Question 1

Which of the following correctly shows the relationship between savings,the government budget balance,and the current account?
A)S + CA = I + (T -G)
B)S + CA = I + (T + G)
C)S + (T - G)= I + CA
D)S + (T + G)= I + CA

Accepted Answer

The equation S + (T - G) = I + CA correctly shows the relationship between savings (S), the government budget balance (T - G), and the current account (CA). This equation states that savings plus the government budget surplus (T - G) equals investment (I) plus the current account surplus (CA).

Question 2

Monetary policy is more effective in an open economy than in a closed economy.

Accepted Answer

Monetary policy tends to be less effective in an open economy because interest rate changes can lead to capital flows that counteract the intended effects of the policy, such as through exchange rate adjustments that can affect net exports.

Question 3

If the government has a $100 million budget deficit,private saving is equal to $500 million,private investment is equal to $300 million,what is the value of the current account in equilibrium?
A)$100 million surplus
B)$700 million surplus
C)$100 million deficit
D)$700 million deficit

Accepted Answer

In an open economy, the national income identity is given by Y = C + I + G + (X - M), where Y is national income, C is consumption, I is investment, G is government spending, and (X - M) is net exports or the current account balance. The savings-investment balance approach can also represent this, where national saving (S) equals private saving plus government saving (which is negative in the case of a deficit), and this total saving equals investment plus the current account balance. Here, private saving is $500 million, government saving is -$100 million (due to the deficit), so total saving is $400 million. Since private investment is $300 million, the difference, which must equal the current account balance, is $100 million. Therefore, there is a $100 million current account surplus.

Question 4

Which of the following is FALSE concerning the long run?
A)Economists believe that fiscal and monetary policies have no permanent effects on the economy.
B)Economists more or less agree that the economy tends to fluctuate around the level that is consistent with full employment.
C)In the long run, the unemployment rate returns to its normal level.
D)The current account must tend toward balance in the long run.
E)None of the above.

Accepted Answer

All the statements A, B, C, and D are generally considered true in economic theory regarding the long run.

Question 5

Carefully explain why monetary policy is likely to be more effective in a open economy than fiscal policy.

Accepted Answer

The answer of Carefully explain why monetary policy is likely...

Question 6

In most cases,expenditure-switching policies must be accompanied by expenditure-reducing policies because
A)expenditure-switching policies are completely ineffective without expenditure-reducing policies.
B)inflation ensues as home country domestic expenditures switch away from foreign goods to domestic goods unless overall expenditures are reduced.
C)inflation abroad may increase the demand for domestic goods, causing inflation to rise.
D)the depreciation in the exchange rate may decrease the domestic price of foreign goods, causing an increase in the current account deficit.

Accepted Answer

Expenditure-switching policies aim to redirect spending towards domestically produced goods, but without a reduction in overall expenditures, this can lead to inflation as demand outstrips supply. By reducing overall spending, the increase in demand for domestic goods can be met without causing inflationary pressures. Therefore, in most cases, expenditure-switching policies must be accompanied by expenditure-reducing policies.

Question 7

If interest rates rise,what will happen to the nation's exchange rate?

Accepted Answer

The answer of If interest rates rise,what will happen to...

Question 8

Which of the following correctly describes the relationship between savings,the government budget balance,and the current account?
A)Private savings plus the government budget balance must equal private investment plus the current account.
B)Private savings plus the current account must equal private investment plus the government budget surplus or deficit.
C)Private savings plus private investment must equal the current account plus the government budget balance.
D)Private investment must equal private savings plus the current account minus the government budget balance.

Accepted Answer

The correct relationship is described by the national income identity, where private savings plus the government budget balance (whether surplus or deficit) equals private investment plus the current account. This identity reflects the flow of funds in an economy and how savings, investment, and the balances of the government and the current account are interconnected.

Question 9

Expansionary monetary policy is likely to lead to a depreciation of the nation's currency.

Accepted Answer

When a country implements an expansionary monetary policy, it often involves increasing the money supply and reducing interest rates. This can make the country's currency less attractive to investors, leading to a weaker exchange rate and depreciation of the currency.

Question 10

An increase in interest rates causes that nation to experience an outflow of financial capital and causes its currency to depreciate.

Accepted Answer

An increase in interest rates typically attracts foreign capital, leading to an inflow of financial capital, which can cause the nation's currency to appreciate due to increased demand.

