Question 1

Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on domestic employment and inflation.

Accepted Answer

Currency devaluation and revaluation impact the current account through changes in exports, imports, and trade balance. These changes, in turn, can affect domestic employment and inflation through changes in the demand for domestic goods and services, prices, and wage levels. However, the primary impact is on the current account.

Question 2

The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S.Congress,promote world economic expansion by stimulating demand in Germany and Japan,and to ease the burden of the U.S.debt service.

Accepted Answer

The Plaza Agreement of 1985 aimed to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and ease the burden of the U.S. debt service.

Question 3

Exchange rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency.

Accepted Answer

When one nation's currency depreciates, its goods become cheaper and more competitive in the international market, which can increase the demand for its exports. This, in turn, can lead to an increase in demand for the trading partner's currency, causing it to appreciate. Therefore, international policy coordination is necessary to ensure that currency movements do not cause imbalances or distortions in the global economy.

Question 4

Under floating exchange rates and high capital mobility,an expansionary monetary policy would help a country resolve a recession and a current account deficit.

Accepted Answer

An expansionary monetary policy can lead to a decrease in interest rates, which can cause an increase in investment and consumption spending, leading to an increase in aggregate demand and output. This increase in output can then lead to a decrease in unemployment and a decrease in the current account deficit as imports decrease and exports increase. Under floating exchange rates and high capital mobility, the exchange rate would adjust accordingly to maintain equilibrium in the market, so the expansionary monetary policy would not lead to an increase in inflation or a decrease in the value of the currency.

Question 5

Was the Plaza Agreement of 1985 a success?

Accepted Answer

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Question 6

What happens to the balance of payments under a fixed exchange rate system,when expansionary or contractionary monetary policy is used?

Accepted Answer

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Question 7

The Group of five (G-5)nations include Japan,Germany,China,and Australia.

Accepted Answer

The Group of Five (G-5) nations are actually France, Germany, Japan, the United Kingdom, and the United States. China and Australia are not part of the G-5.

Question 8

What is international economic policy coordination?

Accepted Answer

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Question 9

Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

Accepted Answer

Fiscal and monetary policies can affect the balance of payments indirectly by influencing domestic economic conditions such as inflation, unemployment, and growth. However, their primary objective is usually to stabilize the domestic economy, not to directly address external trade imbalances or exchange rate fluctuations.

Question 10

International policy coordination is plagued by differing national economic objectives,institutions,political climates,and phases in the business cycle.

Accepted Answer

International policy coordination is difficult and often ineffective due to the aforementioned factors.

Question 11

The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

Accepted Answer

The Bonn Summit of 1978 and Plaza Accord of 1985 are both examples of international coordination of economic policies between major world powers. The Bonn Summit was a meeting between the leaders of the G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and United States) to discuss global economic challenges and coordinate policies. The Plaza Accord was an agreement between the G5 countries (France, Germany, Japan, United Kingdom, and United States) to lower the value of the US dollar relative to other major currencies in order to address trade imbalances.

Question 12

What policy instrument should be used when demand-pull inflation exists?

Accepted Answer

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Quiz 16: Macroeconomic Policy in an Open Economy