Question 1

An overvalued currency arises when
A) the demand for the currency exceeds the supply.
B) the Central Bank gains reserves while maintaining the exchange rate.
C) the Central Bank keeps the official rate above the fundamental value.
D) the Central Bank keeps the official rate below the fundamental value.

Accepted Answer

An overvalued currency arises when the Central Bank keeps the official rate above the fundamental value, which means that the currency is priced too high compared to its true value. This can occur due to various factors such as high demand for the currency, increased foreign investment, or government intervention. However, maintaining an overvalued currency in the long run can have adverse effects on the economy, such as reduced competitiveness of exports and decreased foreign investment.

Question 2

Under a system of fixed exchange rates, what happens if a country's currency is undervalued?
A) The Central Bank loses official reserve assets.
B) The Central Bank gains official reserve assets.
C) The currency depreciates.
D) The exchange rate falls.

Accepted Answer

If a country's currency is undervalued under a fixed exchange rate system, demand for the currency will increase, causing its value to rise. As a result, the central bank will accumulate reserve assets as it sells its own currency to prevent it from appreciating beyond the set exchange rate.

Question 3

Despite the fact the fiscal policy is not effective when dealing with recession, Canadian government conducted an expansionary fiscal policy in response to the 2008-2009 financial crisis and recession. What might explain best the rationale for this policy?
A) Since the US did not conduct an expansionary fiscal policy, Canada had to do it.
B) Canada had a budget surplus and could afford to conduct an aggressive expansionary policy.
C) The muted response proved politically unpopular, and it was increasingly apparent that the recession was worldwide in scope, requiring a coordinated response internationally.
D) No other countries conducted an expansionary fiscal policy, so Canada had to do it.

Accepted Answer

The political pressure to respond to the recession was mounting, and it became clear that the recession was a global phenomenon, requiring coordinated international action. Canada likely felt it necessary to join in the effort to avoid being left behind or criticized for inaction. Option A and D are incorrect because they suggest that Canada only acted out of a sense of obligation to keep up with other countries, but this is unlikely to be the main factor driving policy decisions. Option B is incorrect because having a budget surplus alone does not necessarily justify expansionary fiscal policy.

Question 4

When a group of countries agree to share a common currency, they are said to have formed a
A) currency union.
B) welfare state.
C) monetary alliance.
D) monetary cartel.

Accepted Answer

When countries agree to share a common currency, they have formed a currency union. This means that they all use the same currency, have a central bank that manages monetary policy, and may have other shared economic policies. Examples of currency unions include the Eurozone, which consists of 19 European countries that use the euro, and the Eastern Caribbean Currency Union, which includes several small island nations that use the Eastern Caribbean dollar.

Question 5

Compared to a system of fixed exchange rates, currency unions are beneficial because they
A) allow exchange rates to float.
B) allow every country to have an independent monetary policy.
C) reduce the costs of trading goods and assets.
D) restrict what countries can do with fiscal policy.

Accepted Answer

Currency unions reduce transaction costs and uncertainty associated with trading goods and assets, as members have a common currency. It also eliminates the need for foreign exchange transactions, which further reduces costs.

Question 6

Compared to a system of fixed exchange rates, currency unions are beneficial because they
A) restrict what countries can do with fiscal policy.
B) allow exchange rates to float.
C) allow every country to have an independent monetary policy.
D) eliminate the possibility of speculative attacks.

Accepted Answer

The answer of Compared to a system of fixed exchange...

Question 7

According to the classical model, an increase in the Canadian nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.
A) depreciate; appreciate
B) appreciate; depreciate
C) depreciate; not change
D) appreciate; not change

Accepted Answer

The answer of According to the classical model, an increase...

Question 8

The equilibrium real exchange rate will rise
A) if there is a rise in domestic income.
B) if there is a rise in foreign interest rates.
C) if there is a rise in foreign income.
D) if there is a shift in demand away from the home good.

Accepted Answer

The answer of The equilibrium real exchange rate will rise
A)...