Question 11

Describe the policies a nation would follow to correct a current account deficit.What are the primary purposes of each type of policy?

Accepted Answer

The answer of Describe the policies a nation would follow...

Question 12

Fiscal policy does not have an effect on interest rates.

Accepted Answer

Fiscal policy can have an effect on interest rates. For example, an expansionary fiscal policy (such as increasing government spending or decreasing taxes) may lead to higher demand for credit, which can push up interest rates. Conversely, a contractionary fiscal policy (such as reducing government spending or increasing taxes) may reduce demand for credit and lead to lower interest rates.

Question 13

Explain why in an economy with fixed exchange rates,monetary policy will not cause expenditure switching.

Accepted Answer

The answer of Explain why in an economy with fixed...

Question 14

Describe the difficult choices in macroeconomic policy that Argentina faced in the late 1990s.

Accepted Answer

The answer of Describe the difficult choices in macroeconomic policy...

Question 15

Contractionary fiscal policy can lead to a depreciation of the nation's currency.

Accepted Answer

Contractionary fiscal policy, such as cutting government spending or increasing taxes, can lead to lower economic growth and lower interest rates, which may make the nation's currency less attractive to investors and lead to a depreciation.

Question 16

A depreciation of the currency can switch spending away from foreign goods and reduce the effect of rising incomes on the current account.

Accepted Answer

A depreciation of the currency makes foreign goods relatively more expensive, leading consumers to switch to domestic goods, which can reduce the current account deficit. Additionally, with a weaker currency, exports may become more competitive, thus increasing demand for domestic goods and services in foreign markets, further reducing the current account deficit. Therefore, a depreciation of the currency can reduce the impact of rising incomes on the current account.

Question 17

The J-curve effect that results from currency depreciation results is due to
A)the initial effect having positive effects on the current account balance.
B)the value of imports increasing by more than the value of exports at the time of devaluation.
C)exports and imports being totally unresponsive to changes in exchange rates.
D)decreases in the dollar price of imports.

Accepted Answer

The J-curve effect refers to the initial decrease in the current account balance following a currency depreciation, followed by a gradual increase over time. This phenomenon occurs because in the short run, the value of imports increases more than the value of exports due to contracts and fixed prices. However, over time, the increase in exports and decrease in imports can lead to a recovery in the current account balance. Therefore, option B is the correct answer as it describes the reason for the initial decrease in the current account balance. Option A is incorrect as it refers to the eventual increase in the current account balance, not the J-curve effect. Option C is incorrect as changes in exchange rates can affect export and import demand. Option D is incorrect as it describes the effect of an increase in the dollar price of imports, not a depreciation of the exchange rate.

Question 18

Expansionary fiscal policy is likely to lead a nation's currency to depreciate.

Accepted Answer

The answer of Expansionary fiscal policy is likely to lead...

Question 19

Expenditure switching refers to
A)a switching back and forth between investment and consumption expenditures.
B)a switching back and forth between domestic and foreign goods in response to changes in the exchange rate.
C)a switching back and forth between domestic and foreign goods in response to changes in the interest rate.
D)a switching of back and forth in the current account from a deficit to a surplus and vice versa.

Accepted Answer

Expenditure switching refers to the behavior of consumers and firms who switch their purchases from domestic to foreign goods (or vice versa) in response to changes in the exchange rate. When the domestic currency appreciates, foreign goods become relatively cheaper, and domestic consumers tend to switch their purchases to foreign goods, leading to a decrease in domestic demand and an increase in foreign demand. Similarly, when the domestic currency depreciates, domestic goods become relatively cheaper, and foreign consumers tend to switch their purchases to domestic goods, leading to an increase in domestic demand and a decrease in foreign demand.

Question 20

How does expansionary monetary policy affect a nation's exchange rate?

Accepted Answer

The answer of How does expansionary monetary policy affect a...

Quiz 11: An Introduction to Open Economy Macroeconomics

Which of the following correctly shows the relationship between savings,the government budget balance,and the current account?

Monetary policy is more effective in an open economy than in a closed economy.

If the government has a $100 million budget deficit,private saving is equal to $500 million,private investment is equal to $300 million,what is the value of the current account in equilibrium?

Which of the following is FALSE concerning the long run?