central bankers were committed to following a set of rules for managing their economies under the gold standard, rather than using discretionary fiscal policy or relying solely on either an income-adjustment or price-adjustment mechanism.

Question 16

During the gold standard era,the "rules of the game" suggested that:

Accepted Answer

Surplus countries were expected to increase their money supplies to counteract the inflow of gold, which would help maintain balance in international payments.

Question 17

Starting from a position where the nation's money demand equals the money supply,and its balance of payments is in equilibrium,economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation a:

Accepted Answer

A decrease in money demand, with a constant money supply, leads to excess money in the economy. This can result in increased spending on foreign goods and services, worsening the balance of payments.

Question 18

Which chain of events would promote payments equilibrium for a surplus nation,according to the price-adjustment mechanism?

Accepted Answer

Increasing the money supply leads to higher domestic prices, which makes imports more attractive and exports less competitive, helping to reduce the surplus.

Question 19

Which chain of events would promote payments equilibrium for a deficit nation,according to the price-adjustment mechanism?

Accepted Answer

According to the price-adjustment mechanism, decreasing the money supply would lead to a decrease in domestic prices, which would make exports relatively cheaper and imports relatively more expensive. This would lead to an increase in exports and a decrease in imports, bringing the deficit nation closer to payments equilibrium.

Question 20

Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?

Accepted Answer

The price-adjustment mechanism is most closely related to the quantity theory of money, which states that changes in the money supply will have proportional effects on prices. As a result, countries with an excess supply of money will experience price inflation, which will lead to a decrease in their exports and an increase in imports, causing a balance-of-payments adjustment through changes in relative prices.

Quiz 13: Mechanisms of International Adjustment