Question 9

An increase in the Canadian money supply would cause Canadian output to ________ and the Canadian net exports to ________ in the short run using a Keynesian model.
A) rise; rise
B) fall; rise
C) rise; fall
D) fall; fall

Accepted Answer

An increase in money supply leads to a decrease in interest rates, which in turn stimulates investment and consumption spending. This leads to an increase in aggregate demand and output. However, the increase in aggregate demand also leads to an appreciation of the currency, which makes exports more expensive and imports cheaper, causing a decrease in net exports. Therefore, the correct choice is C: rise in output and fall in net exports.

Question 10

Which of the following best represents Canada's fiscal and monetary policies in response to the 2008-2009 financial crisis and recession?
A) Government followed a contractionary fiscal policy, but Bank of Canada followed an expansionary monetary policy.
B) Government followed an expansionary fiscal policy, but Bank of Canada followed a contractionary monetary policy.
C) Both government and Bank of Canada followed an expansionary policy.
D) Both government and Bank of Canada followed a contractionary policy.

Accepted Answer

Both the government and Bank of Canada followed an expansionary policy to address the 2008-2009 financial crisis and recession. The government implemented a series of stimulus measures, including increased spending and tax cuts, while the Bank of Canada lowered interest rates and injected liquidity into the banking system. These policies were aimed at spurring economic growth and stabilizing financial markets.

Question 11

Currency unions are rare because
A) they're to no one's advantage.
B) countries are reluctant to give up having their own currencies.
C) having flexible exchange rates has the same benefits and none of the costs.
D) speculative attacks are likely to occur.

Accepted Answer

Currency unions require countries to give up the ability to control monetary policy through their own currency. This can be a difficult decision for countries to make, as their economic needs may differ from other countries in the union. Additionally, countries may be wary of giving up a symbol of their national identity (i.e. their currency). Therefore, currency unions are rare because countries are often reluctant to give up their currency.

Question 12

The Intertemporal external balance curve will be shifted down if
A) foreign income rises.
B) domestic income rises.
C) the money supply expands.
D) there is a shift in demand away from home goods.

Accepted Answer

The answer of The Intertemporal external balance curve will be...

Question 13

In a small open economy with flexible exchange rates, a contractionary monetary policy would
A) cause an exchange rate depreciation in short run.
B) increase domestic output in short run.
C) decrease domestic output in short run.
D) decrease domestic output in long run.

Accepted Answer

A contractionary monetary policy involves the central bank reducing the money supply, which leads to higher interest rates and a decrease in investment and consumption spending. This reduces aggregate demand and output in the short run. Additionally, since flexible exchange rates allow the exchange rate to adjust freely, the decrease in domestic interest rates will cause a decrease in demand for the domestic currency, leading to an exchange rate depreciation. However, the long-run effects depend on how the contractionary policy affects expectations and potential output.

Question 14

If investors are to hold both Canadian and foreign bonds, the interest rate on Canadian bonds
A) must equal that of foreign bonds.
B) must always exceed that on foreign bonds.
C) must equal that on foreign bonds plus the expected rate of depreciation.
D) must equal that on foreign bonds, on average.

Accepted Answer

The answer of If investors are to hold both Canadian...

Question 15

Under a system of fixed exchange rates, what happens if a country's currency is overvalued?
A) The Central Bank loses official reserve assets.
B) The Central Bank gains official reserve assets.
C) The currency appreciates.
D) The exchange rate rises.

Accepted Answer

If a country's currency is overvalued in a system of fixed exchange rates, its Central Bank will have to intervene in foreign exchange markets to maintain the value of its currency at the fixed rate. In doing so, the Central Bank will sell its own currency and buy foreign currencies, resulting in a depletion of its official reserve assets.

Question 16

You have just noticed that the dollar depreciated and you suspect that the Canadian government was behind this change. Which would you choose as the most likely cause of this depreciation in the real exchange rate?
A) an increase in the money supply
B) a decrease in the money supply
C) a temporary increase in government purchases
D) a temporary decrease in taxes

Accepted Answer

When the money supply increases, the value of the currency decreases, leading to a depreciation in the exchange rate. This can be due to the Canadian government printing more money to stimulate the economy or to pay off debts. A decrease in the money supply would have the opposite effect, leading to an appreciation in the exchange rate. Temporary increases in government purchases or decreases in taxes may have short-term effects on the exchange rate, but they would not be the most likely cause of a sustained depreciation or appreciation.

