Question 1

Under the gold standard,each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

Accepted Answer

This is indeed the basic principle of the gold standard. Each participating nation would establish a fixed price at which it would buy and sell gold, and this price would be expressed in its national currency. Other currencies could be exchanged for gold at this price, which helped to stabilize exchange rates and promote international trade. However, the gold standard was not without its limitations and drawbacks, and it eventually gave way to other monetary systems in the 20th century.

Question 2

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System
 
-Refer to Figure 13.3.Falling investment profitability in the United States,relative to investment profitability abroad,would shift the U.S.capital and financial account schedule downward from CA0 to CA1,resulting in net financial outflows from the United States.

Accepted Answer

According to Figure 13.3, a downward shift in the U.S. capital and financial account schedule would result in net financial outflows from the United States. Falling investment profitability in the United States relative to investment profitability abroad could result in such a shift, causing the schedule to move from CA0 to CA1.

Question 3

Under the classical gold standard,adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

Accepted Answer

Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run. This was achieved through the mechanism of gold flows, where trade imbalances would result in gold leaving or entering a country, leading to changes in the money supply, prices, and interest rates that would eventually bring equilibrium.

Question 4

The "rules of the game" served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

Accepted Answer

The rules of the game were a set of agreements among major countries aimed at maintaining fixed exchange rates by reinforcing and speeding up the adjustment mechanism of interest rates. Therefore, the statement is true.

Question 5

The price-adjustment mechanism's relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

Accepted Answer

The statement is true. The price-adjustment mechanism relies on the assumption that the economy is always at full-employment level and that the velocity of money is constant. In reality, however, this is not always the case, and these factors can affect the relevance of the mechanism in the real world.

Question 6

Under the price-adjustment mechanism,trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

Accepted Answer

The price-adjustment mechanism suggests that trade-deficit nations experience price deflation and improved competitiveness, while trade-surplus nations experience price inflation and reduced competitiveness.

Question 7

Under the gold standard,a nation with a current-account surplus would realize gold outflows,a decrease in its money supply,and a fall in its domestic price level.

Accepted Answer

Under the gold standard, a nation with a current-account surplus would experience an inflow of gold, an increase in its money supply, and a rise in its domestic price level. This is because an increase in the supply of gold would lead to an increase in the money supply, which would in turn lead to an increase in prices. Conversely, a current-account deficit would result in an outflow of gold, a decrease in the money supply, and a decrease in the domestic price level.

Question 8

Under the classical gold standard,a trade surplus nation would realize gold inflows,an increase in its money supply,rising interest rates,and net investment inflows.

Accepted Answer

Under the classical gold standard, a trade surplus nation would experience gold inflows, an increase in its money supply, and lower interest rates, which would discourage net investment inflows.

Question 9

Under the gold standard of the 1800s,exchange rates were allowed to float freely in the currency markets.

Accepted Answer

Under the gold standard of the 1800s, exchange rates were fixed to a specific amount of gold. This meant that currencies were not allowed to float freely in the currency markets.

Question 10

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System
 
-Refer to Figure 13.3.As U.S.interest rates rise relative to foreign interest rates,the U.S.slides upward along schedule CA0,thus moving towards capital and financial account surplus.

Accepted Answer

This statement is true according to the information given in Figure 13.3. When U.S. interest rates rise relative to foreign interest rates, the demand for U.S. financial assets increases, causing an inflow of foreign capital and a surplus in the capital and financial account. In the diagram, this is represented by a movement along schedule CA0 towards a higher surplus.

Question 11

Regarding the equation of exchange,the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

Accepted Answer

Classical economists assumed that the velocity of money was stable and that the economy was at or near full employment, meaning output was at its maximum level.

Question 12

Under the price-adjustment mechanism,a government's efforts to maintain a current-account surplus is self defeating over the long run because a nation's current account automatically moves toward equilibrium.

Accepted Answer

The price-adjustment mechanism refers to how changes in exchange rates can affect a country's current account balance. When a government tries to maintain a current-account surplus by manipulating exchange rates, it can lead to a situation where the country's currency becomes overvalued and exports become less competitive, while imports become cheaper. This can lead to a trade deficit and a reduction in the current-account surplus over time, as the automatic mechanisms of supply and demand in the foreign exchange market work to bring exchange rates and trade balances back into equilibrium. Therefore, a government's efforts to maintain a current-account surplus through exchange rate manipulation are ultimately self-defeating.

Question 13

According to the quantity theory of money,a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

Accepted Answer

The quantity theory of money suggests that a change in the money supply will cause a proportional change in the price level, assuming velocity and output are constant.

Question 14

According to the equation of exchange,the total expenditures on final goods equals the monetary value of the final goods sold.

Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of final goods and services produced. This equation states that the total expenditures on final goods and services (PQ) must equal the monetary value of those goods and services sold (MV). Therefore, the statement is true.

Question 15

The gold standard's "rules of the game" required central bankers in a trade deficit nation to expand the money supply,leading to falling interest rates and net investment outflows.

Accepted Answer

The gold standard's "rules of the game" required central bankers in a trade deficit nation to contract the money supply, leading to rising interest rates and net investment inflows to correct the trade imbalance.

Question 16

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System
 
-Refer to Figure 13.3.Decreases in U.S.interest rates relative to foreign interest rates would shift U.S.capital and financial account schedule CA0 downward toward CA1,resulting in net financial outflows from the United States.

Accepted Answer

The answer of Figure 13.3.U.S.Capital and Financial Account Under a...

Question 17

According to the price-adjustment mechanism,trade deficits can occur only in the long run rather than in the short run.

Accepted Answer

The price-adjustment mechanism suggests that trade deficits can occur in both the short and long run. In the short run, prices and wages may not adjust quickly enough to balance out the trade deficit, leading to a temporary imbalance. In the long run, prices and wages are more flexible and can adjust to correct for trade imbalances.

Question 18

The gold standard's "rules of the game" required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

Accepted Answer

The gold standard's "rules of the game" required central bankers in a surplus country to initiate expansionary monetary policies, which would lower interest rates and encourage gold outflows to deficit countries, not contractionary policies.

Question 19

Under the price-adjustment mechanism,a trade-surplus nation would realize gold inflows,an increase in its money supply,and a loss of international competitiveness.

Accepted Answer

Under the price-adjustment mechanism, a trade-surplus nation would experience an increase in demand for its currency, which would lead to an appreciation of the currency. This would result in higher prices for its exports and a decrease in international competitiveness. The inflow of gold and an increase in the money supply are also likely outcomes of a trade surplus, but they do not directly impact international competitiveness.

Question 20

The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

Accepted Answer

The quantity theory of money suggests that changes in the money supply directly affect price levels, embodying the classical price-adjustment mechanism where prices adjust to maintain equilibrium in the economy.

Quiz 13: Mechanisms of International Adjustment