Question 17

Which of the following statements about the effectiveness of the fiscal and the monetary policies in response to a recession in a small open economy is true?
A) In recession, fiscal policy is ineffective, but monetary policy is effective.
B) In recession, fiscal policy is effective, but monetary policy is ineffective.
C) In recession, both fiscal and monetary policies are effective.
D) In recession, both fiscal and monetary policies are in effective.

Accepted Answer

The answer of Which of the following statements about the...

Question 18

Compared to a system of flexible exchange rates, currency unions have the disadvantage of
A) requiring all its members to share a common monetary policy.
B) allowing exchange rates to float.
C) requiring every country to share a common fiscal policy.
D) decreasing the sacrifice ratio.

Accepted Answer

Currency unions require all its members to share a common monetary policy, which can limit the ability of individual countries to control their inflation rates, interest rates, and other economic policies. In contrast, flexible exchange rates allow countries to adjust their currency values based on their respective economic conditions. Currency unions also require a high degree of coordination and cooperation, which can be challenging to maintain over the long term.

Question 19

International businesses like a fixed-exchange-rate system because
A) they like large swings in currency values when devaluation or revaluation occur.
B) they profit by speculating on devaluation or revaluation.
C) they can plan better if they know what the exchange rate will be.
D) fixed exchange rates are economically efficient.

Accepted Answer

International businesses prefer a fixed exchange rate system because it provides them with more predictability and stability in planning and budgeting. With a fixed exchange rate, they can more accurately forecast their expenses, revenues, and profits. This allows them to make investment decisions with more confidence and reduces the impact of currency fluctuations on their business operations.

Question 20

The reason that fiscal policy is ineffective during a recession is that
A) an expansionary fiscal policy will lead to higher interest rates, appreciation of exchange rate, and a reduction in net exports.
B) an expansionary fiscal policy will lead to lower interest rates, depreciation of exchange rate, and an increase in net exports.
C) an expansionary fiscal policy will lead to lower interest rates, appreciation of exchange rate, and a reduction in net exports.
D) an expansionary fiscal policy will lead to higher interest rates, appreciation of exchange rate, and an increase in net exports.

Accepted Answer

The answer of The reason that fiscal policy is ineffective...

Quiz 10: Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy

An overvalued currency arises when

Under a system of fixed exchange rates, what happens if a country's currency is undervalued?

Despite the fact the fiscal policy is not effective when dealing with recession, Canadian government conducted an expansionary fiscal policy in response to the 2008-2009 financial crisis and recession. What might explain best the rationale for this policy?

When a group of countries agree to share a common currency, they are said to have formed a

Compared to a system of fixed exchange rates, currency unions are beneficial because they

Compared to a system of fixed exchange rates, currency unions are beneficial because they

According to the classical model, an increase in the Canadian nominal money supply would cause the nominal exchange rate to and the real exchange rate to .

The equilibrium real exchange rate will rise

An increase in the Canadian money supply would cause Canadian output to and the Canadian net exports to in the short run using a Keynesian model.

Which of the following best represents Canada's fiscal and monetary policies in response to the 2008-2009 financial crisis and recession?

Currency unions are rare because

The Intertemporal external balance curve will be shifted down if

In a small open economy with flexible exchange rates, a contractionary monetary policy would

If investors are to hold both Canadian and foreign bonds, the interest rate on Canadian bonds

Under a system of fixed exchange rates, what happens if a country's currency is overvalued?

You have just noticed that the dollar depreciated and you suspect that the Canadian government was behind this change. Which would you choose as the most likely cause of this depreciation in the real exchange rate?

Which of the following statements about the effectiveness of the fiscal and the monetary policies in response to a recession in a small open economy is true?

Compared to a system of flexible exchange rates, currency unions have the disadvantage of

International businesses like a fixed-exchange-rate system because

The reason that fiscal policy is ineffective during a recession is that